Kaap Agri delivered pleasing results amidst tough trading conditions during the six months to end March 2020. The Covid-19 lockdown had a marginal effect on results with only 3½ days of trading being impacted, which were also partially offset by an increase in sales prior to lockdown.
Headline earnings per share increased by 7.9% to 241.83 cents and recurring headline earnings per share increased by 7.5% to 247.65 cents. Revenue increased by 11.6% to R4.9 billion with like-for-like comparable sales growth of 4.8%. The growth in revenue was driven by a 5.0% increase in the number of transactions.
Given the uncertainty of the duration and impact of the Covid-19 pandemic, Kaap Agri decided to forgo the declaration of an interim dividend with the view to preserve cash and liquidity.
Kaap Agri CEO Sean Walsh said that the results were pleasing especially given the fact that it was achieved during the weak economic environment which was widespread even before Covid-19.
“The results are acceptable although below where we would have liked it to be. Encouragingly, our ongoing diversification strategy and resilience continue to yield strong revenue growth despite exceptionally tough trading conditions. Going forward, the pandemic will amplify the already weak economic situation in the country. For the short-term our key focus areas will be cash flow management, securing supply, anticipating and responding to changes in demand, digitalisation, health and hygiene.”
Agri and retail trade experienced a slow start to the financial year due to sluggish retail spend and a constrained consumer environment, underpinned by suppressed GDP growth as well as adverse weather conditions. Encouragingly, both agri and retail performance improved during the second quarter. Crucial late season rainfall needed by the wheat farmers did not materialise, resulting in harvest reductions. Conditions for fruit and vegetable production have largely been positive but significant expansions and infrastructural spend have diminished. The fuel industry has experienced ongoing fuel volume decreases. However, convenience and quick service restaurant performance has been reassuring.
Despite the challenging trading environment, Kaap Agri continued strategic investment activities with capital spend of R110.7 million. Working capital was well managed. Although debtors have grown above the increase in credit sales, out of terms debt reduced by 0.7% of the total debtors book. Bad debt write offs were at 0.07% of debtors, compared to a five-year average of 0.23% and a ten-year average of 0.36%. Stock turn increased marginally.
“We continue to generate strong cash flows from operations and significant investment has been made back into the business to support growth,” commented Walsh.
Income growth from the trading division, which includes Agrimark retail branches, Forge Agri, Forge Build, Pakmark packaging distribution centres, mechanisation services and spare parts, increased by 13.1% with operating profit before tax increasing by 11.7%.
The Fuel Company (TFC) performance was below expectation with income growing by 4.8% while operating profit before tax dropped by 4.1%. Revenue growth has been slow due to low volume growth in like-for-like sites and delays in newly acquired fuel retail sites.
Wesgraan, which includes grain handling and storage, seed processing and potato seed marketing, grew revenue by 23.3% resulting in a 51.4% increase in operating profit before tax. Despite lower wheat volumes received compared to last year, the increased rate of sales has resulted in a heavy weighting of full year profitability in the first six months of the year. This performance is not expected to re-occur in the second half of the year.
Manufacturing income from the production of dripline, sprinkler irrigation products and plastic bulk bins for the agricultural market, contracted by 2.4%, despite good cost control. Irrigation-related revenue continued to be impacted by the prolonged recovery from the drought as well as reduced infrastructural spend resulting from policy uncertainty around land ownership rights. Tego Plastics spent a large part of the year to date developing and enhancing its bulk bin product offering and will ramp up production over the next few months.
Walsh said it is clear that the volatile and challenging trading conditions will continue.
“Whilst we received approval to trade as an essential service provider during the initial lockdown, the scale of our operations has been impacted. The impact of Covid-19 is being felt across all the markets in which the Group operates. As such, a number of interventions have been implemented to mitigate its impact on the business. We anticipate that retail trade will remain under pressure in the short-term, however good agri-trade performance is expected to continue. We will continue to seek out earning enhancing opportunities, albeit more cautiously. A number of new fuel station licence applications are expected to be finalised before year-end, and we expect that revenue from the sale of bulk bins will increase in the second half of the year.”
Walsh is more upbeat about the prospects for the agricultural industry.
“Although Covid-19 is creating much anxiety and uncertainty, we are expecting one of the better fruit farming years, especially if exports can continue in a relatively normal manner. Except for a few micro-sectors which are heavily impacted by Covid-19, most of the agricultural sub-sectors are looking more positive than a year ago.”
“As a supplier of essential goods and services we will continue to review the way we interact with our customers to ensure we provide a relevant and sustainable offering in a responsible manner. We remain relatively positive about the medium-term prospects for agriculture in southern Africa as well as the future of the company.”
“From a strategic point of view, we have probably thus far avoided the iceberg impact of Covid-19. The focus for now will be to stay above water,” Walsh concluded.
7 May 2020