28 November 2019

Kaap Agri, the JSE-listed group trading in agricultural, fuel and related retail markets in Southern Africa, weathered difficult economic conditions in the financial year to September 2019 with a pleasing 6.0% increase in recurring headline earnings per share to 375.19 cents, resulting in a five-year compound annual growth rate of 10.9%.

Revenue increased by 29.1% to R8.5 billion (2018: R6.5 billion) with like-for-like comparable growth of 7.6%. This growth was mainly driven by a 10.6% increase in the number of transactions stemming from strong organic growth and expansion activities.

A final dividend of 90.00 cents per share (2018: 84.70 cents) was declared bringing the total dividend for the year to 123.50 cents per share (2018: 116.70 cents), representing an increase of 5.8% from 2018.

Announcing the results, Kaap Agri CEO Sean Walsh said that considering the tough trading conditions, the results are very pleasing. “Our ongoing diversification strategy and resilience continue to yield strong revenue growth, paving the way for further profitability as some of the revenue growth is still to flow through to the bottom line.”

Operating results
Income growth from the Trading division, which includes Agrimark stores, Forge, Pakmark, as well as Mechanisation services and spare parts increased by 20.6% year-on-year with operating profit before tax declining by 0.4%.

Wesgraan, which includes grain handling and storage of grain and related products, seed processing and potato seed marketing is a notable success story. “As previously forecasted and as a result of higher wheat yields, Wesgraan recovered from the previous year’s drought related performance, increasing income by 91.5% and growing operating profit before tax by 113.8%,” said Walsh.

The Fuel Company (TFC) continues to reflect strong growth with income increasing by 36.4% and operating profit before tax increasing by 18.0%. Whilst convenience and quick service restaurant sales continue to show strong growth relative to fuel litre growth, profit has grown at a rate lower than revenue due largely to a combination of fuel price increases with regulated margins as well as the revenue impact of managed sites converting to owned sites. Managed sites’ profitability is included in the base, but actual revenue is only recorded once the sites are owned.

Manufacturing continued to be impacted by the prolonged recovery from the drought as well as reduced infrastructural spend resulting from policy uncertainty around land rights. Although agricultural conditions improved in the northern parts of the country, income remained under pressure and reduced year-on-year by 1.3%. However, through margin opportunities and good cost control, operating profit before tax increased by 0.6%.

Expansion and upgrades
The group has continued to expand its footprint and improve existing offerings during the year. Five new managed retail fuel sites were added and total group fuel volumes increased by 7.7% in the year. TFC grew annual fuel volumes by 10.4% at owned and managed sites awaiting regulatory approval. Additional quick
service restaurant offerings were added, while further TFC site acquisitions are at various stages of conclusion with a strong pipeline of new sites for the coming year.

A new Agrimark store opened in Kirkwood, improved retail formats were rolled out to four Agrimark stores and a number of smaller upgrades and expansions were completed within the Agrimark and Pakmark environments.

The Forge acquisition has added an additional six business units in KwaZulu-Natal, further diversifying Kaap Agri’s geographic and product exposure.

Capital expenditure of R346.2 million was incurred during the year, with R195.1 million allocated to expansion, R44.7 million on replacement assets and R106.4 million on TFC new site acquisition deposits. Additionally, R50.8m was incurred in the acquisition of businesses, mainly Forge.

“Leveraging culture and diversity remains a key differentiator for unlocking further growth opportunities and remains a key strategic focus area for the group. Considerable efforts were therefore made in improving Kaap Agri’s BBBEE contributor status this year”, said Walsh. It is forecasted that the company will achieve a Level 3 contributor level status with a 110% recognition for procurement spend.

Ongoing diversification
Kaap Agri employs over 3 200 people and has a footprint of 213 operating points across South Africa and Namibia, which includes the retail trading brand Agrimark. Other brands in the Kaap Agri stable include Wesgraan (grain handling, storage and seed processing plants), Pakmark (packaging material supplier and
distributor), Liquormark, as well as Agriplas, a manufacturer of dripline and sprinkler irrigation products. The company’s retail fuel operations are grouped within The Fuel Company (“TFC”), which operates the forecourt convenience brand, Expressmark, as well as other convenience store brands. As of October 2018, Kaap Agri also owns a 60% shareholding in Partridge Building Supplies, which trades as Forge in Southern KwaZulu-Natal (KZN) servicing customers in both the farming and building materials sectors.

The agricultural environment remains heavily impacted by climatic conditions in the various areas in which Kaap Agri operate as well as foreign exchange rate fluctuations. Additionally, agricultural capital investment and expansions have been curtailed partly due to land policy uncertainty. Low GDP growth, decreasing business and consumer confidence, rising unemployment and ongoing fuel price volatility have negatively affected retail consumers.

“The past two years have been challenging for the Group but we believe our growth strategies and resilience have delivered respectable results. Our strategy of diversification has lessened the impact of these challenges, with revenue growth contributions from TFC (10%), Wesgraan (6.3%), Trade (7.7%) and Forge (5.1%) adding to total revenue growth. However, the business environment in which we operate remains constrained with expectations of ongoing pressure in the short-term,” said Walsh.

Retail profit growth again outperformed agricultural profit growth and fuel contributions showed steady growth, providing evidence of the success of the group’s diversification strategy.

Agricultural conditions in the Western Cape have largely improved year-on-year, however certain areas are still experiencing drought. Conditions in the northern regions of the country as well as KwaZulu-Natal are encouraging.

The group anticipates that retail sales and general retail performance will remain under pressure in the short-term as a result of subdued consumer confidence and spending, and any potential exchange rate weakening will negatively impact product and raw material imports. Walsh believes that pressure will remain on fuel volume sales, but said that in addition to new sites, Kaap Agri will continue to capitalise on convenience store and quick service restaurant revenue and margin opportunities at existing sites.

As part of its growth strategy, Walsh also confirmed the establishment of a new wholly-owned subsidiary, Tego Plastics (Pty) Ltd (TEGO) which commenced operations in October. TEGO will initially produce high-quality, food grade plastic bulk bins for the agricultural market through an injection moulding manufacturing process with the opportunity to manufacture additional solid form products at a later stage.

“Overall, we believe Kaap Agri is suitably positioned to take advantage of an improvement in trading conditions and to execute in terms of our strategic imperatives. Our view is to continue doing more business in more places, with more customers and with more products,” Walsh concluded.