Several have strong ties with agriculture
Agriculture has extensive ripple effect
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