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

Good morning, ladies and gentlemen. Welcome to the Zeder Full Year Results Presentation. My name is Johann Le Roux, and I am the CEO of Zeder Investments. In terms of our agenda today, I will be discussing some noteworthy transactions. This will relate to some disposals during the year, also share buybacks and special dividends. I'll then discuss our financial results, the impact of COVID on our business as well as our latest Sum-of-the-Parts update. I'll spend some time on our portfolio assets and to give you a bit of a feel for how they've done during this period. And then I'll spend some time in terms of the prospects for Zeder and strategy. Yes, I'll refer to the cautionary release earlier this morning. And there will be a question session after that. And please may I ask that you can send your questions to the e-mail on your screen during the presentation so that we can answer your questions timeously at the end. In terms of noteworthy transactions during the year, it's been a very, very busy year for Zeder. One often forgets that the Pioneer transaction actually did take place during this financial year. We were very fortunate for that to have been completed 1 week before level 5 lockdown in South Africa. We received ZAR 6.4 billion at that stage, and it put us in a wonderful position prior to all the uncertainty around COVID. We used some of those funds to settle all our debt obligations, and Zeder currently has no debt at a group level. In addition, we were approached on Quantum Foods, and we sold that investment during July. And there, we received a further ZAR 308 million for Zeder. In terms of special dividends and buyback of shares, as a result of the Pioneer transaction, you're all aware that we paid a special dividend of ZAR 2.30 per share in April last year, that was about ZAR 3.9 billion. It was returned to shareholders. In addition, the Board yesterday declared a further special dividend of ZAR 0.20 per share. And we obviously did take into account the effect of COVID on Zeder and our portfolio. And during the year, we also invested in share buybacks. We spent ZAR 426 million on shares. We bought back 172 million shares at an average price of ZAR 2.48 per share. And based on the share price of Zeder yesterday was about ZAR 2.80, so those shares were bought at a lower value than our current share price. In terms of our financial results, I'm just going to spend some time on the summary, where we are, a change in accounting policy, COVID and then later Sum-of-the-Parts. In terms of our results, as I reported at half year, there's a change in accounting status to that of an investment entity effective from 1st of March. This will mean that our results for February '21 will not be comparable to the prior year. This policy was implemented prospectively. And as I said, no prior numbers were restated. And basically, what it means is that we seize to consolidate our subsidiaries and will now measure our investments at fair value through the income statement. Our balance sheet will, from now and also going forward, be closely resemble our Sum-of-the-Parts values. And we of the view that this will be favorably received by the market because we'll be presenting far more useful information, especially on our unlisted investments. In terms of the Sum-of-the-Parts, if you do compare last year to this year, there was a decrease to ZAR 4.33 per share, but that was mainly as a result of the ZAR 2.30 special dividend that was paid last year. Our Sum-of-the-Parts, if you exclude Pioneer and Quantum on the like-for-like basis, it actually increased by about 11%. And that was mainly as a result of upwards valuations in Kaap Agri, TLG and Capespan. At our Zeder share price of yesterday, our discount remains around 35%, 36% levels. And as I said before, this is not unique to Zeder, it's all prevalent in listed markets. In terms of cash and Zeder's balance sheet, we've got a strong balance sheet. We have almost ZAR 900 million of cash at the moment. Capespan and TLG also declared dividends to Zeder that we'll receive in April. And then also, as I mentioned before, the Board resolved to pay a further special dividend of ZAR 0.20 per share, which is just over ZAR 300 million. In terms of COVID, I think we all know the impact on South African business, GDP retraction, job losses, the downgrades we've had, the environment has been quite tough and still remains constrained, but we do see green shoots. And I must say, in terms of Zeder our portfolio, we've been very, very fortunate. And yes, I have to commend our portfolio management where they've implemented proactive measures during the COVID period. And our companies have largely been quite resilient during the COVID period. And as you're also aware, most of our investees were positioned in the essential services industries, and they were largely remained open. But the impact of COVID still remains clear. We'll monitor our investments. We'll look at their balance sheet. And Zeder with the cash that we currently have, we're well positioned and to support our investees where necessary. I think in terms of COVID today, I think the most significant challenge that we see is in global supply chain constraints and bottlenecks. And these are some things that's proactively managed by our investee management. In terms of Sum-of-the-Parts, as I said, from ZAR 5.97 per share to ZAR 4.33, largely as a result of the special dividend. And if I look at our valuations, comparatively, you'll see Zaad's valuation is relatively flat. Logistics group, there's an uptick. Capespan's an uptick. Kaap Agri, an uptick. And in that other bucket is our investment