Financial Mail - Investors Monthly
Agri-investing
Where to plough your money
The agricultural sector in SA, from a pure equity context, is minuscule in terms of the formal JSE listed environment. But in terms of employment, its prospects and market size, it’s an important component of the economy.
Agriculture in SA employs 842,000 people (10% of all formal employment) and has net positive exports, and the sector contributes 3% to GDP. The sector contributed about 10% to SA’s total export earnings in FY2018 at a value of $11.1bn.
The pure JSE-listed agricultural and related investment plays are Astral Foods, Kaap Agri, Quantum Foods and Crookes Brothers. Their combined market value is R10bn.
The overriding sector grandaddy is Zeder Investments, with an R8bn market value, but R6bn of that is allied to its giant 28% stake in Pioneer Foods. The Zeder “rump” is heavily discounted. In 2015/2016 Zeder was riding high on Pioneer Foods, but since then both the Zeder and Pioneer prices have halved, dragging valuations with them.
Zeder, listed by PSG Group in 2006, was the initiator of much of the value creation and value unlock in many of the former unlisted agricultural cooperatives. Its portfolio has slimmed and is now dominated by Pioneer Foods, which is under takeover from US
beverage giant PepsiCo. The list of former agricultural co-operatives has shrunk over the years thanks to sector consolidation.
A recent R300m “scuffle” between grain titan Senwes and fruit and meat business Subtropico for control of co-op KLK Landbou — based in Upington in the Northern Cape — saw Senwes walking away with majority control of 57%.
Many sizeable multibillionrand turnover agricultural companies still operate from the shadows, trading on nonJSE exchanges such as the ZAR X or 4AX. Others still use a matched basis trading platform in-house to put potential buyers and sellers together, a laborious and antiquated method of trading. But there are many undervalued gems in this sector for the patient value-orientated investor.
Pretoria-based Subtropico and GWK in the Northern Cape are excellent, well-run and profitable businesses.
Smaller entities such as Port Elizabeth-based agri co-op, wool and auction business BKB Landbou have attracted the interests of funds that have accumulated stakes hoping to cash in on sector consolidation between the major sector players — Senwes, Kaap Agri and private equity-owned Afgri — as well as the richer, larger regional players such as GWK and timber and agri giant TWK.
These agricultural entities have multibillion-rand revenues and are all highly profitable in their niches. Senwes, based in Klerksdorp in the North West, had a 2019 annual operating profit of R600m.
Another ZAR X-listed agricultural counter is TWK, based in eMkhondo (Piet Retief) in Mpumalanga. It has material interests in forestry and wood product exports, as well as traditional and growing agricultural interests. It has revenue of R7.7bn and operating profit of R350m, trading at 2,650c with a discount to NAV of 30%.
NWK, based in the North West, is listed on the 4AX. With R2bn revenue, it trades at 346c a share and sits on a discount to NAV of 65%.
This tends to be the norm in the unlisted agricultural space: counters have sizeable revenues, are hard-asset based and sit at chunky discounts to NAV.
So, how can IM readers participate in such agricultural bounty?
The agricultural sector is highly cyclical and an investor needs a long time horizon; farming is not a quarterly venture. Earnings tend not to be smooth and an investor needs to be conscious of these cycles. The sector is not without risks.
Weather patterns can be as important to the sector as international soft commodity pricing. Sentiment is also a pertinent feature. Aside from Mother Nature, government policy plays a role. The political noise around expropriation without compensation has rattled the agricultural sector and somewhat curtailed investment and underlying production growth.
So, looking at these factors, which stocks would IM recommend? Four come to mind.
Astral Foods’s (15,576c) is a R6.7bn mid-cap and SA’s largest poultry producer, processing 5-million birds a week.
The counter has had a difficult year as higher input and feed costs simply could not be recovered from a distressed consumer market, and a tight poultry realisation pricing regime from imports saw margin crushed. Interim earnings
to March 2019 halved.
However, management keeps a tight rein on costs, and if a hoped-for increase in the maize harvest is delivered in 2020, maize prices and input costs should fall and margin and earnings should recover.
I’d wait to see the forthcoming FY2019 trading update to September, but Astral, to me, is nearing a point of accumulation for a recovery in the second half of 2020.
Kaap Agri, at 2,900c, is a R2.2bn JSE-listed agricultural business with interests in many provinces. More of a retailer than an agricultural play, the counter is 40% owned by Zeder, which has twice made a tilt to acquire the minority interests.
Kaap was hit hard from the Western Cape drought but still managed to show a meagre positive increase in earnings in 2018. The counter trades on a historic p:e of 8.2 times and 7.5 times forward based on my expectations.
Recovery from the drought and increasing fruit and sector recovery prospects into 2020 bode well for this well-run counter.
National animal feeds, broilers and egg producer Quantum Foods (350c) has a market value of R700m and a NAV of 860c a share, is ungeared and has more than R100m cash in the bank. The company has also bought back 18% of its share in the past year.
Earnings are somewhat volatile due to eggs — in FY2018 earnings soared to 164c a share, but as the egg price boom cracked earnings halved to a still fair 45c a share in the first half of 2019.
On my forecast, Quantum is on a p:e of 4.4 times — still a cracking good deal for such a well-run, asset-rich company.
Finally, for the daring I’d recommend Senwes, which has 68 grain silos and 25% of the grain capacity in SA. It also has a large agricultural equipment division under John Deere, a highly profitable financial services arm and a recovering retail business — a joint venture with Afgri — called Hinterland.
With a market value of R2bn, a share price of 1,165c and a discount to NAV of 17%, this agricultural behemoth does not move quickly.
It is conservative, but a solid, ambitious agricultural player. Its current historic p:e is 6.2 times with a dividend yield of 5.5%, hardly demanding by JSE terms for such a large entity in the space.
It has greater ambitions to become one of the big sector consolidators, and perhaps a move from the ZAR X to the JSE may be on the cards after 2020.
By the time this article is published it may be market talk that investment company Remgro has acquired from Grindrod its 20% stake in Senwes to make Remgro the second-largest shareholder after holding company Senwesbel. Not a bad vote of confidence in management.
Agriculture is a long-term game. Those willing to invest in a well-run sector whose products will pretty much always be in demand might look to put some seeds in the agricultural sector and wait for the sprout to mature into decent investments. ●