A plum un­listed op­tion

Zeder’s crav­ing for fruit ex­plained

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS march@fin­week.co.za

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

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