in Agrivision included. So you'll see quite a nice balanced portfolio, Zaad being our biggest asset. And then the other 3, all between the 15% and 20% region. You'll also just note the number of shares in issue, where in the prior year, we had 1.7 billion shares in issue. That's now just over 1.5 billion, and that's obviously as a result of the share buybacks. Then when I go to our portfolio review, Zaad, our specialist, agricultural seed and agrochemicals company, the CEO here, Antonie Jacobs. As you can see at the top there, all their brands, Agricol, our South African sunflower business. K2 and Agriseeds are some of our African maize operations. Bakker is our Dutch seed business. Farm-Ag is our agrochemicals business in Africa. May is our Turkish investment. And as you can see, it really is a global business that really focuses on emerging markets. In terms of their results for the year, they reported an increase of 2% in recurring headline earnings per share for the year to ZAR 181 million. We are satisfied with this performance from them. The business does have slightly -- or does have just over ZAR 1 billion of debt, but we have an eye on that, and it is well managed. And I think if we have to take the year-end review for Zaad, this is probably the business in our portfolio that was most significantly hit with COVID, especially in our Bakker operations in The Netherlands, where cross-border trade into North Africa and the Middle East was difficult, but we're confident that, that business will restore to the previously profitable levels. We've received good performances from our investments in May Seed in Turkey. That Eastern European market is a big growth sector for them. And also Farm-AG, our agrochemicals business, has made good inroads into the Western Cape market. In terms of agri conditions for Zaad, the summer rainfall up in the northern province were good. But our Agricol, our sunflower business, unfortunately, there were low hectares planted by farmers. So that obviously was a slightly negative effect on them. But that obviously meant that we had an uptick in maize plantings, which is also good for different part of the business. We've communicated before, the Limagrain transaction that we concluded, this is with our French multinational partner. That's a joint venture that focuses on GMO maize in South Africa. And we're very fortunate to have Limagrain as a partner with us. The EA Seeds transaction will be concluded shortly. That is our East African hub. We will be establishing soon, and that will be a nice distribution for Zaad seed varieties in those markets. In terms of our valuations, previously reported that we looked at earnings, the same principle applies, based on comparable EV/EBITDA multiples, obviously, adjusted for company-specific factors. There was a split between the operations, where we applied a slightly higher multiple to our seed business than our chemicals business. It gave us an average of about an 8.3% EV/EBITDA multiple on the Zaad Group. And that EBITDA, we normalize and adjusted downwards to exclude the accounting effects of hyperinflation that's currently being experienced in Zimbabwe. And in addition, the net debt was obviously deducted from the valuation. That brings us to our Logistics business. Our CEO, Anton Potgieter, relatively new management team here. This business has really performed exceptionally well. If you look at our brands at the top, Tradekor is our back of port operator outside the Port Elizabeth harbor, a big, big volume chain of manganese going through that port. Matola Cargo and GT, those are our businesses in Mozambique. And just to reiterate, we do operate in Mozambique, but it's from [indiscernible] and further south. So TLG does not have any operations in Mozambique in the current conflict areas. FPT is the old fruit terminals. And Port Stevedoring is our ship to dock operator in all the ports where we operate. In terms of their results, I think an exceptional performance to report 12% earnings growth per share for the year. This business was affected by COVID, but only for a short period of time during March and April. And I think for this business to achieve this growth is exceptional. As you can see there, only has about ZAR 90 million of debt on their balance sheet, and this business is really positioned well. In terms of their performance for the year, the valuation has increased to about ZAR 1.3 billion. And as I mentioned, there were some COVID effects, but it was of a short term nature, and we've seen a sharp V-recovery in this business. It also has some exciting growth prospects in Sub-Saharan Africa. So we really are very excited about this business. It generates solid cash flow and also paid a dividend to shareholders during their financial year. In terms of the valuation considerations for this business, similar to Zaad on a EV/EBITDA multiple, adjusted for specific company factors. That market-related EBITDA is an EBITDA of about 4.4 for TLG. And the net debt and lease liabilities were deducted from the specific valuation. Then in terms of Capespan, our big farming and fruit distribution business, also had a very, very good year. This business is run by Tonie Fuchs. If I look at their results, they've had a complete turnaround from the prior year where they made a loss of ZAR 36 million. And this year, a profit of ZAR 76 million. So we're very, very happy with this business. When you look at their balance sheet, also a very, very low levels of debt, actually, no long-term debt. That's just a working capital facility that fluctuates during the year. So really a big turnaround. And I think the turnaround, when you look at there, it's got largely to