Rid­ing SA’s growth waves

The group ac­tively seek ac­qui­si­tions

Finweek English Edition - - Focus on kap international -

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

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