Kaap Agri holds onto cash as it braces for virus impact

The Covid-19 lockdown only had a marginal effect on the results of Kaap Agri for the interim period until the end of March 2020, the group announced on Thursday.

Kaap Agri trades in agricultural, fuel and related retail markets.

Only 3.5 days of trading during the interim period were impacted by government lockdown measures to curb the pandemic. There was also an increase in sales prior to lockdown.

Headline earnings per share increased by 7.9{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to 241.83 cents, and recurring headline earnings per share increased by 7.5{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to 247.65 cents.

Revenue increased by 11.6{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to R4.9 billion, with like-for-like comparable sales growth of 4.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. The growth in revenue was driven by a 5.0{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} increase in the number of transactions.

Given the uncertainty of the duration and impact of the Covid-19 pandemic, Kaap Agri did not declare an interim dividend, opting instead to preserve cash and liquidity.

Kaap Agri CEO Sean Walsh described the results as acceptable, though not ideal.

“Encouragingly, our ongoing diversification strategy and resilience continue to yield strong revenue growth despite exceptionally tough trading conditions,” said Walsh. The diversification process started around six years ago.

Change in focus

Walsh – like many others – expressed concern over the pandemic amplifying already weak economic conditions in SA.

In the short term, he said, Kaap Agri will focus on managing cash flow, securing supply, health and hygiene, and digitisation – as well as anticipating and responding to changes in demand.

But he appeared upbeat about the agricultural industry’s prospects as a supplier of essential goods and services.

Wayne Spaumer, John Deere’s product specialist: precision agriculture for sub-Saharan Africa, agrees the digitisation strategy is a wise route. Spaumer says technology is increasingly a key enabler for farmers wanting to meet the challenge of feeding Africa, saying it can help “dramatically increase” quantity, variety, availability and quality of food supply.

Latent concerns

But according to Anthony Clark, an analyst at Small Talk Daily Research, latent and growing concerns within Kaap Agri are “raising eyebrows”. Clark says while a 7.9{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} rise in HEPS to 241.83 cents per share may seem commendable, it’s not the full picture.

“A rapid capex programme over the past years, mostly into fuel, has not delivered sufficient capital returns, and fuel in interim results saw a 4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} reduction in profits despite a 4.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} rise in income. Fuel on an annualised basis contributes a 30{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of revenue and 25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of profit; Covid-19 may see that slashed,” said Clark.

Kaap Agri, with a market capitalisation of R1.6 billion, has a R1.7 billion debt pile, with its gearing at 77.1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. Debt rose 21.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in the period, and interest costs shot up by 29.5{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}.

Its available cash stands at R30 milllion. “So, despite the Covid-19 environment, the passing of the interim dividend – saving some R24 million – was probably wise,” says Clark.

“Today, Kaap Agri is trading at a discount to its Net Asset Value of 24{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}; it used to trade at a premium. Those days have gone, as weak returns form material capex and lacklustre results over the past two to three years have weighed on the share price,” he adds.

At R21.90, Clark says he sees “little excitement”, noting rising concerns over debt and the potential to raise cash.