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

Good morning, ladies and gentlemen. Welcome to the Zeder interim results presentation. My name is Johann Le Roux, and I'll today be taking you through a short presentation. On the agenda for today, we'll be discussing some noteworthy transactions. These are matters that transpired since our year-end of February 2021. We'll spend some time on our interim financial statements, some valuation adjustments on some of our portfolio assets. I'll discuss our portfolio, how they've been doing over the last 6 months, what's lying ahead and also how COVID affected our portfolio, and then we'll deal with some prospects of our business and our portfolio companies as well as our strategy. There will then be a Q&A session after the presentation, and I ask that you please send your questions to the e-mail address on the screen during the presentation, so we can answer your questions at the end of the presentation. In terms of noteworthy transactions, a few things that happened post year-end. We paid a further special dividend to shareholders at ZAR 0.20, just over ZAR 300 million return to shareholders. That was in addition to the almost ZAR 4 billion return as a result of the Pioneer Foods transaction in the prior year. Our portfolio at our year ended well. We received dividends from TLG, Capespan. Kaap Agri also restored the interim dividend, and that meant another ZAR 90 million of cash that came to Zeder during the period. The EAC transaction, the transaction that Zaad was looking at was concluded during the period. Zeder assisted with a bridging loan to conclude that transaction. We're excited about that transaction. And then just in terms of the buyback of shares, yes, we did not buy back any shares since our year-end, and it's mainly as a result of the caution that we're trading under and the result in close period. Just to note, in the prior period, we did buy back shares with the value of ZAR 426 million. In terms of our interim results, just spending quickly on our results, the Sum-of-the-Parts and COVID. We've had a good 6 months. Our NAV per share increased from ZAR 4.33 per share to ZAR 4.45. If you add back the special dividend was paid, it's a 7% increase for the 6-month period. We've had upwards valuations of our logistics business and Kaap Agri, and combined, that was a Sum-of-the-Parts uplift of just under ZAR 400 million. And also, if you add back the special dividend during the 6 months, about ZAR 700 million added to our Sum-of-the-Parts during the 6 months. We are in our annual input cost cycle for some of our agri companies. So investments like Capespan and Agrivision that normally make losses in the first 6 months of the year, there were no adjustments to those valuations. And we still have a discount still around 30%. It's not unique to Zeder. It's in line with other investment holding companies. In terms of our balance sheet, we've got a strong balance sheet with ZAR 470-odd million in the balance sheet. We're well positioned. We can assist our portfolio companies. I mentioned the cash flow we receive from our investments and also the dividend we paid. And normally at our interim period and also as a result of the kind of input cost cycle, we don't declare dividends. The Board's made the decision not to declare a dividend in light of the recent special dividends paid. But also just to be cautious during the COVID period, that's still continuing. In terms of our Sum-of-the-Parts, I'm just putting in the 3 periods here. If you take August last year to our current year, the last 12 months, Sum-of-the-Parts have increased by 25% over the 12 months. That's if you also include a special dividend that was paid. If you look at our portfolio, it's actually a very nice balanced portfolio here with our 4 biggest investments, all each making up about 20% of our Sum-of-the-Parts. Zeder has got no debt. You'll note the lower shares in issue up to year-end, and obviously, since year-end the shares have remained the same because we haven't bought back any shares. And therefore, there are Sum-of-the-Parts currently at ZAR 4.45 and mainly as a result of the increase in valuations of the Logistics Group and Kaap Agri's listed share price. As I mentioned, our discount still about 30%. It was slightly higher at year-end. It's come down probably as a result of the cautionary. But as I mentioned, it's not unique to Zeder. In terms of COVID, I think we all know the impact on South Africa and globally, GDP retraction recently. The unemployment numbers came in on South Africa. They didn't look good. Our economy is struggling. We're not getting the relevant growth that we require. I think the 1 or 2 things accounting in our favor is probably the current low interest rates. And obviously, there's a bit of a commodity boom. So I think in terms of tax revenue, our mining companies contributed to that. But the main problem is just a continuous waves, it's very difficult for business to return to the new normal with these continuous waves. And I reported in July that the main problem is probably access to vaccination, it seems like the -- the