Right(s) siz­ing

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS

THE MAR­KET SEEMS IN­TENT on dis­count­ing good news at in­dus­trial mini-con­glom­er­ate KAP In­ter­na­tional. Af­ter ini­tially warm­ing to a de­ci­sion not to pro­ceed with a R300m rights is­sue pitched at 120c/share, KAP’s price drifted back to 130c on the JSE – not far from the group’s 12-month low of 115c/share in early De­cem­ber 2008.

Times are tough and it’s un­der­stand­able the mar­ket is tak­ing a dim view of KAP’s prospects as de­mand for its bas­ket of goods – PET bot­tling ma­te­rial, au­to­mo­tive tex­tiles, in­dus­trial wear, shoes, meat, tow­els and milling – will be less ro­bust this year. But can any­one re­ally dis­re­gard the rea­sons given by KAP for call­ing off the pro­posed rights is­sue? Late last year KAP – no doubt aware not all share­hold­ers were en­am­oured with the rights is­sue pro­posal – ar­gued fresh fund­ing was no longer re­quired due to a sig­nif­i­cant im­prove­ment in work­ing cap­i­tal man­age­ment. That came about as a re­sult of (pre­sum­ably sig­nif­i­cant) re­duc­tions in com­mod­ity and raw ma­te­ri­als prices.

KAP sub­sidiary Hosaf also ex­pects to com­plete its PET ca­pac­ity ex­pan­sion by April this year, with the hope the ad­di­tional pro­duc­tion vol­ume is fully ab­sorbed by the South African mar­ket. In other words, more cash flow…

KAP also re­as­sured it was work­ing on ra­tio­nal­is­ing its op­er­a­tions to bol­ster longterm re­turns and cash flows. The bot­tom line is that KAP is “comfortable” op­er­at­ing within its ex­ist­ing bor­row­ing fa­cil­i­ties for the fore­see­able fu­ture.

At cur­rent lev­els KAP could be an in­ter­est­ing longer-term op­tion. The cur­rent fi­nan­cial year prob­a­bly won’t present pretty num­bers but share­hold­ers can feel con­fi­dent the group’s bal­ance sheet is strong enough to with­stand tougher trad­ing con­di­tions. The next fi­nan­cial year (to end-June 2010) could show a sig­nif­i­cant im­prove­ment in prof­its as the Hosaf ex­pan­sion starts churn­ing pro­duc­tion.

There could be solid long-term value at KAP for in­vestors pitch­ing at points of weak­ness (pos­si­bly af­ter the release of in­terim re­sults to end-De­cem­ber 2008).

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