Zeder Investments Ltd. (ZED) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Zeder Interim Results Presentation for the 6 months period ended August 31, 2020. My name is Johann Le Roux, and I'm the Acting Chief Executive Officer of Zeder. Today, I'm going to be discussing the following key points in terms of the short presentation. I'm going to discuss a few noteworthy transactions. Most of these transactions are familiar to yourselves. I'm going to spend some time on our interim results where I touched on a change in accounting policy, Sum-of-the-Parts, where we stand today and also how we look at dividends currently. Then I'll touch on briefly on our key portfolio items. I've got 2 slides or so, for portfolio investments. And then I'll discuss this prospects of our portfolio companies, and touch on the strategy of Zeder going forward. After which time, I'll be available to answer any questions that come through on the webcast. So I think in terms of noteworthy transactions, it was quite a significant period for Zeder. And most of these transactions have been reported in the past, the most significant, obviously, the sale of Pioneer Foods. And we are very fortunate of that transaction that it happened. We received the money a week or so before South Africa went into lockdown. So it was quite fortunate for us to receive those funds. We used a big portion of the funds to settle all Zeder's debt obligations. We've paid a significant special dividend to shareholders. In addition, during the period, in June, we sold our investment in Quantum Foods, for just over ZAR 300 million. And we embark on a share buyback program where we bought back 110 million Zeder shares and spent just over ZAR 260 million. In terms of our interim results and executive summary, our Sum-of-the-Parts value decreased from 29 February 2020 to the 31st of March -- 31st of August 2020. Mainly as a result of the sale of Pioneer Foods and the large dividend declared to shareholders. There's been a significant change in accounting policy at Zeder, effective 1st of March that of an Investment Entity. What that means is that Zeder will effectively cease to consolidate in subsidiaries and market investments on a fair value basis through the income statement. The balance sheet will, going forward, and part of this interim results closely resembles Sum-of-the-Part values. This treatment is being done prospectively. So the prior year August numbers or the full year February numbers have not been restated. We believe that the change in accounting policy will be received in a good way by the investor community, since we'll be disclosing far more relevant information to the market, especially in terms of our unlisted investments. In terms of our Sum-of-the-Parts, at end of August, ZAR 3.72. The discount is around 36%. I assume if you exclude cash, it's pretty close to the 50% level. But the discount is not unique to Zeder. I think it's a general thing in terms of investment holding companies currently. In terms of the dividend, the Board remains cautious during the COVID recovery period. We need to kind of see how our portfolio manages through this recovery period. And therefore, there's no interim dividend declared for this reporting period. In terms of our Sum-of-the-Parts and our valuations, a lot of our businesses are quite exposed to agri-input cycle, where it is very difficult at half year to perform new valuations. So you will see that the majority of our unlisted investments are in line with our 29 February valuations. The exception being Agrivision Africa, where there's been a downward adjustment, and I'll spend a little bit more time on it later in the presentation. And you'll see Kaap Agri also slightly lower, but that's a function of the closing share price at the end of August. You'll also note there that we've got cash of just over ZAR 1 billion, and our shares and issues now, 1.6 billion shares where at the 29 February reporting date, was 1.71 billion shares. And that is a result of the share buybacks. In terms of COVID, I think Zeder has the portfolio. We've been very, very fortunate that most of the business that we invested in was seen in the essential service industries. They were, therefore, allowed or committed to remain largely open. But obviously, there's been a constrained environment in terms of consumer spending and demand. So it has affected a few of our businesses. I think the full impact will be unclear for us for a period of time or at least until our operating companies have gone through a full year cycle. As I said, we were fortunate that COVID hit South Africa, and our company, softer input cycle, that's where normally costs are incurred, but the big revenue months are largely towards the end of the year. So we need to work through those periods to really see what effect will be. I think a good example would be Capespan, for instance, that's quite exposed to grapes. They've got [indiscernible] grape farms. And they're a big grape business, where the grape season is November, December into January. So we really need to get through that cycle first to really see what effect that will have on a business like Capespan. And similarly, a business like