do with the restructuring of the global marketing business, and now has a significantly lower cost base, improved performance from the farms. I think a lot of these farms had CapEx invested in them, and it took quite a while for them to get where they are now, but we're very satisfied where they are. And there's also been some solid contributions from the associates that would be Yupaa in India, Joy Wing Mau in Asia, and we also have an investment in Turkey. So yes, I think also I just congratulate Tonie and his team with the restructuring that was done during the year. Also, this business, good cash generation. As I mentioned, no long-term debt. Investments going into farms. Infrastructure to improve the farms continuously. And I must say we're very satisfied with the performance. I think on the farming side, unfortunately, in the Northern Cape, there was late rains, and this affected the business negatively. So the results could have been even better if we didn't -- if it wasn't for the unfortunate rain. And as a result of the good performance, Capespan also declared a dividend to shareholders. In terms of the valuation for Capespan, it's based on a Capespan Group NAV, obviously taking into account-specific factors. We performed independent third-party valuations on all the farms and all the infrastructure assets like the back houses and the associate investments were valued at appropriate p/e multiples. And what we then did is we applied a market-related discount to the Group NAV to get to our valuation. In terms of Kaap Agri, the agri retailer that's also listed on the JSE, run by Sean Walsh. This is their results for September last year. So it's probably old news, where they had growth of 4.6%. Subsequent to that, they have released their trading statement in January this year, where they indicated their Q1 growth. And I just want to make the point that at September last year, their share price was ZAR 20.50, and it's currently trading in the mid- to high 30 levels. And this is obviously a reason also why the Kaap Agri investment and Zeder Books has increased as a result of the higher listed price. Just in terms of that trading update, as you can see there, promising. And once again, I think the management here has been very, very proactive during the COVID period. And yes, we really enjoy this investment. Valuation, as I mentioned, is based on the listed share price. And there's just an indication of how the share price have moved from September last year to end of February, which is Zeder's year-end. Then in terms of Agrivision, this is our African farming and milling operation, improved performances, but challenges still remain in this business. It's actually had a good year with very good wheat yields, the Mkushi farming area, where we've always had a water problem. The dams are full, and things are looking good. But I think it still remains a challenging investment for Zeder. The management team there is managing costs well. But Zambian itself remains a difficult operating environment. And as also previously mentioned, the Zambian government default on their foreign debt does raise a flag in terms of the Zambian risk. But in terms of Zeder, it is small in our lives. We do focus on it, but it's less than 2.5% of our Sum-of-the-Parts. In terms of the valuation considerations, similar to Capespan, Agrivision Group NAV have used and adjusted. We once again did independent third-party valuations on all our farming and milling assets that we apply to the balance sheet. And then we, similar to Capespan, applied a discount to the NAV. But in this case, we applied a significantly high discount to take into account additional risk factors. In terms of prospects and strategy for Zeder, we're very fortunate where we are. Conditions are favorable in the Western Cape. We're going into a winter season, but the dams are relatively full. La Nina still forecast for the year, which is above normal rainfall. So our assets and investee companies are well positioned to take benefit of these conditions. Obviously, COVID, there's some uncertainty. But as I mentioned, Zeder as a group is well positioned to support our investments. In terms of our strategy, you may have noted a cautionary release earlier today on SENS. As you all know, there has been a material change to the size and composition of Zeder as a result of the disposal of Pioneer, Quantum as well as a special dividend. And that has meant that the Board has relooked at the strategy of Zeder. And as part of this process, Board has recently received various third-party approaches on some of our portfolio investments. These are currently being evaluated by the Zeder Board and a potential strategy shift to value unlock option. And I think I just want to make it clear that the strategy does not have a specific time line, and we will be responsible and we'll execute this in an appropriate manner in order to maximize shareholder wealth. As a result of the approaches, we're in a deemed closed period for Zeder, and we will, at this time, not be pursuing any further share buybacks. But I think also important, our overall strategy remains, we need to create value for shareholders. That is my job. That's my responsibility. And as I mentioned before, we will do what is right for shareholders. In terms of communication, we will communicate to the market as and when there is progress on any of the value-enhancing processes. That, ladies and gentlemen, brings me to the end of my presentation. We will now go over to the Q&A session. If you will just bear with us for a few minutes that we can correlate all the questions, and then we'll be back shortly to answer your questions. Thank you very much.

