Zeder improves operating performance, concludes sale of Pioneer Foods

Zeder [JSE:ZED] investor in agribusiness and related industries, improved the operating performances from most of its underlying investee companies, it said in the announcement of its financial results for the year to February 2020 with, released on Friday.  

It showed an increase of 5.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in the sum- of-the-parts (SOTP) value per share to R5.97 as at 29 February 2020 and the underlying investment portfolio was valued at R11.58bn on the same date.

During this period recurring headline earnings per share increased by 18.4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to 32.8 cents. Zeder’s consolidated recurring headline earnings is the sum of its effective interest in the recurring headline earnings of each of its underlying investments.

Zeder CEO Norman Celliers said in a statement that the results are satisfactory given the strenuous trading conditions under which they were achieved.

At the close of business on 7 April 2020, Zeder’s SOTP value per share amounted to R5.95, which includes a cash amount of R3.9 billion to be paid as a special dividend of R2.30 cents per share declared on 1 April 2020 and payable on 28 April 2020.

The special dividend will be paid out of cash reserves, reducing the total cash holdings. Following the payment of the special dividend, Zeder will have approximately R1 billion of unencumbered cash with no debt.

“Our strategic focus was deliberately cautious, conservative and largely unchanged during the year…strengthening balance sheets where possible while driving for additional and diversified growth from within existing investment platforms,” says Celliers.

Pioneer Foods

Strategic focus was given to ensure the successful disposal of its largest investment, Pioneer Foods. Zeder disposed of its entire interest in Pioneer Foods on 23 March 2020 for a total consideration of R6.41 billion. 

This provided the company with an opportunity to use a portion of the cash proceeds received to settle all its debt and related obligations. The remainder of Zeder’s portfolio represents strategic equity interests in leading organisations that span the agribusiness value chain.

Celliers said the successful and timely implementation of this transaction has ensured that Zeder is better positioned for the Covid-19 related economic challenges. This, combined with the company’s deliberate process over the last few years to strengthen balance sheets, reduce debt and preserve cash resources, provides it with improved agility at a time of crisis.

Furthermore, he noted that Capespan, the fruit company known for its table grapes, fell by by 16{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to R999 million was no real surprise because the fruit sector has been in a tough period and Capespan has not exactly performed well.

“What is of interest in the Capespan narrative in the results, it that, again during the course of the last 12 months, they have been selling off assets to generate income. It is worth putting a little note on that. They have been an ongoing seller of assets to try and realise value from that company,” said Clark.

What was a big surprise for him, is that Agrivision Africa, which is Zeder’s joint venture in Zambia, where they actually grow, mill and sell maize directly to the consumer via their own operations, saw the destruction of value 51{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} year-on-year. 

“Zeder decided many years ago to go into direct commercial farming and Zambia has a good water table and the crop there allows you to have two maize crops a year. However, it has been an unmitigated disaster from day one,” said Clark.

“Zambia, due to government interference, price controls, droughts and the general economy, which is very reliant on copper has not been a great investment.”

At one point it was valued at nearly R700 million. It is now valued at R242 million. 

“Zeder shareholders have seen a significant destruction of value of half a billion rand in the years that Zeder has been involved in that asset. For the last two to three consecutive years Zeder has mentioned that it wants to sell Agrivision Africa, but has failed to yet do so,” said Clark.

“Here we are once again as shareholders seeing another major fall off in value, That is a significant question mark over Zeder. Why have they failed to actually turn this company around or actually sell it?”

The remaining assets inside the portfolio post the exit of Pioneer Foods, is a stake in KaapAgri (41{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}) and a stake in Quantum Foods. They are the only two JSE-listed companies. Most of the assets left inside Zeder post Pioneer Foods’ departure are mainly unlisted, directors valuations.

Going forward, how will the market look at Zeder?

“I believe, as a long-time follower of the stock since 2006, and one of the only analysts who has consistently covered the stock and who covers all the underlying assets, the market will not look favourably at the remaining assets inside Zeder, which are all the assets post Pioneer Foods,” said Clark.

“All the assets are either directors’ valuations and unlisted, which means it is difficult to actually put a correct valuation for them. What you have left is a portfolio with approximately round numbers R7 billion, where there is R1 billion in cash, which is around 60 cents a share with the theoretical sum of the parts after the cash had been paid out after the special dividend of around R3.60.”

The share price should trade at about R1.97, in his view, giving a current discount of Friday of roughly 46{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}.

“I think that is fair for Zeder, purely because the market will not be interested or understand many of the underlying assets inside the portfolio. They are cyclical, long lead time agricultural assets and there is no specific asset inside the portfolio which could grow significantly fast enough in the next year or two to move the valuation needle inside Zeder,” said Clark.

“So, whilst the assets may be credible assets in a long-standing private equity portfolio, I do not believe the market will actually look at what I call ‘Zeder post Pioneer Foods’ too kindly and the discount will remain high.”

With R1 billion in cash Zeder, in theory, could go on an acquisition spree and they have already announced around a R300 million additional investment in Zaad.

“However, given that I cover the agricultural sector closely, there is not much you can buy with R1 billion. And R1 billion in a portfolio would not give you sufficient momentum to re-rate the company and narrow the discount. That is the problem,” said Clark.

“My best course for Zeder is for PSG to either come in and make an offer for minorities and buy out existing shareholders – probably do one of the lower discounts and I think people would sell. Or to do a major share buy back.”

I sees Zeder a bit like its performance the last few years, being “a lacklustre investment”. 

“Sadly, now with the only key assets inside Zeder having gone, the remaining assets, although they are fairly good, are not sufficient in my mind to enhance the underlying valuation of Zeder and as such I see the stock as a dull hold,” concludes Clark.

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