Zaad, where most of the profits are made towards the end of the year. The balance sheets overall look healthy. And as I said, Zeder has about ZAR 1 billion of cash available, and we're well positioned to support our investee businesses where appropriate. That brings me to our investee portfolio, Zaad. And the biggest investment in Zeder's portfolio, the CEO, Antonie Jacobs, this is a great business, lots of international interest. It's not only a South African business anymore. If I look at all the brands in front of you, I mean Bakker Brothers, Farm-Ag, gives us exposure West Africa, May is a business in Turkey. Hygrotech, vegetable business, also operate in all sides of Africa. We've got a few JVs with large international organizations like the Sorghum Solutions and DLF. So it's really a seed business with quite a big international player at the moment. In terms of their reporting, their half year reporting, once again, very difficult to compare the period July '20 to July '19. During the July period -- the July '20 period, Zaad upped its stake in Farm-Ag, where the business now owns 100% of that company. So comparatives are quite difficult to make. But there's been an improvement in Zaad at half year, and I think that's the important thing to note. COVID in terms of this business, as I said, we'll only really know the impact once we've been through the full agri cycle. But where we stand now, the most significant impact we've seen in the Northern Hemisphere business, the Bakker Brothers business, where borders were closed and they weren't allowed to trade, and there's been some revenue losses for the year at Bakker Brothers. If I look at this business going forward, summer conditions seems to have normalized, it will bode well for Zaad and going forward and towards the end of their financial year. In terms of valuation considerations, Zaad is early generative, and we value this business on a comparable p/e multiple, obviously adjusted for company-specific factors. This business consists of 2 main divisions, and we value them separately. One is the seed business, and one is the agrichemical business, which is the Farm-Ag business. And once again, because it's the interim reporting period, it's very difficult for us to deviate from the prior valuation. But obviously, we've taken market conditions into account and things like COVID. But the valuation in our books at the end of August has remained at slightly over ZAR 2 billion, which is Zeder's value or Zeder's portion of the business. Just on a few transactions, the Vilmorin transaction, as those are our French partners, we're very excited about this joint venture. Vilmorin has a very big seed business, probably the fourth largest in the world, where Seed Co is a big African player. This joint venture will allow us to be a strategic player in the South African maize market. It will be white maize and yellow made. And then we're quite happy to hold hands with this partnership and to be a key player in this market. It's a very competitive market, but we think we can do well with the joint partnership. Then a transaction has been on our radar for a while, and we have reported on it in the past. That's our East African hub that we're trying to establish, East African Seeds. There's been good progress with this transaction. The regulatory approvals have been obtained recently, and we hope to conclude the final conditions towards the end of this financial year. That brings us to our second largest investment in terms of Zeder's value, the TLG, the CEO, Anton Potgieter. That's a relatively new management team, got very big ambitions and great entrepreneurial flair, and we're very excited about this business. It's not only a business that's got port-based assets. We've got tech in terms of The Logistics Company. So we're very excited about the growth prospects of this business. This business, unfortunately, had quite an impact in terms of COVID. And for its half year period, you'll see there's about a 35% decrease in recurring headline earnings, and that's largely as a result of lower trade through the ports, specifically FPT, which is the old fresh produce terminals and Tradekor, that's our Port Elizabeth backup port operation, where we own 50% of that business, where it's a big export of manganese through the Port Elizabeth port. We have, however, seen a sharp V-recovery. I mean, this business in the latter stage of the COVID period. This business is a solid cash generation, and we have the view that the business will make up the losses that they've made -- well, let me rather say, not the losses, the fact that they're behind their prior numbers, we think they'll make that up in the final 6 months or so of the year. In terms of valuation considerations for this business, we also value the business on a comparable p/e multiple, adjusted for company-specific factors. The valuation is once again in line with the prior reported number, even though they are 35% down half year. We've taken into account the effects of COVID and obviously, also the subsequent results that's available to Zeder. The valuation in our books is just over ZAR 1 billion for Zeder's portion. The following business as Capespan, our