Skele­ton in the cup­board still a worry

Finweek English Edition - - Front Page - VIC DE KLERK vicd@fin­

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.

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