Skeleton in the cupboard still a worry
SENWES, South Africa’s biggest agricultural business in terms of turnover, is preparing itself for listing, probably early next year. For many shareholders in the old Sentraal-Wes agricultural co-operative based in Klerksdorp, that will be the end of a long process that started 15 years ago when the co-op switched to a company and subsequently plummeted to the brink of insolvency before recovering well over the past few years. (See box.)
This move is good news for its shareholders. But be careful not to be over-optimistic. Senwes’s shares are currently trading at 830c on the informal market – but that already looks rather fully priced compared to those of its competitors, such as Afgri, and other listed companies with a market capitalisation of around R2bn. For the financial year to 30 April 2010, the group recorded earnings of 120c/share, out of which an ordinary dividend of 40c/share was declared. According to its balance sheet, its net asset value is 586c/share. Investment analysts will note the shares are now trading at an earnings multiple of seven times the previous year’s profit, a dividend yield of 4,8% and a significant premium of more than 40% above NAV. That’s not excessively expensive, but at the same time it’s not a valuation that will take your breath away.
Afgri, which was listed quite a number of years ago and has undoubtedly been a more successful and steady business over the past
two or even three decades, is currently trading at a PE of just more than 10 and a very attractive dividend yield of almost 6%.
Senwes will also have to learn how to emphasise its financial figures that are important to investors rather than concentrating on performances that would have impressed members in the old days. It’s no good saying its latest profit of R208m is the second-best in Senwes’s history, especially not if investors can see it’s more than 40% lower than the R368m profit chalked up in its previous financial year. Admittedly, some of its activities have closed down, but it’s still quite a big fall in profits.
Investors also like to look at return on equity. It’s the best – some say the only – yardstick to measure how well a management is doing its job. And here Senwes’s management isn’t doing too badly. The return on equity in 2007 was only 16,4%. Then it rose to 20,7% in 2008 and a hefty 32% in 2009, before dropping back to 19,7% in 2010. That’s still not bad. Anything around 20%/year is very good in SA.
Investors don’t like excessive interestbearing debt in a company. Both Afgri and Senwes fail that test. Their traditional business model is one of borrowing from the Land Bank and giving the money to the farmers/members, now shareholders, as production credit or some other kind of advance. But Senwes is currently improving its cash management. The graphs show profit currently covers its annual interest commitment slightly more than five times. That’s better than in the past, but still nothing to write home about.
Hopefully, if the listing does go ahead, its prospectus will provide more clarity on prospects. Currently, a record maize crop of more than 13m t is being harvested in SA. Senwes will handle 30% to 35% of that, which should be very good for the group’s income statement for the year to April 2011. However, the prospects after that don’t look so good. At the current maize price of just more than R1 000/t, very few of Senwes’s traditional producers can still plant maize profitably. The prospects for 2012 and later may look completely different from the current acceptable financial performance.