Financial Mail

The Land Bank poser

Anthony Clark


The next wave of agricultur­al sector consolidat­ion may occur sooner rather than later, writes

hen a century-old lender like the Land Bank defaults on its debt — triggering a liquidity contagion in the R280bn farming sector — the repercussi­ons are bound to ripple through the wider economy.

Investors in agribusine­sses will need to watch developmen­ts over the next few months closely.

The Land Bank’s problems started early in 2020, when it was unable to repay a debt instrument due to a liquidity crunch. The bank did the unthinkabl­e — it defaulted on its debt. Panic ensued.

Internatio­nal ratings agencies Moody’s and Fitch moved swiftly to cut the bank’s credit rating, further exacerbati­ng its precarious financial and liquidity position.

The default was to fall back on a cash-trapped Treasury. It had already, in February, increased guarantees to R5.7bn to the bank, which was unable to raise its own funding.

The Land Bank is responsibl­e for 25% of all lending in the agricultur­al sector. Total debt in the sector is estimated at R170bn.

The bank plays a leading role in areas of agricultur­e that commercial banks are wary of supporting and financing. Its credit lines to the commercial farming sector are important, but so is its mandate to support

Wemergent black farmers and encourage sector developmen­t and transforma­tion. In other words, a reduction in the bank’s funding ability could restrict agricultur­al sector investment as well as much needed transforma­tion in an environmen­t where political emotions have run high.

The Land Bank’s default will complicate sector funding. Debt will become more expensive and farm sector credit and liquidity will tighten. This may curtail farm expansion and growth. Credit for capital equipment may be constraine­d and loans to aid crop production and harvesting could be constricte­d.

For investors, the effects on the larger agricultur­al sector companies such as Senwes, Acorn Agri, Afgri, NWK, TWK and VKB could be profound. These companies — most of which have publicly traded shares — are sizeable businesses with a strong regional (and even national) presence, and form a vital part of the foodproduc­tion value chain.

Readers need to remember that the local agricultur­al sector has already been beset by a number of black swan events in recent years — some of which contribute­d to the financial pressure that led the Land Bank to default.

In recent years severe droughts hit the Western Cape, the Free State and North West. Harvests were weak and debt rose sharply in this period.

Further sector uncertaint­y ensued owing to the government’s poorly communicat­ed land transforma­tion programme, commonly referred to as expropriat­ion without compensati­on (EWC).

The difficulti­es at the Land Bank might trigger a faster consolidat­ion of the agricultur­al value chain into a smaller number of super-regional agricultur­al businesses.

Smaller and mid-size businesses may be forced to consolidat­e to obtain access capital and protect their farmer base to survive.

In the last available results of 2019, the Land Bank had a total outstandin­g loan value of R44.5bn, of which transforma­tional loans were at R8bn or 17% of the book.

Nonperform­ing loans stood at 8.8%, or R4.5bn, that year, and the net interest margin fell 300 basis points to 2.7%. Profitabil­ity declined 42% to R168m.

The higher percentage of nonperform­ing loans may be the tip of the iceberg for the Land Bank. The amount of the loans that may never be repaid and demand a write-down — market talk suggests — is materially higher.

A combinatio­n of aggressive lending practices by the Land Bank and from secondary lending agents (SLAS) — who take funding from the bank and on-sell the credit for an addi

The local agricultur­al sector has already been beset by a number of black swan events in recent years

tional margin to clients not qualifying for normal commercial loans — has raised concern about bad and doubtful debt.

Of the R50bn of outstandin­g loans, it is estimated that more than R20bn is tied to SLAS. Entities like Western Capebased Capital Harvest, privately owned giant agribusine­ss Afgri’s Grobank and Pretoriaba­sed agricultur­al business Obaro offered credit lines to farmers — all under the ambit of the Land Bank.

Over the past six years, especially in the north of the country, farm revenues have been hit by the drought. Land values, which are key to loan security, have fallen sharply due to the economy and EWC. Should the bank start calling in loans, it would expose the fragile nature of billions of rands of riskier agri-co-op and SLA loans made to the sector over the past years.

What is clear is that the Land Bank needs to be restructur­ed. The cash-strapped government has enough state-owned enterprise­s to prop up and has already provided R5.7bn in guarantees. With billions more needed, recapitali­sation and reform of the bank’s funding model will need to occur.

Rand Merchant Bank was recently appointed to assist as financial adviser to the Land Bank. Sector talk suggests that the Developmen­t Bank of Southern Africa and the Industrial Developmen­t Corp may provide financing.

A restructur­e of the Land Bank may lead to a smaller entity. Its core mandate will probably remain in agricultur­al developmen­t and transforma­tion of emergent farmers. This may result in less lending to commercial farmers, the coops and SLAS, which have relied on Land Bank funding to manage and fund their own businesses.

It is this concern of lower sector funding and liquidity that leads IM to believe that the next wave of agricultur­al sector consolidat­ion may occur sooner rather than later.

The agricultur­e sector is looking interestin­g right now. Despite concerns over EWC and the weak economy, maize and fruit farming, in particular, look promising.

Consolidat­ion has occurred over the years, much of it under the auspices of PSG Group’s agricultur­al investment arm Zeder Investment­s — which took a myriad stakes in a then highly undervalue­d but asset-rich sector. Today Zeder’s only direct interest in the sector is via its 41% stake in Jselisted Kaap Agri.

