KAP In­dus­trial pro­vides an op­por­tu­nity for pa­tient in­vestors

The Star Early Edition - - OPINION & ANALYSIS - Amelia Mor­gen­rood Amelia is a re­gional di­rec­tor of PSG, a cer­ti­fied fi­nan­cial plan­ner, a mem­ber of the South African In­sti­tute of Stock­bro­kers and the In­vest­ment An­a­lyst So­ci­ety.

IF I HAD to put my money on a com­pany that will one day be num­ber one on the JSE it will def­i­nitely be KAP In­dus­trial Hold­ings. This is a share that might cre­ate loads of wealth for long-term share­hold­ers. But you have to be pa­tient. You can tick all the im­por­tant boxes: great and dy­namic man­age­ment, economies of scale, mar­ket lead­ers, sus­tain­able diver­si­fied earn­ings, strong cash gen­er­a­tion, mea­sured and con­ser­va­tive, high bar­rier to en­try in­dus­tries, etc.

Since KAP ac­quired the in­dus­trial as­sets of Stein­hoff in 2012, it has es­tab­lished a re­mark­able track record. Af­ter five years of strate­gic re­struc­tur­ing they now have set a base for con­tin­ued growth, a ma­ture busi­ness with ma­ture man­age­ment. The group’s mar­ket cap grew from R7 bil­lion to more than R20bn in just five years, and they have a per­son­nel force of around 20 000.

KAP is a diver­si­fied in­dus­trial group of which 48 per­cent of rev­enue is de­rived from lo­gis­tics and 52 per­cent from in­dus­trial operations. Of the 48 per­cent, 36 per­cent is con­trac­tual and 12 per­cent pas­sen­ger trans­port. The beauty of the con­trac­tual lo­gis­tics is that they are linked to the fuel price and there­fore mar­gins can­not be com­pro­mised.

They trans­port any­thing from food, petro­chem­i­cal prod­ucts, ce­ment and ex­plo­sives for the min­ing in­dus­try and agri­cul­tural prod­ucts. They do ware­hous­ing and freight for­ward­ing – ba­si­cally a com­plete turnkey lo­gis­tics divi­sion, also in­te­grat­ing with the rest of the com­pany’s in­dus­trial operations.

Uni­trans Pas­sen­ger spe­cialises in per­son­nel, tourist, in­ter­city and com­muter trans­port ser­vices. The pas­sen­ger trans­port in­clude names like Grey­hound, Ci­ti­liner, Mega Coach and Magic Trans­fers. They trans­port 10 mil­lion pas­sen­gers in 1 350 ve­hi­cles an­nu­ally. The im­mi­grants in South Africa vis­it­ing their fam­i­lies in Africa are trans­ported, and they have con­tracts to ser­vice min­ing operations.

The Gau­train bus ser­vice is another con­tract, and a per­son­nel trans­port con­tract in Mozam­bique con­tin­ues to per­form ahead of ex­pec­ta­tion with con­tract ex­pan­sion. The fleet size in­creased from 45 ve­hi­cles at the start of con­tract in Mozam­bique, to 60 ve­hi­cles.


The in­dus­trial side of the busi­ness is di­vided into four seg­ments: in­te­grated tim­ber (forestry and tim­ber man­u­fac­tur­ing); chem­i­cal (man­u­fac­ture of poly­eth­yl­ene tereph­tha­late (PET), urea formalde­hyde (UF) resin and im­preg­nated paper); au­to­mo­tive com­po­nents (com­po­nents used in new ve­hi­cle assem­bly and af­ter­mar­ket ve­hi­cle ac­ces­sories); and in­te­grated bed­ding (man­u­fac­ture all the dif­fer­ent com­po­nents of a mat­tress).

Of the 52 per­cent in­dus­trial rev­enue con­tri­bu­tion, the big­gest part is chem­i­cal at 17 per­cent, fol­lowed by in­te­grated tim­ber at 16 per­cent, au­to­mo­tive com­po­nents 11 per­cent and in­te­grated bed­ding 8 per­cent.

