Agri-services conglomerate Kaap Agri probably deserves wider recognition for its success in cornering a superb retail niche with its Agrimark brand(s).
Still, its share price responded well to a robust trading update at last week’s AGM. The market also now seems inclined to let management press on with the so-far underwhelming thrust into fuel retailing via The Fuel Company (TFC). It was pointed out that if Kaap Agri had concentrated solely on its Agrimark brand, the returns for shareholders would have been markedly higher over the past five years.
I’ve not been convinced about the merits of the fuel thrust, but there are glimmers of hope. The AGM presentation showed fuel gross profit per litre up a sprightly 12%, with management stressing a change to the business model as regards costly property ownership structures. Perhaps more encouraging — especially if you look at fuel sales as a "loss leader" for other business — is that forecourt convenience store and quick-service restaurant sales bounced back 23%.
I’d also be paying attention to Kaap Agri’s expansion into the vibrant pet store niche. I wrote an article for sister publication Investors Monthly last year showing just how the profit tails are wagging in this captive niche.
Interestingly, the most intriguing angle at the AGM had nothing to do with Kaap Agri, but corporate cousin Zaad. Zaad, a seed business, is controlled by PSG-aligned Zeder Investments, which is the biggest shareholder in Kaap Agri. In addressing returns at Kaap Agri, a shareholder remarked about plans to list Zaad, which Zeder values at over R2bn, on the Amsterdam Stock Exchange. I managed to track down the busy Zaad CEO, Antonie Jacobs, who quickly scotched talk of an offshore listing in the near term.
He did concede there was perhaps longer-term merit in looking at a European bourse — not necessarily Amsterdam — with investors in these markets more familiar with the intellectual property associated with the seed businesses. Zaad might need to bulk up considerably before looking at greener pastures offshore.
Bright sparks
On a lighter note, electrical product supplier ARB Holdings put a rocket in its socket in the interim period to end-December. The 60%-owned lighting division — mostly Eurolux as well as the recently acquired Radiant Lighting — increased revenue by 5.8% but operating profit by an astounding 98%.
The rationalisation from integrating the Eurolux/Radiant facilities in Joburg is, in the company’s words, "starting to reflect significant savings". This will placate shareholders who were initially nervous about the Radiant deal, remembering the dim performance of this business under its former owner, South Ocean Holdings.
ARB finished the interim period with a positive cash balance of R305m — operational cash flows were also buoyed by destocking in the lighting segment. That free cash is significant for a group with a market value of about R1bn. Officially, acquisitions remain part of the group’s growth and expansion strategy, and expanding the product base in the electrical division is being evaluated. But, for now, it seems the spotlight will remain on its warehouse management system project at the Lords View distribution centre to make certain the integrated Eurolux and Radiant operation continues to run smoothly.
With the Burke family already speaking for the bulk of ARB shares, its cash pile will no doubt prompt prickly questions around the possibility of a buyout offer to minority shareholders. ARB is cheap at the current price. It might be more prudent to approach senior management of the lighting division — who retained 40% of the business — for talks around a full takeover. That said, I don’t think it will be easy to prise loose these shares from the lighting group’s management.