vertically integrated fruit producer and global marketing business, the CEO, Tonie Fuchs. And there's been a lot of changes in this business over the past few years. It's obviously got big farming operation, grape farms in the Northern Cape and in Namibia as well as big apple and pear farms in the Theewaterskloof and an Elgin area and then citrus in the Citrus Bowl or [ Ken ] William area as well as well as in the Southern Cape. This business has gone through a lot of restructuring. There's been a significant improvement for the half year results June compared to June '19, where they made a loss in the prior period of ZAR 89 million compared to the loss of ZAR 27 million. I think this is, once again, important to note that this business is also in the softer part of its input-cost cycle. So it's not as big revenue-generating months. But there's been an improved results, and it's largely due to the better performance from the farming division. There were some farms that we spent a lot of time and effort and money on and that are now blue chips farms and they're getting through their J-curve. I think in terms of the global marketing business, I think there's still a lot of work for us to do there. I don't think we're quite there yet, but the business is definitely moving in the right direction. There's been a smallish transaction during the period where Capespan sold its equity investment in a business in Germany, Van Von Wylicks, just for over ZAR 120 million. In terms of valuation considerations for Capespan, because of the loss-making food business currently, we still use a market-related NAV that we obviously adjust for company specific factors. So it's mostly the valuation of the farms. These are tested with a third-party valuations or with most recent sales. In the last 18 months, we actually did sell 3 Northern Cape farms, and those values were in line with our valuation that we've reported to the market. The next business is Kaap Agri. I think you all know it as the Western Cape -- well, largely Western-Cape-based agri retail business. It's a listed business. So in terms of what they've reported to the market, their half year, 7.5% up end of March. Their full year is end of September. So they're in that period now. I think what's important for the market is what they've reported in terms of a trading update release in July where they mentioned their Q3 numbers. Those were also positive. And I must say this management team has been very, very proactive during the COVID-19 period. Kaap Agri being listed, I think welcome to engage with the management team from Kaap Agri. Although they're in a close period now or you can just visit their website where there's a lot of additional information on the business. The final business that I'm going to talk about is Agrivision Africa. Agrivision Africa has also had an improved performance for the 6 months. Once again, it's a business that's in its input-cost cycle. So the half year is not a reflection of the expected full year. But I think one has got to be honest, this has been a very difficult investment for Zeder. And as I mentioned at the start, we've -- there's been a further downward valuation of this investment in the books of Zeder and has largely got to do with additional Zambian risk. I'm not sure if you've seen in the papers, but the Zambian government has requested an extension on their U.S. dollar debt repayments and a result mainly of that factor, we've decided to adjust the valuation downwards. Agrivision Africa is also based and assessed on a market-related NAV, but we do apply a significant discount to that market-related NAV to get to the valuation that Zeder reports to the market. Then I think in terms of prospects going forward for our portfolio specifically. I think we're in a fantastic space. I think in terms of our logistics division, volumes in the ports have increased, which is obviously great. And in terms of agri conditions, the Western Cape winter rainfalls, you all know that pictures of the Theewaterskloof Dam, that's phenomenal to be able to see that dam to capacity. That obviously bodes well for food farmers, which will bode well for Kaap Agri, where food farmers is a big client of theirs in the Western Cape, but also bode well for Capespan that is a food farmer in the Western Cape. In addition, it's been a cold winter in the Western Cape. It feels like it's still cold outside. I don't know when summer is going to arrive, but the winter snow and the cold units are also positive for fruit farmers. And once again, will be for Capespan and for Kaap Agri, that's a big player in something like packing materials. So big volumes of fruit, hopefully coming, will be good for those 2 businesses. Then in terms of the rains as well, the winter wheat crops look promising. I don't know if any of you've driven out of the [indiscernible], it's just a green dot, wherever you look, the rains come at the right time. So that's [ wood where we are ] now, it looks promising. And once again, that falls straight bang in the middle of business like Kaap Agri. Then in terms of the northern part of the country, where La Nina's forecast. La Nina is above-average summer rainfall. Zaad, our seed