A ‘plougher­ful’ play might be to go short on Crookes and long on Zeder

Financial Mail - Investors Monthly - - Opening Bell - Marc Hasenfuss

he marked in­crease in the As­so­ci­ated Bri­tish Foods (ABF) of­fer to buy out mi­nor­ity share­hold­ers at su­gar group Illovo might reignite mar­ket in­ter­est in the hand­ful of agribusi­ness list­ings on the JSE.

That the mighty ABF, which is one of the largest con­sumer busi­nesses in the world, is will­ing to look be­yond this low point in the agri­cul­tural cy­cle speaks vol­umes about the longer-term po­ten­tial of spe­cial­ist farm­ing busi­nesses in SA.

Aside from ABF there are more than a few pri­vate eq­uity-type en­ti­ties mak­ing se­lected ac­qui­si­tions in the lo­cal agribusi­ness sec­tor.

At this junc­ture, two stand­out com­pa­nies — PSG-con­trolled Zeder In­vest­ments and KwaZulu Natal-based Crookes Brothers — ap­pear poised to plough into what is still a largely frag­mented agribusi­ness mar­ket.

Both are geared to­wards ac­qui­si­tions. Crookes re­cently raised R215m to fund new growth op­por­tu­ni­ties in sub-Sa­ha­ran Africa. PSG last year raised more than R2bn in an ac­cel­er­ated book­build, and there is lit­tle doubt that a por­tion of this fresh cap­i­tal must wend its way to Zeder — which prob­a­bly needs to em­bark on a rights is­sue be­fore it can start hunt­ing se­ri­ously for op­por­tu­ni­ties that are big enough to move the port­fo­lio per­for­mance nee­dle.

While de­vel­op­ments at both Zeder and Crookes are worth mon­i­tor­ing closely, a “plougher­ful play” might be to go short on Crookes and long on Zeder.

Crookes is by no means over­val­ued, and was trad­ing at the time of writ­ing at less than the nearly R63/share net as­set

Tvalue re­flected as at the end of Septem­ber 2015.

The com­pany is con­ser­va­tively man­aged, and its in­terim per­for­mance — when earn­ings came in at 181c/share — was more than re­spectable.

The chal­lenge, how­ever, is di­ver­si­fy­ing con­vinc­ingly away from the reliance on its core com­pe­ten­cies in the su­gar in­dus­try, which still ac­counts for 63% of rev­enue and much more of op­er­at­ing profits (where the fledg­ling macadamia and de­cid­u­ous fruit ven­tures traded at a loss in the last in­terim pe­riod).

Gut feel is that Crookes will prob­a­bly not rush deal mak­ing — even if the poor agri­cul­tural con­di­tions might have dried out the de­ter­mi­na­tion of ven­dors to hold out for pre­mium prices for agribusi­ness as­sets. There is an air of cau­tion in the in­ter­ims — with the div­i­dend cov­ered more than five times by earn­ings de­spite the re­as­sur­ance of op­er­at­ing cash flow com­ing in 5% higher at R102m. Di­rec­tors did note that sev­eral ma­jor projects were un­der eval­u­a­tion, tak­ing into con­sid­er­a­tion the need to bal­ance longer-term projects with short-term cash-gen­er­a­tive in­vest­ments.

These in­clude a “low risk” green­field de­vel­op­ment of a 300 ha banana farm in south­ern Mozam­bique, a part­ner­ship with Sil­ver­lands in 2016 and plans to un­lock value via a res­i­den­tial, com­mer­cial and in­dus­trial prop­erty de­vel­op­ment near Scot­tburgh.

Things are also look­ing up for the macadamia and de­cid­u­ous plant­ings. But ul­ti­mately Crookes is likely to ben­e­fit from these en­deav­ours only in the medium term, and the share may con­tinue to drift lower on su­gar’s bit­ter­sweet prospects. Zeder, on the other hand, could ex­pe­ri­ence a shorter-term up­lift af­ter en­dur­ing sev­eral months of poor per­for­mance on the JSE.

Zeder holds a num­ber of agribusi­ness in­vest­ments, rang­ing from fruit mar­ket­ing gi­ant Capes­pan and farm­ers’ re­tailer Kaap Agri to a spe­cialised seed busi­ness and a com­mer­cial farm­ing ven­ture in Zam­bia. But its mar­ket value is largely pegged to its big­gest in­vest­ment, con­sumer brands gi­ant Pi­o­neer Foods. At the time of writ­ing Zeder was trad­ing at roughly a 20% dis­count to its sum-of-the-parts val­u­a­tion of R8,64/share.

New deal flow could nar­row the dis­count to closer to 10%. But what will bol­ster mar­ket sen­ti­ment more than any­thing is the ad­mis­sion that PSG is “in­ves­ti­gat­ing var­i­ous al­ter­na­tives to the cur­rent man­age­ment fee”.

The man­age­ment fee is highly con­tentious, since so much of Zeder’s value story is dic­tated by Pi­o­neer rather than by man­age­ment tinker­ing with the port­fo­lio. Should a more eq­ui­table fee struc­ture be agreed on, Zeder would cer­tainly be viewed much more pos­i­tively by the mar­ket.

Zeder should per­haps also give se­ri­ous thought to un­bundling its stake in Pi­o­neer, which would re­sult in a smaller, but much more in­trigu­ing, agribusi­ness port­fo­lio that would be more ac­com­mo­dat­ing of smaller ac­qui­si­tions.

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