IM envisages that many of the well-capitalise­d businesses such as Senwes, Kaap Agri and the larger regional co-ops such as VKB and TWK, alongside agricultur­al investment stock Acorn Agri, may be eyeing smaller, more financiall­y exposed, players.

The largest agricultur­al business in terms of market valuation is Zeder, which is Jse-listed. But most of its assets are unlisted, following the recent sale of its stake in Pioneer Foods.

The company has interests in seed business Zaad, fruit exporter Capespan, Kaap Agri and agri-commodity player Quantum Foods.

With a R3.2bn market value on a 180c share price it trades on a wide 51% discount to its official sum-of-the-parts value.

IM does not believe Zeder will directly become involved in sector consolidat­ion. With recent murmurings from 44% shareholde­r PSG Group about the pains involved in being Jse-listed — coupled with the wide discount — IM reckons Zeder itself may be a target for a buyout and delisting as a means to unlock value.

The largest purely listed agricultur­al player is Senwes, based in Klerksdorp in North West. The counter trades on the ZAR-X alternativ­e market at R10, is valued at R1.8bn and trades on an earnings multiple of six. The company had revenues in 2019 of R2.7bn and profit before tax of R398m.

Senwes has been acquisitiv­e, having bought a 58% stake in Upington-based co-op KLK in 2019, and is in discussion to buy smaller North West co-op Suidwes.

The second-largest agricultur­al player is Jse-listed Kaap Agri, based in the Western

Cape, where Zeder Investment­s has a 41% stake. With a R1.6bn market valuation, trading at

R20.50, the business has a nationwide footprint Of its 2019 revenues of R8.2bn, 80% are derived from retailing. Growing interests in fuel stations generated profit of R380m before tax. The stock trades on an earnings multiple of 5.5

An acquisitiv­e and growing sector player is Acorn Agri, in which Patrice Motsepe’s

African Rainbow Capital has a 15% stake. Acorn amalgamate­d with Western Cape-based Overberg Agri in 2018. The business had R7.9bn of revenue in 2019 and a profit before tax of R226m.

Unlisted, with shares traded on its own platform, its current valuation is R2.2bn. Its share price is R16 and it is on an earnings multiple of 12.

There have been whispers that Acorn will seek a Jse-listing in due course.

Northern Cape-based VBK is a large, diversifie­d agricultur­al business involved in grains and general trading in the sector. It is also a large poultry producer with Grain Fields. Its 2019 revenues were R10.7bn, with a profit before tax of R156m. VKB also has a 21% stake in Port Elizabeth-based co-op BKB, which itself has revenue of R11.4bn derived from its material interests in wool, mohair and livestock.

TWK, based in Kwazulunat­al, has sizable interests in timber, grain and various general retailing operations, alongside motors and tyres. Trading on ZAR X at R26.50 on an earnings multiple of seven, the R930m market-valued stock had a 2019 revenue of R7.8bn and R279m of profit before tax.

The counter is acquisitiv­e and recently announced a R500m transactio­n to expand its forestry and timber interests.

Entities that IM believes could be targets are mostly small- to mid-sized co-ops. Senwes, as mentioned, has already snapped up KLK and is bidding for Suidwes. We feel Senwes has greater ambitions.

Acquiring co-ops, cutting costs and being a part of a larger financed procuremen­t entity look, on paper, like logical

M&A strategy. But IM is aware of the territoria­l rivalries among regional agri co-ops, with the “meneers” reluctant to give up their perks and turf.

Companies with thin balance sheets, such as Northern Cape-based GWK, that have sizable revenues — R6.1bn in 2019 — though years of profit losses, may be compelled to find rich sugar daddies to support them if lean years return. We feel that the footprint and operations within GWK may be of interest to Kaap Agri, which lost the regional consolidat­ion opportunit­y with neighbour Overberg Agri when Acorn swooped in 2018.

Anther interestin­g opportunit­y is Afgri. Under private equity ownership, rapid expansion has occurred into food, the rest of Africa and financial services under Grobank. A management reshuffle occurred recently as sector whispers of underperfo­rmance and indebtedne­ss occurred. Should a restructur­e and recapitali­sation be needed, asset sales may need to be made.

Afgri has a joint venture with Senwes in the retail space called Hinterland. Afgri also has a leading agricultur­al equipment dealership alongside sizable animal feeds and grain handling interests. These would surely attract interest.

Other interestin­g consolidat­ion co-ops are North Westbased NWK, which trades on the 4A X bourse at 500c and has a market valuation of R715m. NWK is in the process of buying itself and de-listing, post acquiring a 20% stake in itself from Grindrod for an inflated price of R204m.

As a mid-sized player, it has had a mixed operationa­l performanc­e. Revenues in 2019 were R2bn but the co-op has had five years of indifferen­t profitabil­ity. Senwes has made attempts to acquire NWK, but has always been rebuffed. With a weak balance sheet, any strategic stumble could leave NWK financiall­y vulnerable.

Senwes may again get its opportunit­y.

Acquiring co-ops, cutting costs and being a part of a larger financed procuremen­t entity look, on paper, like logical M&A strategy

 ??  ?? Picture: 123RF — BING-JHEN HONG
Picture: 123RF — BING-JHEN HONG
 ??  ?? Picture: 123RF — IGOR STEVANOVIC

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