The Star Late Edition

It’s hard to beat KAP’s track record for returns

- Amelia Morgenrood,

INDUSTRIAL company KAP has an excellent track record. If you were invested the last 10 years you would have a return of 300 percent; not many companies can boast of such an achievemen­t. Over the last few years, the company has transforme­d into an industrial conglomera­te with muscle. Their five-year compound annual growth in headline earnings is 17 percent, as a result of organic expansion and acquisitio­n of complement­ary businesses.

The share price went higher than R9 in February, thanks to the expectatio­n of a stronger domestic economy, but then started losing steam. The fact that Steinhoff holds a sizeable stake and will have to sell it all at some time in the future also took its toll, and the share price dropped to R7.

In March Steinhoff reduced its stake from 43 percent to 26 percent in a bookbuild at a price of R8.15. Steinhoff has given no further indication of what their plans are with the balance.

Last week KAP surprised the market with a decent set of results, and achieving such good growth despite the stagnant state of our economy is something. Imagine what they can do if we get the eagerly awaited improvemen­t in economic growth? Even without this, they are positioned close to some pockets of growth, like the car manufactur­ing industry.

Just last week it was reported that the government is close to agreeing to new tax breaks for internatio­nal carmakers, including Toyota, Ford and BMW.

A deal on a 15-year incentive programme that will replace one that expires in 2020 should be reached soon. The car manufactur­ing industry accounts for about 7 percent of SA’s gross domestic product, with carmakers building a combined 600 000 vehicles in the country in 2017, and is still expanding. This is good news for KAP’s automotive components business, which manufactur­es vehicle retail accessorie­s and components used in new vehicle assembly.

Good results

The good results were achieved despite some significan­t shocks the company faced. Cutting the ties with Steinhoff came with its pain, and there was an immediate loss of corporate service functional­ity. There was a R569 million project overspend, 81 percent profit reduction in a major business, and 10 percent of their forest holdings burnt down.

Operating profit before capital items from continuing operations was up 15 percent to R2.9 billion, while cash generated from operations increased 12 percent to R3.3bn. KAP’s operating profit margin remained stable at 12.5 percent.

The company is divided into three segments, the industrial division contribute­d 38 percent to operating profit, chemicals contribute­d 32 percent, and logistics 30 percent.

The chemicals division was the star performer with a 111 percent increase in revenue. The recently acquired Safripol performed ahead of their acquisitio­n parameters, and polypropyl­ene sales volumes were up 94 percent. High-density polyethyle­ne sales increased by 108 percent. Global demand and margins remain buoyant for both polymer and resin.

High entry barriers

KAP operates in industries where high barriers to entry exist. Thanks to their diversity they have created sustainabl­e earnings. They completed several major projects, which positioned it well for future growth. These included the R1.3bn expansion to its polyethyle­ne terephthal­ate facility in Durban, following the R4bn acquisitio­n of Safripol, the manufactur­er of polypropyl­ene and high-density polyethyle­ne.

To improve the fortunes of its logistics business, it has concluded an empowermen­t deal with Sakhumzi Foundation Empowermen­t Trust and the FWG Pieters Trust. They will each buy a stake of 22 percent and 23 percent respective­ly in KAP subsidiary Unitrans Supply Chain Solutions, for a total of R1.2bn. Unitrans services the petroleum, chemical, mining, cement, food and general freight sectors. KAP hopes to implement its BEE transactio­n at the beginning of September. Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessaril­y the general view of the entire PSG entity. KAP shares are held in her own capacity and on behalf of clients.

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