CULTIVATING RETURNS: In search of agri value?
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.