business is a big player in that market, especially when it comes to maize and sunflower and even across our borders. So above normal rainfall will mean that farmers will plant seeds [indiscernible] buy seeds. And we think that could also be good for Zaad as a business. Then in terms of strategy for Zeder, you would have noted, the sense with the release of the market in early September. I think we -- in terms of investment holding company discounts, Zeder trades at a discount. It's always Zeder at a discount from my memory. But I think it's important to note that management have undertaken several initiatives. We've internalized the management fee, that was what was due to PSG. During this reporting period, we sold our largest investment in Pioneer Foods. We've also sold another listed investment in Quantum Foods. So if you think about it, we actually, in terms of listed entry points, there's only Kaap Agri, that's the only remaining listed entry point for investors that like to invest in our portfolio. But I think the investment holding company discounts that's not prevalent in all listed markets, this year it will remain. We understand the market concerns. We're not trying to move away from it. We feel the pressure that the market is putting on top of us. And I think in terms of strategy going forward, I think it's important to mention that the overall strategy at Zeder remains. We need to create value for shareholders, whether it's going to be with the share price growth, whether it's going to be with dividends or whether it's going to be with capital that we need to return to shareholders. And I think that's a decision that our Board needs to make. I think one needs to be aware that we're sitting in a COVID environment where -- how it's going to affect our portfolio remains uncertain until we've worked through a full agri cycle. But we're obviously aware that subsequent to the Pioneer transaction, we are a much smaller business since we were a ZAR 10 billion business in terms of investments at February 29, and we now, I think, just under ZAR 5 billion business. So we're half the size we used to be. But the Board is currently considering various strategies. I think there's unfortunately no quick solution, but we're also not going to waste time, and we will communicate to the market once the decisions have been made. But I think in closing, the assurance I can give you, the shareholders that we will do what is right for Zeder's shareholders. I thank you for your time. I will now be available to answer questions as registered on the webinars call or data log. Thank you very much, and I hand over to the webcast administrators for the Q&A session.

I'm first going to go to the questions on the webcast. The first question we have is, Zeder has 5 assets and cash of which one Agrivision is being valued down year in, year out. So you have 4 assets, one is JSE listed. What is the point of even being listed entity now?

I think we've received many questions on the way forward for Zeder, including options of a potential delisting. I think all of these questions are currently being considered by the Board as far as maybe a potential revised strategy. And as I said in my presentation, we will communicate to the market as soon as the Board has made a decision on any of those strategies for Zeder going forward. The second question is a question related to Agrivision. Agrivision has been revalued down to ZAR 155 million. Back in the day, it was worth over ZAR 600 million. This asset has been slated for the -- to be sold for years. And all we see is value being eroded, is this latest valuation cut a plan to eventually get out? I think we've acknowledged to the market that has been a difficult investment for Zeder. But like all our investments, we are continuously evaluating options around the investment. You must remember that we also have 2 co-shields in Agrivision. But the evaluation of Zeder and our portfolio is receiving attention from the Zeder board. The third question, is Zeder currently debt-free? Does it intend to remain debt-free? Under what conditions will consider taking on debt? I think at this stage, we're happy to be debt-free. It's still a COVID-19 environment. And I think Zeder needs to consider and evaluate how it may have to support its investee companies, even though their balance sheets are healthy. And I think the additional raising of debt from Zeder will all be dependent on the strategy going forward. And as I mentioned, it's obviously currently being evaluated by the Board. The next question is, are any of Zeder's underlying businesses actively looking for acquisitions in the current market? I think the answer to that is, yes. I think as part of my presentation, I mentioned the EAC transaction, which will mean about a ZAR 200 million capital investment from Zeder. So yes, we're willing to support our portfolio companies on acquisitions. The next question, they're two questions actually. In the last annual report, Zeder stated that they plan to allocate a further ZAR 200 million to Zaad. Can you give us an update on your intentions to invest in Zaad given the announced change in Zeder's strategy? I'll respond to that one first. As