Not your common or garden agricultural sector counter

Agricultural counter TWK Investments, which listed on the Cape Town Stock Exchange (CTSE), is one of the handful of agribusiness counters covered in past editions of IM.

But of all those counters IM has covered, TWK — over a five-year period — has ploughed the most profitable furrows by a significant margin.

Five years ago investors could have snapped up TWK at R17.80. Today it’s R50, and even attained a 2022 high of R60.

Despite a heady run in the share price, the current earnings multiple rating remains a compelling 5.8 times with an expectation that its results to its August 2023 year-end will show another year of material earnings increase.

TWK, though, is not a classic agricultural sector counter.

Aside from its traditional business servicing the farming community from selling fertiliser, capital equipment and requisites, TWK’s largest division is timber.

It owns significant forestry assets and the associated processing plant but its trump card is the export of wood chips to the global paper and pulp market.

The company cultivates 37,400ha and had financial 2022 sales volumes of 1.46Mt (+62%). Much of this increase in demand came from the wood chip export market. TWK exports to Asia but there is growing demand from Europe given the sanctions against Russia, a major exporter of timber products.

With TWK’s Richards Bay exporter facility expected to be at full utilisation in 2022, IM expects further expansion in offshore sales — reinforcing TWK’s rand hedge qualities in the years ahead. The weakness of the rand in the past months will also translate into healthier profits.

In a segmental review of its last results to August 2022, timber was only 22% of total TWK revenue but 46% of profit.

In financial 2022 TWK reported revenue of R10bn (+18%), operating profit of R615m (+20%) and profit after tax of R363m (+42%). Headline earnings rose 27.5% to a record 863c a share and a dividend of 150c a share was paid. Net asset value rose 13% to R52.55 a share.

The stock will have a tale of two halves in the financial year ahead. IM expects more muted interim results to February as lower fertiliser volumes and margins and a high previous operating base subdues the interim performance.

However, the second half should more than make up for any market conditions as a material increase in timber exports to 900,000t from the 2022 volume of 635,000t should kick into results.

The largest division by revenue is retail and mechanisation allied to the agricultural sector. In the past financial year revenue of R5.1bn was recorded with a profit of R187.4m. This compares to the R259m contribution from the dominant timber operations.

Other divisions within

TWK encompass financial services (10% of profit), grain (11%) and motors and tyres (6%). Of the smaller units, financials services is growing strongly from its range of insurance and unique financing solutions and grain should have another good year given the fourth successive year of good weather.

Motors and tyres has been rationalised, with loss-making fuel stations sold alongside the tyre business.

The bottom line is that TWK has a unique business model for an agricultural listed counter. It’s not as dependent on the traditional soft commodities, horticulture and fruit, as other listed sector counters such as Kaap Agri and Senwes (though these counters have also diversified their reliance away from soft commodities to varying degrees).

TWK makes for a comparison with JSE-listed timber player York. IM believes TWK will outperform York for some time due to the maturity of its forestry operating assets and the growing rand hedge benefits of the wood chip export market. Every 10c weakness in the rand adds R5m to TWK’s export profits.

Admittedly, as a CTSE listing, TWK is less visible to investors than some other agricultural investments. Liquidity is tight due to the holding company structure that controls TWK Investments. There are board discussions under way to improve liquidity.

IM understands TWK’s first quarter was good, an improvement on the first quarter of 2022. Timber was performing satisfactorily, but there was some initial uncertainty on the core agricultural side as farmers battled higher year-on-year input costs. However, farm revenues are robust and another 15Mt maize crop is forecast for the season.

With a high headline earnings base of 863c a share in financial 2022, TWK is forecasting another solid year. If there is share price weakness during the weaker first-half trading period, there may be an opportunity for investors to acquire shares in a largely overlooked stock that has great longer-term prospects.