In the Western Cape, the summer of 2018/19 will be less traumatic than the last as dams have slowly filled. That said, the consequences linger and citizens and companies are still feeling the impact of the drought. Water restrictions, though eased, are still in place, and for agri firms, the drought hit where it hurts most – on the bottom line.
“The drought meant that our customers did not have profits to reinvest back into their businesses in 2017,” says Sean Walsh, CEO of JSE-listed Kaap Agri. “If they don’t have the fruit to export, they don’t buy cartons from us. It’s that simple. This cost us revenue growth. While farmers have been slow to pick up their spending, there are definitely green shoots about – the deciduous fruit harvest was good and the wheat harvest is looking promising.”
In fact, for Kaap Agri, the impact of the drought far outweighed the impact of the land expropriation discussion, he says. “We are not seeing disinvestment or a wait-and-see approach to investing. Many farmers are exporters and they cannot afford to fall behind in their investment cycle. They know that if they do, they will get left behind and they will never catch up,” he says.
This is not to say this sentiment is being felt across the board. “The land expropriation debate has impacted some property values and investment in stressed farming regions, notably in the Free State, but this is not the case in the Cape,” Walsh says. “I cannot speak for everyone, but we are engaging far more constructively with the government on this issue than we were a year ago, and that has to be positive.”
Kaap Agri employs over 3 000 people and has a footprint of 200 business units across South Africa and Namibia, which includes the retail trading brand Agrimark. Other brands in the stable include Wesgraan (grain handling and agency services), Pakmark (packaging material supplier and distributor), Liquormark, and Agriplas, which focuses on the manufacturing of irrigation products. The company’s retail fuel operations are grouped within The Fuel Company (TFC), which also operates the forecourt convenience brand Expressmark.
During the year, revenue increased by 2.1% to about R6.55 billion, up from R6.42 billion in the previous financial year. Limited as it was, this growth was mainly driven by a 12.1% increase in the number of retail transactions, and growing fuel volumes at TFC.
Recurring headline earnings grew by 1.7%, while recurring headline earnings per share increased by 0.7% to 354.10 cents, resulting in a five-year compound annual growth rate of 14.1% to September 30, 2018.
“We estimate the drought impact on Wesgraan and agri retail to be 11.3% of the targeted 15% growth with a further 6.5% impact due to regulatory delays in the retail fuel environment. The remainder of the business grew by 4.5%,” says Walsh.
To illustrate, Wesgraan – which includes grain handling and storage of grain and related products, seed processing and potato seed marketing, and typically contributes about 16% of group revenue – was heavily impacted by the drought and lower wheat volumes. Income dropped by 38.2%, resulting in a decrease in operating profit before tax of 54.5%.
“The results are disappointing and reflect a very tough second half as farmers delayed spending until they were certain the drought was broken,” says Anthony Clark, an independent analyst.
However, he expects the performance in almost every division to continue to steadily recover in the first half, gathering pace into the second half of the financial year. “Harvests are looking better and the backlog in the transfer of fuel trading licences is being reduced which means TFC can book its full share of profits. All that remains lacklustre in the division is the sale of capital equipment.”
Entry into KZN
After year-end, the group acquired a 60% shareholding in Partridge Building Supplies which trades as Underberg Forge in southern KwaZulu-Natal (KZN). The acquisition provides Kaap Agri with an entry point into a new geographical region, KZN, as well as an additional business stream in the pasture-based dairy sector.
“Continued focus on our strategic goals will contribute to the business recovering from the subdued 2018 performance. We remain on track to achieve our strategic medium-term plan target of a minimum 15% compound annual growth rate in recurring headline earnings at a 15% return on equity,” says Walsh.
On a price-earnings ratio of 10, Kaap Agri is looking reasonable. “I’d suggest that at R35 it is a recovery buy,” says Clark.
The company will pay a final dividend of 84.7 cents per share, a 2.5% increase on the previous year. Including the interim dividend, the total dividend for the year was 116.7 cents per share, 4.2% more than the prior year. It has grown at a compound annual growth rate of 18.5% over the past five years.