SIMON BROWN: I’m chatting with Sean Walsh, Kaap Agri CEO. Results for six months ending March 2022: revenue up 26.7%, recurring headline earnings up 15%, dividend up 15%. Sean, I appreciate the time today. Going through the numbers, listening to your presentation, you’re well ahead of pre-pandemic levels. In part, the agricultural sector, I imagine, has helped it as well but, going through the numbers, efficiencies that you’ve picked up over the two years of pandemic are certainly also benefiting the group.
SEAN WALSH: Most definitely, Simon. Some of the operational expenditure savings that we were able to implement in the Covid year of 2020 we’ve been able to make permanent in the business. That’s probably why our growth for the half year, over the pre-Covid half-year, is 42%.
SIMON BROWN: Turning to some of the pieces you are seeing – and I’ve chatted with some other folks in the retail space – people in the broad farming community are certainly seeing high inflation, fuel fertiliser, commodities. Are people shopping less as a result? I imagine in the farming space, for example, they need the fertiliser almost regardless.
SEAN WALSH: Absolutely Simon. So what we are seeing in the agricultural side [is] a farmer needs to produce, he needs to then package that product in a carton or a bag and sell it on the market. So he unfortunately has to get through this high-inflation cycle no matter what, whereas on the retail side, obviously with a high fuel prices we are definitely seeing a dampening effect on the commuter traffic, so conservative travelling out there for consumers as well. With more people going out now in the evenings, it would seem that the QSR (quick-service restaurant) side is picking up versus the DIY (do-it-yourself home and garden) which is dropping off.
SIMON BROWN: Let’s touch on that DIY. We certainly saw a massive boom, not just with yourself, but of course the specialised [businesses] such as Cashbuild and the like, and all indications are we spent that first year in lockdown and we got tired of staring at the cracked tile or flaking paint. The sense is we’ve fixed those tiles, we’ve painted the walls, and that DIY boom has sort of reverted back to normal.
SEAN WALSH: Yes, Simon. When we say ‘the DIY boom’, I think the boom’s actually over, and in the latest quarter, being January to March, most role players were actually negative on their sales year on year. We were still fortunate that we were 7.5% up on those DIY like-for-like categories, but certainly, as we are speaking it’s coming off more and more.
So I really think that all these inflationary pressures in the market are having a general effect on the consumer out there.
SIMON BROWN: I want to come to that in a moment, but grain services is another area [that’s] very strong, obviously helped fairly significantly by the wheat harvest being experienced right now. What’s your expectation for the second half of this financial year, and then for FY 23 in terms of crop harvests from the community?
SEAN WALSH: We are sort of halfway through the fruit season; the first-half grapes were great. The guys did struggle to get the exports out of the harbour.
Needless to say we expect apples, pears and citrus to have a record volume here, but bumper volumes aren’t going to necessarily mean bumper prices on the farm.
So unfortunately in the latter [part] of this year our farmers are also going to feel income pressures on farms, and their expendable income will be lower than a year ago. We’ve spoken about the general retail – that’s certainly going to be under pressure.
SIMON BROWN: I imagine the farmers are getting the bumper crops, but the input costs, fertiliser, we touched on that – that is hurting. Does that impact, I imagine, perhaps farm irrigation? You’ve got your irrigation sector, sort of general infrastructure spending by farmers. They’re going to pull back on it, I imagine, as they get the input squeeze.
SEAN WALSH: Yes. I think the farmers have been through two or three years of growing volumes, a weak exchange rate, and relatively stable input costs. They have been investing largely in that period with any excess expendable income, and this is one of those years where they’ll go back into survival mode, and they will curtail their capital expenditure on their farms to a large degree.
SIMON BROWN: You’ve mentioned fuel cells and certainly in 2020 they absolutely nose-dived. They’ve started recovering. Are you seeing some pressure? You alluded to it a moment ago in terms of volumes due to the record levels for petrol and diesel.
SEAN WALSH: Absolutely, Simon. The sector is down between 5% and 8%. Our group is only down 1.3% but, needless to say, down. That’s after investing in more sites and growing the network over the last few years. So the impact is significant. I don’t think middle- to high-income people understand the impact it’s having in the general commuter trade.
SIMON BROWN: In the fuel business obviously there’s the margin on fuel, and that is regulated. I know there’s talk about unregulating petrol 93, and in your presentation you were commenting that’s at best a non-issue, but at worst a bad idea. Your margins are set. For you it’s I imagine more about the convenience store and QSRs. You mentioned a moment ago folks are going out a little bit more; that’s perhaps where you almost can really push the foot traffic and the volumes.
SEAN WALSH: Absolutely, Simon. Whereas we’ve seen a pull-down on litres [petrol], we are still seeing a slow recovery on our convenience store and our QSR trading even in that same period. So while commuters are travelling less, they are still slowly buying more and more or spending more in the convenience retail space. That’s a definite trend we can pick up.
SIMON BROWN: And the PEG fuel retail deal that’s happening, if my memory serves, around midyear, certainly it adds a geographic spread in terms of new areas, new roots. How many sites will that add to your capacity?
SEAN WALSH: Currently we’ve got 44 retail fuel sites, and this PEG deal will add 41, which will take us to 85. Post the deal they will do well over 500 million litres a year. It sounds like a lot, Simon, but it’s still only about 3.5% of the retail fuel sector of South Africa – but significant.
SIMON BROWN: Yes, significant. A last question. Watching your results presentation, the number that absolutely blew me away [was] impairments on your loan book. These are loans to farmers. As I understand it, farming is lumpy in that I’ve got costs, but the crop comes at the end of the season when I finally manage to sell it. But of course I’ve got costs leading up to that, in terms of seeds and fertiliser and so forth. But you keep your impairments, your – in old speak – bad debts to frankly what I think is a level which would make the traditional bankers blush.
SEAN WALSH: That is true, yes.
Our impairments on our debtors book are on average below 0.2% for the last five years and 10 years.
Normally when one talks about it, Simon, something happens. So it’s probably better not to brag about it. But look, I think it comes from good management of the customers per se, choosing the customers, giving out the right credit facilities, evaluating the credit and the risk properly, and having your feet on the ground. I think a lot of commercial banks are withdrawing their feet from the rural areas where we still have that footprint presence in the marketplace.
SIMON BROWN: That was going to be exactly my point. It’s old-fashioned credit lending, in the sense that you know what’s happening in the community. In many cases, you will know the person who’s coming to apply for the credit, and you’ve got the track record, expectations around the harvest. It’s that good old-fashioned lending, as you say, in the community.
SEAN WALSH: Sure. We say well over 60% of the evaluation is about who the farmer is and how well he operates, rather than the evaluation itself in terms of risk.
SIMON BROWN: We’ll leave it there. Sean Walsh, CEO of Kaap Agri, I always appreciate the conversation.