Sev­eral have strong ties with agri­cul­ture

Agri­cul­ture has ex­ten­sive rip­ple ef­fect

Finweek English Edition - - Agri-businesses -

THE STATE OF AF­FAIRS and events in agri­cul­ture af­fect the well-be­ing of more listed com­pa­nies than just the group of food pro­duc­ers. Sev­eral oth­ers are de­pen­dent on farm­ing for at least part of their in­come.

This ex­ten­sive list in­cludes groups such as Afrox, Om­nia and Sa­sol, Sappi, York­cor, Bar­loworld, Bell, pack­ag­ing groups As­tra­pak, Nam­pak and Con­sol, liquor groups Awethu, Dis­tell, KWV In­vest­ments and SABMiller and, of course, food re­tail­ers Pick ’n Pay, Sho­prite and Spar and gen­eral re­tailer Wool­worths.

Even listed com­pa­nies like Stein­hoff and KAP, Spur­corp, Fam­brands and Kingco have agri­cul­tural ties. Add a few more, such as banks and in­sur­ers, and you’re re­ally as­tounded at how far the in­flu­ence ex­tends.

As far as food pro­duc­ers are con­cerned, not a sin­gle one of the group of 14 listed com­pa­nies was rated a bad buy on the ba­sis of short-term tech­ni­cal indicators at the be­gin­ning of April. Only In­ter­trad­ing wasn’t given a strong rec­om­men­da­tion (it got a neu­tral rat­ing), which means that you can now buy al­most any share in the food sec­tor with im­punity.

The eco­nomic pros­per­ity in SA, good agri­cul­tural prices and bet­ter ex­port mar­kets – due to the rand be­ing slightly weaker – all con­trib­utes to the cur­rent pros­per­ity.

Since the ap­prox­i­mately R61,01bn of April last year, the to­tal mar­ket cap­i­tal­i­sa­tion of the sec­tor has risen to R74,15bn, a growth of 21,5%. How­ever, the mar­ket caps of AVI, As­tral and Rain­bow, Conafex, Crookes and Ton­gaat all grew by more than 30%. Es­pe­cially Rain­bow, where its price shot up from 980c a year ago to 1 650c/share (+68%), re­ward­ing its share­hold­ers hand­somely.

In the year to endDe­cem­ber 2006, Ton­gaat, which has strong ties es­pe­cially in the sugar in­dus­try, chalked up the best per­for­mance in the more than 100 years of its ex­is­tence. The group’s op­er­at­ing profit in­creased by 40%, from R730m to R1,02bn, and its head­line earn­ings grew from R466m in its 2005 fi­nan­cial year to R703m. The op­er­at­ing profit from its sug­ar­cane ac­tiv­i­ties grew by 42% to R356m, even though SA’s crop was the sec­ond low­est in 10 years.

It says a lot for agri­cul­ture that it can still fare so well in a group that has in­creas­ingly more in­ter­ests out­side the agri­cul­tural in­dus­try, such as its suc­cess­ful prop­erty de­vel­op­ment on the KwaZulu-Na­tal coast.

How­ever, Af­gri – one of SA’s for­mer grain co-ops and orig­i­nally listed in 1996 as OTK – re­mains one of the listed com­pa­nies with the strong­est ties with agri­cul­ture. Though it has di­ver­si­fied con­sid­er­ably since its list­ing, its in­come is still de­rived largely from agri­cul­tural ser­vices that it pro­vides in Mpumalanga and sur­round­ing prov­inces, but in­creas­ingly also be­yond those for­mer bound­aries, al­ready hold­ing in­ter­ests in Aus­tralia and Zam­bia.

Af­gri also keeps seek­ing new op­por­tuni-

ties in the in­dus­try. For ex­am­ple, it re­cently re-en­tered the broiler mar­ket with new en­thu­si­asm af­ter ac­quir­ing Day­break Farms for R110m. The group had pre­vi­ously been in­volved in the poul­try in­dus­try with great suc­cess, but had to step back tem­po­rar­ily for tech­ni­cal rea­sons when it sold its share in Early Bird in 2005.

But whereas Af­gri di­ver­si­fies mainly in the agri­cul­tural in­dus­try there are oth­ers like Om­nia (listed in the chem­i­cals sec­tor) that di­ver­sify equally strongly in other fields. Om­nia was pre­vi­ously largely de­pen­dent on its agri­cul­tural in­come but has ac­quired strong in­ter­ests in the chem­i­cals and min­ing sec­tors in re­cent years. That en­sures it won’t fluc­tu­ate so much in poor agri­cul­tural years.

How­ever, when there are good agri­cul­tural sales – such as in Om­nia’s half-year to end-Septem­ber 2006 – Om­nia is usu­ally one of the mar­ket’s best per­form­ers. Good fer­tiliser sales con­trib­uted to its 18% in­crease in turnover and 48% in­crease in head­line earn­ings to R80m. Early in April, its price was at 6 751c/share, about 53% higher than at the be­gin­ning of April 2006.

How­ever, the un­steadi­ness of agri­cul­ture re­mains a prob­lem for any com­pany that de­pends on this in­dus­try wholly or even par­tially for its earn­ings.

The cur­rent sea­son is one of the best ex­am­ples of how prospects can change dra­mat­i­cally even within three or four months. That af­fects farm­ers very se­ri­ously, but of course also ex­tends to busi­nesses that pro­vide prod­ucts and ser­vices to farm­ers or process their prod­ucts.

For ex­am­ple, Af­gri MD Jeff Wright says that the op­ti­mism among farm­ers at the be­gin­ning of the maize sea­son in Septem­ber to Novem­ber last year was al­most tan­gi­ble. That was due to the dou­bling of Safex’s maize price.

“Un­for­tu­nately, it was one of the dri­est sea­sons in years and that op­ti­mism dis­ap­peared as the sea­son pro­gressed,” Wright says.

“Now they’re talk­ing about re­turns that will bring in an av­er­age of 35% less than in the pre­vi­ous sea­son, which will mean a con­sid­er­able loss of in­come for farm­ers.”

How­ever, Wright says that SA’s farm­ers have started farm­ing smarter over the years by skil­fully hedg­ing their prod­uct prices and even hedg­ing crops and the weather. “How­ever, farm­ing risks – such as the ex­change rate, sharp in­creases in fuel and equip­ment costs and other risks – are still be­yond their con­trol.”

Wright says that for those and other rea­sons there’s a move within the agri­cul­tural in­dus­try to fewer but larger farm­ing op­er­a­tions, char­ac­terised by sharp busi­ness skills and greater busi­ness suc­cess. “Th­ese are the peo­ple who could en­sure that SA’s own novice farm­ers, as well as those in other African coun­tries, learned the finer skills of agri­cul­ture.”

Wright says com­pa­nies like Af­gri are be­com­ing in­creas­ingly in­volved in busi­ness strate­gies that help farm­ers to farm bet­ter, which in­cludes part­ner­ships to make fi­nan­cial and other skills avail­able to them. “We un­der­stand the risks the in­dus­try is ex­posed to. And though those risks will never com­pletely dis­ap­pear, we can help to man­age them bet­ter and to en­sure agri­cul­tural suc­cess in SA.”

There’s a move within the agri­cul­tural in­dus­try to fewer but larger

farm­ing op­er­a­tions. Jeff Wright

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