Riding SA’s growth waves
The group actively seek acquisitions
WHEN GERMAN CORPORATE investor Claas Daun assembled KAP International Holdings, listing it on the JSE in 2004 through meat and leather manufacturing group Kolosus, he effectively formed a group that was stronger than the sum of its parts.
In the past two years, the group has seized on the rising tide of SA’s consumer and industrial growth. Today, with a market capitalisation approaching R2bn, annual revenues almost R3,5bn and a payroll of 5 300 people, KAP International has placed itself in the vanguard of mid-cap manufacturing concerns, representing one of the best bets on the JSE for institutional and private investors alike.
The group, which trades at a relatively modest historic price-earnings ratio of 12 times, compared to the sector’s 14, represents a diversified suite of investments across some of SA’s most buoyant industrial and consumer sectors. From processed meat and leather products, to footwear, towelling, synthetic fibres, bottle resins and automotive components, KAP plays a leading, or dominant, role in the majority of its markets. Its automotive division, in particular, housed under Feltex Automotive, is the clear market leader, manufacturing 90% of the foam used in car seats in SA and holding 60% of the moulded interior trim market, while Hosaf Fibres accounts for 50% of the polyethylene terephthalate (PET) bottle resin market, used for the packaging of mineral water and soft drinks.
Paul Schouten, an 11-year stalwart of the Daun Group, was appointed by Daun as CEO of KAP International in 2003, a time when KAP’s predecessor, Kolosus, had been making significant losses. Schouten steered the company back to profitability, disposing of loss-making subsidiaries and streamlining operations within the meat and leather divisions. In addition to bedding down the subsequent listing, Schouten has also overseen the acquisitions of Feltex, Jordan & Co, Hosaf Fibres and Glodina, while structuring the group into clearly defined industrial and consumer pillars. “We were careful in selecting businesses in growth sectors, and as a group, we are now primarily focused on organic growth, backed by strategic acquisitions in complementary businesses.”
In line with that, KAP is in the process – subject to a due diligence and competition board approval – of acquiring a controlling interest in Brenner Mills, strategically merging KAP’s “Bull Brand” with Brenner’s “Shaya” maize meal and expanding the distribution range of both products. Feltex, meanwhile, entered into a joint venture with Australian group Futuris Automotive Interiors for the construction of a new factory in East London for the production of high-quality tufted automobile carpets. It also acquired Caravelle Carpets, further beefing up its Trim division.
Schouten says that while the group had the capacity and shareholder support to actively seek acquisitions that fit in with its vertical integration plans, he attributes the group’s success over the past four years to a strong understanding of manufacturing, as well as the entrepreneurial culture of its independently run companies. “Our management is empowered to make decisions, and we expect them to add value. We aren’t here to impede that process.
“Clearly, we operate in competitive industries, so it’s important to create an environment where we can motivate improved productivity, through fostering on-the-ground confidence in our people, in our processes and ultimately, in our products.”
Schouten’s expansionary vision is predicated on some impressive growth numbers in KAP’s core markets, notably within the
automotive and PET industries locally and internationally.
Feltex, for instance, enjoys strong strategic alliances with the local Original Equipment Manufacturers (OEMs) and would directly benefit from an overall increase in local vehicle production. Conceivably, SA’s auto output could reach a million units over the next four years from current production of 560 000 units, representing market growth of almost 80%. “We are relative minnows on the car production stage and therefore there’s lots of room for growth. Toyota and VW are already ramping up production, and because much of that is exported, we aren’t dependent on the relatively small SA market,” says Schouten. He also sees vast opportunity in the PET market, which is largely used by the bottling industry. “Globally the industry is experiencing dynamic growth. Currently we are in a position where supply and demand are in equilibrium with consistent annual growth of at least 7%. Extrapolated to 10 years down the line, that equates to a doubling in the market, and we are well positioned to expand capacity to meet that demand.” He says that the plastic products’ competitive advantage comes from the fact that it’s low cost, as well as environmentally friendly. Hosaf, for instance, is currently recycling about 3 600 tons a year, about 3% of the overall market, and would look to double that in the next year.
Schouten also believes the 2010 World Cup could prove a fillip for the industry: “Glass bottles are out for sporting events of this nature, so the obvious answer is PET bottles.” The World Cup could also be a stimulus for growth in other areas, notably for towel manufacturer Glodina, which is aiming at the 2010 hospitality market, and at United Fram, the company’s industrial footwear business, which is already struggling to produce enough safety boots in the wake of significant infrastructural spend.
KAP operates in growth industries Paul Schouten