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Fuelling Kaap’s growth

MONEY WEB / 30 NOVEMBER 2017 - 00:04 / SASHA PLANTING

A new BEE deal in Kaap Agri’s fuel business positions the company well.

An investor casting their eye over the recent share price performance of agri, fuel and related trading group, Kaap Agri, could be forgiven for thinking that this is a company in deep trouble. Its share price has fallen precipitously, from R65 at listing in July, to R47.98 today.

Fuel is a key component in the growth strategy. Picture: SeongJoon Cho/Bloomberg

But investors should bear in mind that a short 12 months ago the share was trading at R28 over the counter – which gives one a sense of the value that has been unlocked since the group’s July listing – between R1.8 billion and R2 billion in fact.

Of course investors are concerned that the drought is taking its toll on the company – this is an agri business with a large footprint in the stricken Western Cape – but the business is more diversified than many might think.

In addition to the historical grain handling and agency business, along with the core agricultural services business, Kaap Agri has been aggressive in rolling out its Agrimark retail stores and expanding its fuel and associated retail quick store business.

The effort has generated strong results for the year to September. In the period recurring headline earnings per share increased by 17.9% to 351.9 cents, resulting in a compound annual growth rate of 18.9% over the five years to September 2017.

“Our diversification drive has gained traction,” says CEO Sean Walsh. “In the period under review the trading profit from general retail was similar to that of agricultural-related retail. Indications are that general retail growth will exceed growth in agricultural retail in future.”

As a whole though the Trading division, which includes the Agrimark retail branches, Pakmark packaging material distribution centres, mechanisation services, spare parts and irrigation operations, grew revenue by 6.3% to R4.1 billion, with operating profit before tax increasing by 14.1% .

Wesgraan, which includes grain handling and storage of grain and related products, seed processing and potato seed marketing, grew income by 27.1% and increased operating profit before tax by 68.7%, as a result of increased wheat volumes.

The fuel business reflected spectacular turnover growth of 34.2% and operating profit by 37.4%. Walsh believes that within three to five years this business will generate revenue of R6 billion from its current R1.3 billion, and will account for 35% of sales within the group. “Until recently we were held back by the Department of Energy because we did not have direct black ownership at the forecourts,” he says.

This issue was resolved with the formation of The Fuel Company, a subsidiary within the group, which is 33% black-owned, and has its own MD and management team.

At the same time Kaap Agri expanded its fuel footprint from one service station in Gauteng to eight.

The acquisitions are effective from November and December and are expected to boost fuel sales by 40% to 50% on a 12-month forward basis.

This makes Kaap Agri one of the few listed companies with (increasing) exposure to the fuel sector, and one with higher black ownership than the standard 25% in the fuel sector.

Another growth-supporting feature of The Fuel Company is the fact that it is brand agnostic – thus its 40-odd filling stations are a mixture of oil majors and own brand. “We think this presents a compelling business case,” Walsh adds. “We like doubling companies every five years, and with 15% compound annual growth we should achieve that in this case.”

A final dividend per share of 82.6 cents (2016: 68.0 cents) was declared to bring the total to 112 cents (2016: 94.5 cents), representing an increase of 18.5%. This brought the compound annual growth rate over five years for dividends to 26.2%

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LINK - https://www.moneyweb.co.za/news/companies-and-deals/fuelling-kaaps-growth/

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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