CUL­TI­VAT­ING RE­TURNS: In search of agri value?

Finweek English Edition - - COLUMN - CHRIS LO­GAN

Agri com­pa­nies have re­cently also been the source of hotly

con­tested bid­ding wars

THE VALUE-EN­HANC­ING trans­for­ma­tion of staid agri­cul­tural co-op­er­a­tives to highly re­ward­ing in­vest­ments has been a happy hunt­ing ground serv­ing up com­pa­nies of the cal­i­bre of Pi­o­neer, Kaap Agri, Clover and Capes­pan. Agri com­pa­nies have re­cently also been the source of hotly con­tested bid­ding wars, as in the case of KWV and what’s tran­spir­ing at Capes­pan.

PSG has un­doubt­edly led the way in cap­i­tal­is­ing on that value-en­hanc­ing trans­for­ma­tion by cre­at­ing a R2,5bn com­pany in Zeder and de­riv­ing a use­ful re­cur­ring fee in­come from the man­age­ment of Zeder’s agri in­vest­ments. Black em­pow­er­ment gi­ant HCI – af­ter mak­ing five times its money on Clover – also reaf­firmed its ap­petite by re­cently sur­pris­ing the mar­ket and buy­ing 35% of KWV.

Two fac­tors stand out in defin­ing the abil­ity of those his­tor­i­cally staid co-op­er­a­tives to ei­ther make or not make the tran­si­tion into highly re­ward­ing in­vest­ments.

The first fac­tor is the ca­pac­ity to drive pre­cip­i­tous change.

Clover – in a very short space of time – pulled off the feat of re­cap­i­tal­is­ing it­self to the tune of more than R1bn, which it fol­lowed up by re­struc­tur­ing its com­pli­cated dual share struc­ture then list­ing its or­di­nary shares on the over the counter mar­ket and not long there­after on the JSE. Clover as it now stands en­joys very strong brand value and has en­hanced its rep­u­ta­tion by trans­parency, tak­ing its orig­i­nal pro­ducer share­hold­ers along for the ride and be­ing fair with mi­nori­ties.

Capes­pan has markedly ac­cel­er­ated its pace of change. It com­menced 2011 by em­ploy­ing a highly re­garded out­sider as CEO and at its re­cent AGM spelt out a com­pelling for­ward-look­ing vi­sion in­volv­ing two dis­tinct busi­nesses in a cus­tomer-driven fruit busi­ness and a ca­pac­i­ty­driven lo­gis­tics busi­ness. While Capes­pan has set the goal of be­ing in­vestor friendly, it needs some breath­ing space to pro­vide in­vestors with crit­i­cal in­for­ma­tion, such as the ca­pac­ity and util­i­sa­tion of its all-im­por­tant lo­gis­tics divi­sion.

KWV ran out of steam af­ter un­bundling its Dis­tell in­ter­ests. That should have pro­moted accountability and trans­parency but it sim­ply didn’t. For ex­am­ple, KWVs last an­nual re­port was a very un­friendly doc­u­ment with valu­able as­sets ei­ther not be­ing men­tioned, car­ry­ing no value at all or car­ry­ing val­ues dat­ing as far back as the Twen­ties. War­ren Buf­fett’s wis­dom that “im­pe­rial cor­po­rate palaces (read La Con­corde) in­duce imperious be­hav­iour” rings loud.

The sec­ond fac­tor is the of­ten painful process of pro­mot­ing pro­duc­tiv­ity and com­pet­i­tive­ness. Clover achieved that in a “de­lay­ing process” that made 500 po­si­tions re­dun­dant. Cost sav­ings were passed on to con­sumers and mar­ket share rose.

Capes­pan im­proved pro­duc­tiv­ity at yearend 2010 by sig­nif­i­cantly re­duc­ing staff at its head of­fice and fruit divi­sion, in­cur­ring R21m in re­struc­tur­ing costs.

KWV’s 2010 num­bers re­veal its staff on av­er­age gen­er­ate 22% less rev­enue than their peers at Dis­tell but are paid 56% more, which leads to staff costs at KWV amount­ing to 18,2% of rev­enue ver­sus 9,1% at Dis­tell and, at best, mar­ginal prof­itabil­ity.

Trans­lat­ing those con­cepts into rand and cents over the past year to 30 June: Clover’s share price has more than dou­bled with it com­ing on to the OTC mar­ket in midJuly 2010 at the 100c level, split­ting it­self two for one and then list­ing on the JSE, where it cur­rently trades at R1100c/share, a pre­mium to its NAV of 928c/share. Capes­pan’s OTC share price has risen strongly from 130c to 245c bid, al­most clos­ing the gap on its NAV of 277c/share. KWV’s OTC share price has lan­guished at the 1050c level, which puts it at a mas­sive dis­count to its un­der­stated NAV of 1869c/share. Gaz­ing into the fu­ture it ap­pears only a hand­ful of agri com­pa­nies won’t fall prey to takeover and con­sol­i­da­tion. The for­tu­nate few will be those that drive the nec­es­sary changes to be­come fully pro­duc­tive and com­pet­i­tive and, by im­pli­ca­tion, highly re­ward­ing in­vest­ments.

Lo­gan is di­rec­tor of Op­por­tune In­vest­ments.


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