Zeder is ripe for the picking

Drought and fees dispute are temporary problems.

This article was first published in Moneyweb Investor. To read the magazine click here.

Agricultural counter Zeder, which at one point this year was trading at a massive 50% discount to its sum of the parts (SOTP) value, has narrowed the discount to 30.5%, raising questions as to what (or who) exactly is driving the share price upward.

It is certainly not the expectation of sterling results for the year to February 29 2016. In back-to-back AGMs the CEOs of Kaap Agri (which accounts for 5.6% of Zeder’s SOTP value) and Pioneer (which accounts for almost 63%) warned investors that their results would be adversely affected by the drought.

Kaap Agri, which provides agricultural products and services to the farming community and beyond will lose millions as a result of lower storage and handling of wheat in the last season. Earnings growth in 2016 is expected to be between 10% and 15%, slightly below last year’s 15.9%.

And the CEO of food producer Pioneer, Phil Roux warned that economic challenges facing the company, notably the drought and rand weakness will accelerate inflationary pressure on food manufacturers – some of which will have to be absorbed by the company. Results will be “muted”, he says.

The tiny but exciting Agrivision Africa, which accounts for 5% of Zeder’s value, has been hammered by three years of drought in Zambia. And fruit handler and exporter Capespan will also have felt the impact of the drought, though 80% of its revenue is ex-South Africa, so it may be shielded. The performance of Zaad, the country’s third largest seed company, is also likely to be affected by the drought.

Oddly, it was as this less-than-rosy picture was communicated to shareholders that the Zeder (and Pioneer) price began to rally. Since the two AGMs, Zeder has risen from R4.67 to R5.49/share while Pioneer, whose fortunes tend to dictate those of Zeder, has risen from R128.95 to R136.68.

“It simply does not make sense,” says Anthony Clark, small and mid cap analyst at Vunani Securities and long-time Zeder watcher. “While you can’t go wrong buying Zeder at these levels, the strong rally is mystifying. Pioneer, the largest holding, is going to have a horrendous 2016. I can’t help wondering if something else is going on.”

In some quarters there are whispers that parent company PSG may be considering buying out minorities. However, PSG owns 34.5% of Zeder and is theoretically unable to accumulate additional shares as this would trigger an offer to minorities. But the whispers persist.

Another reason for the rally could be the perception that PSG management is softening ever so slightly on the contentious issue of management fees levied by PSG on Zeder.

The storm over the management fees – which had been brewing for two years – broke last year. This followed strong results from the company in 2015 on the back of significant corporate action, which resulted in a rerating of the share price.  

The management fee is levied in two parts – a base fee, which is calculated at 1.5% of average market capitalisation for that half-year.

And a performance fee, which is calculated as 20% on Zeder share price outperformance against government’s bond index yield plus 4%, adjusted for dividends.

In the last financial year, the recurring base fee and non-recurring performance fee doubled to R118 million (2014: R59 million) and R118 million (2014: R59 million), respectively.

This incensed asset managers who did not believe the fee was justified.

PSG, unsurprisingly, disagrees. “The fee and the magnitude of the fee is a contractual right,” says CEO Piet Mouton. “Asset managers earn fees from picking shares. We earn fees from being at the coalface – spending significant time with our managers to ensure the businesses run better.”

That said, Mouton indicated that PSG is engaging with shareholders on the issue. “We have various proposals on the table. One solution is that we walk away from fees in totality in exchange for say the issue of 15% new shares in Zeder. The difficulty is getting shareholders to agree on it. Everyone wants something different.”

Chris Logan of Opportune Investments applauds the fact that PSG is actively seeking a solution. “There was great disillusionment about the fees which, together with drought concerns, triggered the collapse in Zeder. However, PSG is actively seeking a solution to the difficult fee problem. That knowledge has resulted in a marked narrowing of the Zeder discount. Investors who bought Zeder at discounts in excess of 40% will probably do very well in the fullness of time”.

While Zeder makes up just 6% of PSG’s SOTP value, the excessively wide discount was detrimental to PSG’s reputation as a great dealmaker. “My guess is that there will ultimately be a pragmatic solution which narrows the discount closer to the 25% level,” he adds.

Clark prefers to wait for change before applauding. “The management fee is not going to be an issue in the coming results because the share price has not out-performed. This will buy management time to resolve the issue of fees – or not. I prefer to wait until after the results are released before buying back in.”

Which doesn’t really answer the question of why the share price is rallying.

It could just be that someone sees enormous value in the company and is prepared to sit out the issue of management fees and poor performance for the next 18 months, Clark says.

After all the SOTP is currently R7.85 per share, as per the Zeder website, and a share price of R5.49 (as at 25/02) clearly offers value.

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