The op­er­at­ing mar­gin for the diver­si­fied in­dus­tri­als in­creased from 11 per­cent in 2016 to 12.3 per­cent in 2017, thanks to in­vest­ment in tech­nol­ogy. All these di­vi­sions in­creased their prof­itabil­ity, but the star divi­sion was au­to­mo­tive com­po­nents with a 100 per­cent in­crease, on a 48 per­cent in­crease in rev­enue.

South Africa has great tax in­cen­tives for car man­u­fac­tur­ers, there­fore in­ter­na­tional man­u­fac­tur­ers flocked to SA in re­cent years. Though not a great job cre­ator, it has been a boon to the sec­ondary car man­u­fac­tur­ing mar­ket.

Ex­port vol­umes are grow­ing, thanks to new model in­tro­duc­tion and a grow­ing world econ­omy, there­fore they are not ex­posed to the sub­dued lo­cal car mar­ket. KAP man­u­fac­ture things like the resin in­side a dash­board and leather for seats. The af­ter­mar­ket (bull­bars, etc) pro­vided a new diver­si­fied stream to this divi­sion with the ac­qui­si­tion of Au­tovest in early 2016.

Safripol was ac­quired late in 2016 for an at­trac­tive R4.1bn and forms part of KAP’s diver­si­fied chem­i­cal divi­sion, which al­ready in­cludes its Hosaf and Wood­chem busi­nesses.

It is a plas­tics man­u­fac­tur­ing com­pany that sup­plies Polypropy­lene and High­den­sity Poly­eth­yl­ene to the con­vert­ing in­dus­try, for the man­u­fac­ture of a wide range of pack­ag­ing and in­dus­trial end uses. The ma­jor­ity of their em­ploy­ees are based at their man­u­fac­tur­ing plant in Sa­sol­burg.

The lo­cal mar­ket for this col­lec­tive divi­sion’s prod­ucts is also un­der­served, with im­ports fill­ing the sup­ply deficit. It is a nat­u­ral ex­pan­sion­ary op­por­tu­nity for the group. The chem­i­cal divi­sion is in par­tic­u­lar in­ter­est­ing. Wood­chem SA is the largest pro­ducer of UF resins in Africa.

The new paper im­preg­na­tion line makes Wood­chem the largest pro­ducer of im­preg­nated paper in Africa. Hosaf is the only pro­ducer in South Africa of vir­gin PET, which is used in the bev­er­age in­dus­try.

Formalde­hyde, a raw ma­te­rial, is sold to more than 30 dif­fer­ent in­dus­tries in South Africa. With the erec­tion of an ad­di­tional formalde­hyde plant in 2007, the ca­pac­ity for the pro­duc­tion of 37 per­cent formalde­hyde was in­creased to 90 000 tons per an­num, mak­ing Wood­chem the largest pro­ducer of wood panel resins in Africa.


The lo­gis­tics op­er­at­ing en­vi­ron­ment re­mains chal­leng­ing amid the current eco­nomic re­ces­sion­ary sit­u­a­tion. Man­age­ment is fo­cus­ing on in­creas­ing the long-term con­trac­tual rev­enue base, which should re­sult in more re­silient rev­enues through the cy­cle. Merg­ers and ac­qui­si­tions are likely to con­tinue.

This is a solid healthy com­pany, con­tin­u­ously in­vest­ing in tech­nol­ogy and new plant and equip­ment. The busi­ness is well-struc­tured to weather current mar­ket con­di­tions and my best guess is that the bad eco­nomic con­di­tions in SA will have a dis­mal ef­fect on KAP in gen­eral.

Gau­train bus driv­ers on a break at the Gau­train bus de­pot in Midrand. The Gau­train bus ser­vice is another con­tract in KAP’s bus pas­sen­ger trans­port ser­vice, to­gether with Grey­hound, Ci­ti­liner, Mega Coach and Magic Trans­fers.


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