Over­val­ued, and lan­guid in parts

I fear this may be Zeder’s last cy­cle — be­cause in­sti­tu­tional dis­sat­is­fac­tion will surely swell if the sta­tus quo re­mains

Financial Mail - Investors Monthly - - Guest Column -

Ihave cov­ered agri­cul­tural fund Zeder Investment­s, a busi­ness 42%-owned by fi­nan­cial ser­vices com­pany PSG Group, for more than a decade. I also cover its un­listed con­stituent parts, and I was even in­volved in the list­ing of its largest as­set, Pi­o­neer Foods.

I men­tion this not as a boast but to put into con­text the depth of my cov­er­age on the counter and its un­der­ly­ing as­sets.

I have been a harsh critic of the fee struc­ture that PSG im­posed on Zeder which, for the sec­ond time, was re­cently amended. I have ar­gued that most of Zeder’s as­sets had been in a coma for 2016. I also be­lieve the counter is over­val­ued.

Zeder is now in its third life cy­cle as an owner and op­er­a­tor of agribusi­ness as­sets.

Un­less there is rad­i­cal change in the struc­ture to un­lock value and re­vi­talise the co­matose R4.5bn over-the-counter (OTC) and un­listed port­fo­lio, I fear this may be Zeder’s last cy­cle — be­cause in­sti­tu­tional dis­sat­is­fac­tion will surely swell if the sta­tus quo re­mains.

When Zeder was founded more than a decade ago, its main aim was to ac­quire OTC shares in highly un­der­val­ued agri­cul­tural stocks such as Kaap Agri, NWK, OTK and BKB. The Zeder would work with man­age­ment to un­lock value by cre­at­ing profit cen­tres in­stead of what were long stand­ing farm­ers’ co-op­er­a­tives.

Zeder was very suc­cess­ful and there was ma­te­rial up­lift in the port­fo­lio’s sum of the parts (SOTP) valu­a­tion.

In Zeder’s sec­ond life cy­cle, it sold off as­sets which it could not ma­te­ri­ally in­flu­ence to fo­cus on a core group of stocks where it could gain mean­ing­ful value up­lift. Thus Capes­pan, Kaap Agri and Agri­col (now Zaad) came to the fore. At the same time, PSG and Zeder re­alised that the ma­te­rial value that was trapped in­side SA’s sec­ond-largest food com­pany, for­mally OTC listed, Pi­o­neer Foods.

Many of the agri­cul­tural co-ops they ac­quired had stakes, for his­toric rea­sons, in this highly un­der­val­ued food gi­ant. The big­gest stake was held by Western Cape Agri co-op Kaap Agri, which owned a stag­ger­ing legacy, hold­ing of 56m Pi­o­neer Foods shares.

When Kaap Agri un­bun­dled this highly val­ued stake into a sep­a­rate OTC list­ing ve­hi­cle called Agri Voed­sel in 2013, the stock traded at a 30% dis­count to its key as­set. It was an illiq­uid, if valu­able, hold­ing com­pany.

Zeder swooped in to ac­quire the mi­nori­ties in Agri Voed­sel in 2014. The R2.3bn deal was seen as con­tentious as it un­der­val­ued the in­her­ent stake in Pi­o­neer Foods. From this point in mid-2014, Zeder’s dis­count to SOTP widened as the weight and scale of the vast Pi­o­neer Foods stake weighed on the counter. The un­listed stocks, which were lit­tle un­der­stood by the mar­ket, were grad­u­ally dis­re­garded as Zeder in­creas­ingly was viewed as a Pi­o­neer Foods proxy.

A mat­ter of months ago Zeder, at its worst, was trad­ing at a 50% dis­count to its SOTP. The en­tire mar­ket value of Zeder was dom­i­nated by Pi­o­neer (now 66% of the fund) with the other as­sets val­ued at less than zero.

Fur­ther, the large man­age­ment and per­for­mance fees that PSG Group levied on Zeder raised the hack­les of large in­sti­tu­tional share­hold­ers.

I also felt it was ut­terly un­just that a large 1.5% man­age­ment charge and an ad­di­tional per­for­mance fee was levied on share­hold­ers for a fund that was pre­dom­i­nantly val­ued by the mar­ket as noth­ing more than a Pi­o­neer proxy.

I was happy to pay a fee for the OTC and un­listed as­sets — how­ever, why pay a fee on a R10bn as­set where Zeder has no real in­flu­ence?

That fee struc­ture, thank­fully, has been amended in ex­change for an is­sue of 207m new Zeder shares (worth R1.3bn) to PSG (which re­lin­quishes its an­nual man­age­ment and per­for­mances fees). This frees up Zeder to pay higher div­i­dends, gear its bal­ance sheet to the tune of R1bn to R1.5bn and is­sue new shares to fund any pos­si­ble ex­pan­sion.

How­ever, I now pon­der if, in this its a third life cy­cle, Zeder has any rea­son to ex­ist.

I strug­gle to see where any sig­nif­i­cant up­lift can come from, and won­der if it’s not bet­ter to break the com­pany up.

It was un­just that a 1.5% man­age­ment charge and an ad­di­tional per­for­mance fee was levied on share­hold­ers

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