A plum unlisted option
Zeder’s craving for fruit explained
OVER THE PAST FIVE YEARS value investors keen on buying quality assets at attractive discounts have targeted large unlisted agribusinesses. PSG’s Zeder and Sanlam’s recently formed Agri-Vie Fund are two entities that have identified opportunities in agriculturally aligned business activities. Zeder currently owns anchor investments in KWV and Pioneer – but has also been rather prolific in acquiring stakes in an array of agribusinesses.
Perhaps Zeder’s most interesting transaction is its recent foray into Capespan – the fruit-marketing organisation formed from the mid-Nineties merger between deciduous fruit specialists Unifruco and citrus marketing company Outspan.
Capespan’s annual report (for the year to end-December 2007) goes a long way to explaining why Zeder has taken a nibble of the fruit business. Fruit exporting – especially in the deciduous sector – has lately been a tricky business. Capespan’s report describes the market as “difficult to predict at times” and “potentially volatile”.
You only have to look at what transpired at the old WB Holdings and listed fruit and vegetable exporter Intertrading to see exactly how tough a market it has been over the past five years. The fruit business is affected by a number of variables: the climate, fruit volumes, fruit quality, exchange rates, the oil price and (fickle) consumer trends.
However, it would seem financial 2007 was a fairly good year for Capespan. Total fruit pallets exported increased 16% to a new high of almost 2,2m (1,9m pallets in 2006), with the citrus industry contributing a markedly higher 91m cartons (2006: 72m).
One difficult area for Capespan during 2007 was its logistical service companies, which suffered from the constant shift towards containerised shipments instead of conventional reefer pallets. Fortunately
Capespan’s shipping operation, Universal Reefers, managed to deploy vessels in other trades.
As a value proposition, Capespan is a no-brainer. The shares were last traded at 110c on the company’s over-the-counter platform. Headline earnings were 20c/share in 2006, yielding a dividend of 6c/share. Net asset value was stated at almost 200c/share, while cash flow from operations of R81,5m equated to 20c/share. Net cash flow – after dividends and tax – was equivalent to 10c/share.
But there’s a catch. The shares are hopelessly illiquid, with one broker saying there are many willing buyers of Capespan stock but no sellers. The fact that Zeder managed to secure a stake of around 8% in Capespan (admittedly via an 18,1% holding in Outspan and only 1% directly) seems nothing short of miraculous.
Capespan group MD Neil Oosthuizen concedes that until the recent Zeder transaction, trading of shares was very limited. Prior to the Zeder transaction more than 90% of Capespan’s issued shares were held by three shareholders: Outspan (39,5%), Unifruco (39,4%) and Total Fruit plc (11,5%).
But plans are afoot to increase tradability. “We’re currently in a process to simplify the shareholding, in that current shareholders in Unifruco and Outspan will, if completed, hold shares directly in Capespan. That will increase their tradability and share value.”
Oosthuizen says no JSE listing of Capespan is being contemplated “at this stage”. However, demand for unlisted Capespan shares is understandable and it would seem that the inventive Zeder has bought in at just the right time. Capespan looks to be on a strong growth trajectory, with traditional export markets also likely to be complemented by business in fast-growing markets in China and India.
Oosthuizen notes exports to India and China are still limited. “However, various regulatory requirements are systematically being addressed and the potential is great.” He says the trend of major supermarket groups globalising is also evident in China and India. “That will create a new dynamic. The infrastructure in China is well developed, and growth in exports will be more rapid, although India will soon catch up. We also see those countries as sources of products for our marketing entities.”
A drawback of the fruit marketing business is its low trading margins – which is perhaps understandable, as the product is more a commodity than a brand. Capespan managed a respectable pre-tax margin of 3,9% in 2007. But Oosthuizen says it’s difficult to interpret the margin – a mixture of many different activities. “Our objective is to increase margins overall. But it should be mentioned that the margins in fruit trading are in general very low.”
No doubt a weaker rand would help margins markedly, as will the recent drop in the crude oil price. But Capespan is also lessening its reliance on locally produced fruit and global sourcing has been prioritised to increase current volumes 50% by 2011. Oosthuizen discloses Capespan sourced 19,2m cartons of fruit from 40 different countries. “We’re projecting to end 2008 on about 21m cartons.” He says the target set requires Capespan reaching 30m cartons by 2011. “It’s a stiff challenge but we’re confident we can achieve it.”
No listing in sight. Neil Oosthuizen