KAP Industrial provides an opportunity for patient investors
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.
PHOTO: DUMISANI DUBE