Hold off on buy­ing this great com­pany, for now

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

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.

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