Supply chain disruptions and Covid hit Zeder profits

‘Why list? To go raise funds in the market is no longer an option. There’s no way you’re going to go raise money at your share price. You want to go raise money at your sum-of-the-parts value. So the pressure is on investment holding companies. [But] I don’t think it’s necessarily the end of the road for Zeder’: Johann le Roux – CEO, Zeder

FIFI PETERS: Zeder Investments today rewarded investors with a special dividend for the third consecutive year. This as it tried to continually maximise shareholder value. But the group, like many, is worried about inflation and the impact that higher costs could have on margins.

We are joined by Johann le Roux, who is CEO of Zeder, the agricultural-based investment group. Johann, thanks so much for your time. Earlier on today when we spoke you said that you are worried about inflation and, in fact, that inflation was one of the biggest worries for the group right now. Which price increases in your stable concern you the most?

JOHANN LE ROUX: Fifi, when I say inflation on the farm, I think we’re going to have significant inflation in terms of of agri inputs. Obviously the higher oil price as a result from the Ukraine-Russia conflict will lead to higher prices in things like fertiliser, and obviously also fuel on the farms. So the inflation on the farm in terms of the input will definitely lead to margin squeeze for the farmer.

In our investments, Zaad, Agrivision and Capespan, but probably more Capespan than Agrivision, there are big farming operations, so we are going to feel that inflation pressure on the farms.

But, having said that, the soft commodity price, if that can remain high, a business like Agrivision – that’s a wheat and soya farmer – the highest soft commodity prices, they should benefit from that. But when I mention inflation, it it’s the agri input side where the cost to the farmer will definitely increase.

FIFI PETERS: I imagine that the farmer can’t plan around elevated commodity prices, remaining there for longer. I imagine that decisions need to be taken for a worst-case scenario. I want to speak to you about that worst-case scenario in the sense of how much of the cost pressures that the farmer is currently experiencing at the factory gate can likely be recouped from passing it on to clients in this environment?

JOHANN LE ROUX: I think it all depends in what state your consumer is, your consumer market is. In South Africa, I think the consumers are already under significant pressure with other costs that have increased. We’ve got things like transport costs, fuel, we’ve got things like electricity – so the consumers are already under pressure.

So obviously the farmer or the agri-producer would try to push the price through to the consumer as much as possible, but if the consumers are already under significant pressure, that becomes even more and more difficult; and there’s normally a bit of a delay in that as well. It doesn’t just happen overnight.

So yeah, I think farmers will be under pressure. I think they’ve got inflationary pressure as a result. There’ll be more inflation on the food side, which obviously is not great for the consumer.

FIFI PETERS: Certainly. And then if I can just drill in on some of the supply-chain factors that have also been adding to costs. Perhaps we’ve got a new supply-chain challenge right now, depending on how long it sticks around in the form of the floods that have taken place in KZN in recent days. So throughout the day we have seen businesses releasing statements, one by one, updating the investment community about any impact to their operations. I mean, I just read something from Sappi talking about the damage to some inventory that could affect customer orders. What’s the situation looking like for Zeder?

JOHANN LE ROUX: We are not aware of any damage in terms of any of the assets that we own. The Durban port, however, is a critical port for exports of fresh fruit, especially citrus, and as citrus is coming off the trees now it needs to move as quickly as possible. It’s a perishable product; all fresh fruit is, so you don’t want to leave it in a cold-storage container for too long.

Hopefully it’s a short-term blip and that the Durban port can restore operations as quickly as possible, because there are not many options for the citrus to move.

They [fruit exports] can either go to Maputo via the Mozambican corridor, or you can drive it down to any of the other ports. But that obviously means delays and means that your food takes a longer time to get in the markets, and that leads to quality issues and quality issues probably lead to lower prices. So it’s a real kind of chain of events.

We need the Durban port to be operational as soon as possible.

FIFI PETERS: This is another challenge that is facing the ports here in South Africa, as operated by Transnet. We’ve seen unfortunate inefficiencies unravelled throughout the year, throughout the pandemic, that have cost quite a lot of exporters. But we’ve also heard pronouncements from the President in trying to fix the situation at our national ports. I’d like your comment on that, and whether you have seen any material changes so far.

JOHANN LE ROUX: Fifi, we’ve not seen material change on the ground. There’ve been the committees and forums created to try and come up with plans to resolve the issues, but operationally on the ground, we haven’t seen an improvement yet.

Read: No major improvement in Durban Port efficiencies, says organised business

FIFI PETERS: We’ve heard miners update us as to what the value of the lost export sales were as a result of the inefficiencies at Transnet. I’m wondering if you have a value in terms of the opportunity cost to the group as a result of not being able to get your citrus out on time?

JOHANN LE ROUX: Fifi, unfortunately, I don’t have a number for that. I think the biggest difference between mining commodities and something like fruit is that in the fruit industry, you’re a price-taker when it comes to the other side of the ocean in terms of your market.

So, I think it’s even more difficult to quantify. But, as you know, agriculture is a massive employer of people. And if this kind of area that’s had a very, very stable and actually very, very good period throughout Covid, is harmed, unfortunately it can probably lead to more job losses.

FIFI PETERS: It would be very unfortunate. But just reflecting back on your numbers and the year under review, lots of corporate activity. You unbundled your stake in Kaap Agri, and you are selling the logistics business, and you could sell more businesses. Is this the end of the era for the investment holding company as we know it, given that we have seen similar corporate activity happening elsewhere at RMI, with PSG for instance?

JOHANN LE ROUX: Fifi I think the investment holding company is definitely under pressure historically. Why would you come to the market and be a listed vehicle? It would be to raise money and obviously to grow and to invest.

Currently investment holding companies all trade at a significant discount to their Nav or their sum of the parts…

[This] means that that critical reason why you would be listed – to go raise funds in the market – is no longer an option. There’s no way you’re going to go raise money at your share price. You want to go raise money at your sum-of-the-parts value.

So, the pressure is on investment holding companies. I don’t think it’s necessarily the end of the road for Zeder. We not under pressure to sell our remaining assets at all costs. If we can do good transactions, hopefully at premiums that we can maximise shareholder wealth, then obviously we’ll definitely consider and entertain those.

FIFI PETERS: But could this be the end of the road for Zeder on the JSE?

JOHANN LE ROUX: Fifi, I don’t think so. I mean, I think for business to de-list is not as easy as people think. It’s not like your board can wake up one day and decide ‘we want to de-list’. You need someone that’s going to make an offer to all the shareholders of Zeder.

We haven’t had such an approach yet. At the moment approaches we’ve received have all been on specific individual assets.

FIFI PETERS: All right. Just given the flurry of the listings that we have seen in the recent while, one would think that it was as easy as that. But thanks for clarifying that for us. Johann, we’ll leave it there. Johann le Roux is the CEO of Zeder Investments.

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