Shaking of the tree brings hope of growth

any times, investing is all about timing rather than the inherent underlying operating fundamentals.

Back in April, in a company review on York Timbers, IM commented that the company had “deep roots but not enough fertiliser”. With low liquidity, poor returns and weak prospects IM saw little to interest investors. The commentator correctly identified the firm’s flaws, despite the stock trading at a 76% discount to NAV.

There was weak, inconsistent cash flow and a poor return on assets and equity. These issues had been endemic for more than a decade as management focused on the never-ending drive to boost NAV a share. Earnings consistency and any hope of a dividend were seemingly not a corporate focus; there was more of a private equity-type

Mmandate than an investorfriendly philosophy, and over a 10-year period York’s share price fell 45% in recognition of that operating scenario.

Certain segments of the market have for more than a decade bemoaned the weak returns, slumping share price and apathy of the management, which seemingly ran the company as a feudal fiefdom.

All that changed over the past months. It’s amazing what shaking the proverbial tree can do. York Timbers is now the stock market darling, compared with being a splinter in the market’s finger.

So, what transpired? There was shareholder activism and a change in share ownership. In late July, it was announced that long-standing private equity partner Lereko Metier had exited its stake and sold 16.21% of the company. The buyer was A² Investment Partners, the newly formed vehicle of former asset manager Adrian Zetler and industry executive André van der Veen. The same duo are also behind the resurrection and share price run in printing and publishing company Novus Holdings.

A² swept in and bought the stake, IM believes, for 185c, and has continued to add small parcels to its holding. IM believes it now owns 20% with, more importantly, backing from many long-suffering major institutional shareholders.

On the back of this activist move, York’s share price attained a recent high of 390c. At the time of writing this update, York is trading at 335c. A nice gain from the April IM note price of 220c — all on the back of activism. After years of lethargy, some light at the end of the tunnel emerged with a return to positive earnings at recent results to June 2021.

Much of this was in process before the emergence of A², but the nomination to the York board of two nonexecutive directors from A², IM contends, may speed up the company’s restructuring.

Revenue for the 2021 year rose 28% to R1.85bn with an operating profit of R224m and profit before tax of R19m.

From a loss in the previous year, headline earnings came in at a pleasing 43c a share. No dividend was declared.

Net debt improved somewhat, declining 12% to R515m, and the NAV rose 4% to 952c a share. The current discount to NAV is 64%, far better than the 80% before A²’s activism.

IM commends the company for the recovery from the Covid factors that slammed the 2020 year’s results.

However, IM is aware of operational issues, and questioned management at the results presentation.

In what was an unprecedented construction-anddemand boom after the reopening of the economy when lumber- and timber-related products soared in value and were in short supply, York admitted, its utilisation of its factories was simply not up to scratch to meet market needs. Much can be done to improve efficiency and thus profitability.

With the business back on a profitable footing and with new blood hopefully coursing through the board, IM has high hopes for the growth within York, and hopefully dividends.

A² clearly sees the large discount to NAV and the inherent value of the biological assets as an opportunity.

Realigning management’s remuneration towards profits and earnings rather than NAV will be a good start. With the untimely passing in early July of York CEO Piet van Zyl, a search for a new CEO is under way. The naming of that candidate could be key to York’s ongoing resurrection.

A further welcome move would be a restructuring of the York board, which has presided over the decade of dire performance. Shareholders saw lacklustre earnings and no dividends, but the York management team collectively reaped R150m in fees for themselves.

IM now sees York Timbers as an activist stock in play, one that has solid assets with a number of permutations, and lumber and timber operations that are unique and valuable in SA. The agricultural interests in citrus, avocado and nuts, though small compared with timber, have expansive growth potential as some land is converted from timber to more profitable, faster growing cash crops.

Much work still needs to occur, but the levers are there to make the business a profitable entity. They just need to be pulled — or, rather, planted.

IM issues a “buy” recommendation on York, with an ambitious target of 525c. ●