Kaap Agri warns of farm pressure

• Rising fuel and fertiliser costs could offset the benefit of higher yields and prices for SA’s fruit and grain farmers

Western Cape-based agricultural services group Kaap Agri has warned that SA farmers are going to feel a bit more pressure in 2022 as surging fuel and fertiliser costs weigh on margins, but it is sticking to plans to more than double its pretax profit to R1bn over the next three years.

Western Cape-based agricultural services group Kaap Agri has warned that SA farmers will feel a bit more pressure in 2022 as surging fuel and fertiliser costs weigh on margins, but it is sticking to plans to more than double its pretax profit to R1bn over the next three years.

The “audacious” earnings target will inevitably involve mergers and acquisitions, CEO Sean Walsh told Business Day.

But Kaap Agri is also looking to optimise existing businesses that grew revenue almost a quarter above prepandemic levels in its 2021 year. The group more than tripled its total dividend for the year to endSeptember, benefiting from a record performance in its grain services business and a strong rebound in its fuel and convenience offerings. The latter were under the most pressure Covid19 restrictions in 2021.

Kaap Agri runs various brands, offering everything from farming equipment to dog food and building materials, in addition to owning a network of retail fuel sites.

The group also offers financial, grain handling and agency services, and has 226 business units in eight SA provinces and Namibia. Retail now accounts for 37% of group trading profit and fuel 32%, agri services 23%, and manufacturing 8%.

Agriculture is one of the few areas of the economy to benefit during the pandemic, operating as an essential service, while prices of commodities have soared. SA has benefited from favourable rainfall across much of the country.

Bumper fruit and wheat harvests are expected in the coming year too but surging energy and fertiliser costs are likely to absorb benefits of higher yields and prices, said Walsh.

Kaap Agri is also grappling with the “slow poison” of loadshedding, which remains difficult to predict and manage across business units. “We have 150 generators and even at stage 2, with two hours a day of loadshedding, it is costing us between R1m and R1.5m a month,” he said.

Group revenue rose 23.4% to R10.56bn in Kaap Agri’s year to end-September, after registering 1.5% growth a year earlier.

Group recurring headline earnings rose 23.8% to R347.2m, and pretax profit 20.6% to R460.2m. Recurring headline earnings are the group’s preferred profit measure, and adjustments refer to nonrecurring expenses, such as acquisition costs.

The group benefited supply chain and inventory management more effective than at its competitors, Walsh said, with ongoing focus on inventories and prices, but also focus on using digital platforms to engage with customers. Kaap Agri achieved compound annual growth of recurring headline earnings per share of 15.1% since its 2011 year, and needs to achieve the same growth to meet its R1bn pretax profit target by its 2025 financial year.

The group issued a cautionary announcement earlier in November, and Walsh said he could not comment on areas of interest.

Net debt fell 8.9% to R1.2bn, while after the end of the period the group inked a R445.6m deal to sell 21 properties on which its fuel stations operate. The sale will not affect trading and the group will conclude long-term leases.

Small Talk Daily’s Anthony Clark said he believed Kaap Agri did have a promising future and the group had at least two years of growth ahead of it, notably due to SA’s wheat and fruit harvest prospects.

“Even if it reverts, the balance of the portfolio will keep on performing,” he said.

Although its prospects were dented by drought conditions in 2017 in the Western Cape, a one in a hundred year event, the group had “come back with a vengeance”, said Clark. “Even during Covid-19, their underlying results were flat compared to other retailers, because their agricultural base was performing so well,” he said.

Kaap Agri may be looking to increase its provincial footprint in hardware and building materials, but may also be looking to augment its packaging division, which is directed towards the fruit and fruit export market.

“I don’t see them expanding into fuel,” said Clark. He still sees upside for the share, which has more than doubled from its 2020 low.

Kaap Agri, valued at R3.4bn, increased its final dividend 122% to 111c — a total payout of about R82.3m — while its total dividend more than tripled to 151c.

At close of trade on the JSE, Kaap Agri was trading 0.55% lower at R45, having risen about 50% since the start of 2020, and by more than a third so far in 2021.