Hold off on buying this great company, for now

Big things have been expected of KAP since Steinhoff’s industrial and transport assets were reverselisted into it in 2012. KAP has so far delivered unfailingly.

In the six months to December, it lifted headline EPS (HEPS) by 18%. It took average interim HEPS growth over the past five years to 16%.

Consistent performance has endeared KAP to the market. In the past four years its share price has trebled to about 850c.

In the latest half year, acquisitions contributed 8% of KAP’s 18% HEPS growth.

The driving force behind KAP’s first-half growth was its industrial operations, which upped combined operating profit by 49% to R624m, 56% of the group total of R1.11bn. Growth was achieved off revenue that grew at a far slower 12% to R4.64bn and came primarily thanks to an impressive rise in average operating margin from 10.1% to 13.5%.

“The strategic initiatives we have implemented over the past few years and capital investments are now boosting our bottom-line performance,” says CEO Gary Chaplin.

KAP reveals revenues but only percentage changes in the operating profits of its four industrial operating divisions.

Performances were robust across the board, with the

biggest uplift in operating profit — 100% — delivered by the automotive division on a 48% rise in revenue to R1bn. Providing a big boost was Autovest, a vehicle accessories franchise business acquired in April 2016 in a R560m cash deal.

Performance of the division’s core automotive components operations was solid, says Chaplin. Drivers included a 4% rise in vehicle assembly volumes, new model introductions that remain ongoing and increasing automation of production facilities.

KAP’s vertically integrated timber division, of which timber products business PG Bison is the core component, lifted revenue 15% to R1.44bn and operating profit 48%.

KAP’s biggest industrial division by revenue, chemicals, lifted revenue 8% to R1.53bn and operating profit 45%.

Chemicals became a far more crucial component in KAP’s lineup on January 1, with the closing of the R4.1bn deal to acquire Safripol, SA’s largest producer of high-density polyethylene and polypropylene plastics. The deal valued Safripol on an 8.4 p:e based on its R488m taxed profit in 2015.

The chemicals division is busy with a major expansion of its Hosaf unit, SA’s only producer of PET plastic used extensively in the beverage sector. The R700m project, due for completion in August, will increase annual capacity from 128,000 t to 240,000 t.

To assist in the funding of the Safripol deal, KAP turned to shareholders in December, raising R1.5bn through a rights issue. KAP’s debt level has also risen sharply with net interestbearing debt, which includes R1.37bn in bonds, jumping from R2.6bn at the end of December to a current R6.7bn. It lifted KAP’s net debt-to-equity ratio from 25% to 65%. KAP still has debt facilities of just over R3bn.

KAP is a fine company headed by a dynamic, growthorientated management team. It makes it a great long-term investment, but in the short to medium term its share price appears to be in for a breather.

Evan Walker of 36One Asset Management agrees. “On a 16.5 p:e its valuation is looking stretched for an SA industrial company. We have sold out our holding, which we bought at around the R4-R5 level.”

There is minimal chance KAP’s share price will reach that level again, but it could pull back to about 730c-750c, when solid buying support should kick in.