per my previous answer, it relates to the EAC transaction, where there's been good momentum. The relevant regulatory approvals have been obtained, and we hope to close the transaction by the end of the year. And that set, ZAR 200 million that was earmarked for Zaad at our financial year-end. Zaad generated ZAR 23 million of earnings for the first 6 months. I don't feel there's enough disclosure for us to assess the ZAR 2 billion valuation, can you offer more insight? And are the ZAR 2 billion valuation were justified? I think it's important just to note that most of our investments have an agri-input cycle, which makes it quite difficult to assess on an interim reporting basis. So what we would do in those cases, we would look at the most recent financial statements, which would be our Zeder February reporting period. We would consider relevant market conditions subsequent to that. In this case, it would be obviously COVID-19 and an effect on the business. In Zaad's case, we valuate on an earnings multiple, a comparable earnings multiple to other seed businesses. And obviously, we'll adjust it down for relevant factors that are specific to Zaad. I think as part of our change in accounting policy, we also undertake to provide far more information to the market in terms of our unlisted investments, in terms of our methodologies so the market can also make their own assessment. Can you -- the following question is, can you detail the cost structure head office, holding company level after all the changes that have been made? Yes, I think subsequent to the resignation of Norman Celliers, if I just do a ballpark number, I think in terms of our Sum-of-the-Parts, that's just under ZAR 6 billion currently. I would think that our cost structure would be about 0.5% of Sum-of-the-Parts. Next question. What is the thoughts on further share buybacks for Zeder in light of the substantial holdco discount? I think at appropriate levels, it will be a mechanism that may be used in a circumspect manner. The following question is, what are PSG's thoughts regarding value unlock for the Zeder business? I unfortunately cannot speak for PSG. It's their results presentation next week, and my suggestion would be to pose a question to the CEO, Piet Mouton, at that presentation. There's another question. Significant debt level for Zaad. Is it sustainable? Have any covenants to watch out? Will Zaad require further funding from Zeder going forward? We, from a Zeder point of view, obviously, monitor -- I'm the Chairman of the Finance and Risk Committee at Zaad. So we look at the business. We obviously look at covenant breaches. I think the business is a healthy business. We've got our eyes on debt levels currently, but we don't think there's significant risk. But as I mentioned -- and that's why we're in a fortunate position to have just over ZAR 1 billion cash at Zeder that if need be, we will be in a position to support our investees and where appropriate. If I look at the -- there's another question that's just come through. Timing wise, when do you expect to announce a renewed strategy for the business? As I mentioned, we will communicate to the market as soon as its Board has made a decision. I don't really want to put a time frame on it, but it's receiving attention. That's the last of the webcast question that I can see from -- on my screen. I just want to refresh the screen to make sure that we haven't not answered any questions. Yes, there are no questions. If I can just ask the web cost administrator to maybe just see if there are any questions on the live calls, please?

[Operator Instructions] We have a question from Chris Logan at Opportune.

A couple of questions. Just on the share buyback, obviously, it's quite NAV enhancing. Did you -- have you done a comp just how much you announced your NAV buybacks you've done to date? That's the first question. And then secondly, we have had big discussions, but Remgro has now made a significant change in that they've made alignment of interest, a strategic priority. By alignment of interest, I mean, they're trying to align the management team's incentives and Rem with shareholder value. It's a new thing. But obviously, there's substantial upside if you get that right, but of course, as we know, incentives determine outcomes. Perhaps you could give me some thoughts on your attitude towards that as Zeder?

Chris, I think to your first point though, we do the calculation. And unfortunately, I don't have it at my fingertips at the moment, but I can provide it to you. I think in terms of the share buybacks, we bought back about 6.5% of our issued share capital, and that's 110 million shares. And your second question relating to incentives and management. I think the change in accounting policy at Zeder, where in the past, we looked a lot at earnings and also at Sum-of-the-Parts, we, now going forward, will only focus on Sum-of-the-Parts as the key benchmark. I think that change in itself will probably drive a change in maybe the Rem policy to be more aligned with growth on a Sum-of-the-Part level rather than earnings. So I think it is a valid comment, and it's something that I can take to our RemCom for consideration.