KAP vs Barloworld
KAP is a clear winner in the performance stakes, outdoing Barloworld. But in the rating stakes KAP, which has been trading under the shadow of its disgraced major shareholder, Steinhoff, is lagging well behind Barloworld.
Steinhoff, locked in a fight for survival, made its first move in March, reducing its holding in KAP from 43% to 26% in a private placing worth R3.67bn.
Nadim Mohammed of First Avenue Investment Management says: “I believe Steinhoff will sell its KAP stake completely through further placement tranches. That’s what it did with its PSG stake.”
KAP has already distanced itself from Steinhoff with moves that include the termination of mutual corporate services and the vacation of rental space in Steinhoff’s head office.
With Steinhoff’s woes as they affect KAP now being resolved, it appears to have created an opportunity to go long on KAP and short on Barloworld. Performance figures speak for themselves. In its five years to September Barloworld produced average annual headline EPS (HEPS) growth of only 7.5%. In its best showing, HEPS lifted 15.9% in its past year, with a big boost from R231m (29%) lower taxation.
In a far stronger showing over five years, KAP, measured to its December interims, generated average annual HEPS growth of 15% with a high degree of consistency.
For its efforts Barloworld is being rewarded by the market with an 18.7 p:e, while KAP is trading on a 15.8 p:e.
Barloworld, with an annual revenue of R62bn, has caught investor attention over the past two years due to increasing hard commodity prices, which benefit Baroworld’s R18.3bnrevenue Southern African and R5bn-revenue Russian Caterpillar earthmoving equipment operations.
In Barloworld’s past year new mining equipment contributed 46% of its Southern African and 51% of its Russian revenue. However, Barloworld’s earthmoving equipment operations’ results were unspectacular. Southern Africa operating profit lifted 13% to R1.78bn. In Russia it rose 7% in US dollars but, hit by a strong rand, was down 3% on conversion to R582m. Since September the rand has strengthened a further 11% against the dollar.
The other big determinant of Barloworld’s fortunes is its R32bn-revenue automotive division, which operates in the highly competitive rental, fleet management and dealership segments. The division did not shoot the lights out in Barloworld’s past year, lifting operating profit 5.6% to R1.75bn.
KAP is also active in the automotive industry, through its seats and floor-fittings manufacturing operation Feltex and accessories franchise business AutoVest. Regrettably KAP reveals sales and operating profits only at the divisional level. At the subdivision level only percentage changes in operating profits are revealed. Here KAP’s automotive subdivision did well to up operating profit 18% in the past half year.
KAP CEO Gary Chaplin is upbeat on prospects following Feltex’s winning of a contract to supply Volkswagen with Polo components.
Barloworld and KAP share a common involvement in logistics, but performance differs.
Barloworld’s logistics division has for years been locked in a state of restructuring, but with no sign of success. In the past year the R6.1bn-revenue division’s operating profit slumped 55% to R122m.
The division also represents poor capital allocation. At financial year-end it was tying up net operating assets of R8.7bn, R2bn more than the automotive division.
By contrast, KAP’s logistics division, with Unitrans at its core, lifted revenue 3% to R4.6bn and operating profit 4% to R600m in the past half year. Divisional assets were R7.66bn.
From an acquisition perspective KAP has shown itself to be far more dynamic than Barloworld when it comes to deals that move revenue and profit needles. KAP’s acquisition of AutoVest in April 2016 for R560m is a reflection of this. It lifted the automotive subdivision’s revenue by 48%.
Bigger still was the January 2017 acquisition of Safripol, SA’s largest high-density polyethylene and polypropylene plastics producer. The R4.1bn acquisition added R721m in profit at the level of earnings before interest, taxes, depreciation and amortisation in the six months to December.
Safripol is housed in the R8bn-revenue chemicals division, together with Hosaf, SA’s largest producer of PET plastic, used extensively in the beverage sector, and Woodchem, SA’s largest wood panel resins producer. KAP has also shown willingness to invest in existing assets for future growth. Recent moves include a R600m upgrade of PG Bison’s Piet Retief particle board facility and a R700m project to lift Hosaf’s annual capacity from 128,000 t to 240,000 t.
Due for completion last August, the Hosaf project hit start-up problems, including its primary equipment supplier’s insolvency. It limited the chemicals division’s operating profit rise to 4%, but it was a shortterm setback, believes Chaplin.
Despite Hosaf’s problems and muted logistics growth, KAP still produced an 11% HEPS rise in its past reporting period. Once Hosaf’s problems have been resolved KAP appears well set to resume its 15%/year HEPS growth trend.
KAP has shown itself to be more dynamic than Barloworld when it comes to deals that move revenue and profit needles