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Is there opportunity in the bumper agricultural crops this year?

‘For me the opportunity really is going to be in the raw material producers’ – Gary Booysen from Rand Swiss.

SIMON BROWN: I’m chatting now with Gary Booysen. He is, of course, a portfolio manager at Rand Swiss. Gary, good morning. I appreciate your early morning time. More and more data is coming through that we’re seeing bumper agricultural crops in South Africa. Certainly citrus has had a good year, maize seems to be on track, [with] all the other bits – wheat and so forth. Your take? You’ve been doing some digging around. Is there an opportunity perhaps in the Kaap Agris? Perhaps it’s the manufacturers, such as Tiger [Brands] or Zeder or Omnia –  what’s your take on the possibilities here?

GARY BOOYSEN: Before we start, let me just give you a qualifier. Our kind of speciality is really managing money across international markets – US, UK and  Europe. To do it, we run quantitative models, which really requires a consensus to get a sense of price discovery. On the kind of companies that we’re going to talk about today, which is Tiger Brands, Omnia and Astral Foods, you don’t often get that consensus because generally they are lower liquidity and you don’t have enough analysts covering the company to really get that accurate price discovery. But what that does give you, and especially private clients, is the ability to go into it with a little bit of fundamental research and get things at a massive bargain, which I think is what we’re going to try and look for today.

Looking at, as you say, the bumper crops, we are sitting at a very unique situation for agriculture at the moment. On the one hand, you’re absolutely right, we are looking at across the board basically bumper yields. We’ve had a very, very good year from a volume and a production point of view. But generally what that means is, when you have this kind of increased production just basic economics comes into play. The supply and demand equation plays out, and you see prices falling. 

But because of the coronavirus and because of the disruption to supply chains in the international market, what’s happened is international prices have remained quite elevated.  What that means is that the raw-material producers are going to almost get windfall profits, but it is going to put pressure on companies that are up the value chain – I think Tiger Brands, even AVI to an extent, definitely Astral Foods – in that the inputs to their businesses are going to be more expensive, even though we’ve got the other side of the coronavirus coin, which is essentially customers that are under pressure, and they’re not going to be able to push through pricing increases. 

So they’re kind of going to get squeezed, but the raw manufacturers are in an almost unique position where they are going to be able to push through big price increases because they can always export, and they’re going to have high volumes.

So for me, the opportunity really is going to be in the raw material producers. Here I’m thinking of the likes of Zeder.

SIMON BROWN: So good old-fashioned Zeder, also trading at a fair bunch of discount. One of the stocks I’ve been looking at, and it’s held up fairly well, is Kaap Agri. It’s not directly in the space, but farmers are having better years and they’re going and buying new bakkies or tractors and the like. We could perhaps see some activity there, or am I getting too smart for myself?

GARY BOOYSEN: [Chuckling] Kaap Agri is interesting because I think there might be some sort of corporate action around Kaap Agri just because of it being a component of Zeder. That kind of makes the valuation difficult. Obviously, if you look at Zeder as a sum of the parts, it’s an investment holding company. They’ve already sold their Pioneer Foods stake, they sold their Quantum Foods stake last year, and the company hasn’t come up with a clear strategic direction. 

Read/Listen: Zeder declares special dividend on interim results

But you get the sense that a lot of these things might be bundled up into PSG Alpha, which is the big shareholder. You kind of look at the sum of the parts. I have no problem with going into Kaap Agri, and it really depends on if they decide to exit the business and it depends on what they do with it.

But if I just bring it back to Zeder, that’s kind of where I see it. You’re obviously going to get about 20% of the value of Zeder going to be Kaap Agri anyway. But I suppose the part I like is the Zaad business, of which they obviously own 97%. That makes up just over a third of Zeder’s value. But what we have with the opportunity, I think anyway, is that because the investment holding company is trading at about a 30% discount to the sum of the parts, if they do almost collapse Zeder over time and kind of absorb it more into the PSG stable, which has obviously not been announced or anything like that, you could see a release of around 30%. That’s I think the opportunity in the sector for smaller investors.

SIMON BROWN: Of course. I’d forgotten Zeder owns Kaap Agri, so you’ve already kind of had it there already. 

Gary Booysen, portfolio manager at Rand Swiss, I so appreciate you early morning time. 

Listen to Tuesday’s full MoneywebNOW podcast here

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