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).