Okay. Thank you, Johann. Good morning, ladies and gentlemen. We received a number of questions via e-mail. And I want to employ you again those of you that's got questions, please e-mail them timeously to ensure that we can answer them. There's been a number of questions on share buybacks. But Johann, I think you've already mentioned that given the close period, one is not entitled to do any share buybacks now. So I think that remains the answer for a number of questions, but we'll then address the rest of the questions. One of them is if you don't do any share buybacks, why do you keep the cash at all?

I think the cash that we currently have on our balance sheet, at ZAR 870, that is prior to the special dividend. So that balance will decrease by ZAR 308 million, and then that EAC's investment in Zaad, Zeder has made a commitment to support that investment, which also lower that balance. So Zeder will sit with a significantly lower balance of cash on our balance sheet post those 2 events. But we'll still have efficient cash to be able to support our investee companies.

Thank you. Further questions, [ SOTP ] have made changes to tax relief received on the unbundling of investments. How do these changes impact on the economics of, for example, unbundling Kaap Agri, as this change in tax being reflected in the Sum-of-the-Parts valuation?

Thank you. I think the change in the tax law will have an impact, especially on something like unbundlings. In our Sum-of-the-Parts and on our balance sheet as a result of the change over to investment entity, we actually do not create a CGT liability or a CGT asset on any of our subsidiaries. So it's not reflected in our valuations.

Thank you, Johann. Another question is regard Agrivision. Given the substantial investment in the past and the fact that it's been cut down in value, is this asset now held for resale? And then a question following that is, this asset has been disappointing, and Zeder keeps holding same. Is there a plan to exit this asset?

Yes. I think we have to be honest, it's been a very, very difficult investment for us. The valuation has decreased, but there are many factors for it. We do have 2 partners with us there. We're very close to them, a Norfund and the IFC. And we are in continuous discussions with them as to what the appropriate strategy would be for Agrivision. But I think if we have to be honest, it has been a difficult investment. And yes, there has been shareholder value loss at Agrivision.

Thank you, Johann. The next question, to what extent was Capespan's good performance attributable to a weak rand and a strong harvest season last year compared to the restructuring that was mentioned in your presentation?

I think several factors had -- I think the reason for the good performance were several factors. I don't think currency was a material fact at all. I think the better farming operations, especially in Namibia, our apple and pear and our citrus farms. But then once again, it could have been significantly better if our Northern Cape farms didn't have late rains. But on the marketing side, the successful restructuring of that business led to significantly lower costs, which will be the case going forward as well. So the business is far better positioned now than what they were a year or 2 ago. And we think that these type of levels of profitability can be sustained.

Okay. I think you've answered on the capital gains tax scenario. Just give me 2 seconds to see if any further questions have come through. There's a question, I think it was mentioned in your presentation, Johann, but please can you indicate the dividends received from portfolio companies post year-end, you mentioned April.

Yes, there's dividends from TLG and Capespan that were declared in their financial years. So those funds we'll receive in April. Capespan's dividend was a ZAR 50 million dividend to shareholders. TLG was a ZAR 56 million dividend to shareholders. And that will mean that Zeder will receive approximately ZAR 80 million of cash at the end of April, that's not currently reflected in our end of February Sum-of-the-Parts valuations.