problem at the moment is just a slow vaccination rate. In terms of Zeder in our portfolio, we've been very, very fortunate. Our management teams have been proactive doing lockdown 5, but straight through, put in very, very good measures. The long-term impact remains uncertain, but our portfolio has really done well over the past 6 months. The balance sheets have been strengthened, Zeder sitting on cash, so we can assess them where required. I think the biggest problem we currently have is in global supply chain. It is a real problem. Shipping, access to containers, so we're keeping a close eye on supply chain constraints in our portfolio. In terms of our portfolio review, we've had a very good 6 months. We are mostly an agri business. The climate has been good. We've had a good 6 months now, but also actually a good 12 months, and I'll spend some time on each of our portfolio companies. Zaad, our biggest business, the seed and agrochemical business run by Antonie Jacobs, just all the brands there. You'll note the East African seed at the top of the screen on the left. That is our new acquisition in East Africa and Kenya. We're excited by that business. And this is really a multinational business with reaches not only in South Africa and Africa, but also in North Africa and the Middle East, Turkey and in Europe. This business' main focus going forward will be on margin optimization. The business is still growing nicely. I think we've got all the building blocks that we require for this business. So we're excited about Zaad and its prospects going forward. In terms of their results, Zaad did undergo a year-end change from January to June, just to better align outside the key summer crop cycle. So the 12 months is probably not comparable to the previous 12 months. But if you would compare it, it reached ZAR 177 million profit up to end of June compared to the January 12-month period of ZAR 181 million. So it's pretty much in line. You'll see the debt in this business have been relatively stable. And as I said, the focus here is to optimize the margins, improve cash flow and reduce debt over time. In terms of the valuation of Zaad as a result of the flat earnings for the 12 months, we've not adjusted the valuation. Just in terms of the valuation considerations, we look at market-related EV/EBITDA multiples. We do split the business into the seed and the chemical sections. They command different multiples. And we normalize the EBITDA downwards to kind of exclude the accounting effect that Zimbabwe is currently facing with hyperinflation effects. And then obviously, the net debt is deducted from the valuation. In terms of the business in the past 6 months, we've had very good performances from May Seed. That's a business located in Turkey. Farm-Ag is our agrichemical business, our African operations also performed well. Bakker has had a bit of a hiccup with COVID-19, mainly as a result of tenders not materializing and kind of cross-border trades was difficult to do into North Africa and the Middle East. It's a big focus for us. The business is end of June is restored to profitability. So we're actually very happy with the progress we can see there. In terms of the recent unrest in KwaZulu-Natal, limited damage for the Zaad Group. We've had slide damaged 1 of our agrochemical businesses in Durban, but it was unfortunately only limited to some of the administrative block and not our warehouses as such. And as I mentioned, the EAC transaction was concluded. Our key focus there would be to push some of Zaad's IP products through those distribution lines. It's really a great business, and we're very fortunate to be able to partner with that group. In terms of agriculture conditions, it's mostly favorable for Zaad especially in Southern Africa. So we're very happy where the business is going. In terms of COVID-19, I mentioned some supply chain constraints we have. There are some units where we import seeds, grow it here and then distribute. There's been some hiccups to get them in time, but management is focusing on putting the relevant measures in place to mitigate for those constraints. Our logistics business run by Anton Potgieter, a great business, asset-light business. If you look at some of the brands here, Tradekor is our back-of-port operator in Port Elizabeth, FPT is our old fresh produce terminals, also now handling bulk and breakbulk. Port Stevedoring is our stevedoring business, pretty much loads the ship from warehouse across the key side onto a ship. Gestao de Terminais is our terminal operating business in Mozambique, just past the Komatipoort border. And this business has had a fantastic 6 months. The earnings up 178%. And you must just bear in mind that it did come off a low base in the previous 6 months as a result of COVID, especially lockdown level 5, where the port pretty much close. So there is a slight reason [indiscernible], but the business has done very, very well. If you compare the 6 months to the prior 6 months, the ZAR 90 million versus the ZAR 30 million, all the numbers, revenue is up. So the business is really doing well. The main reasons for it is there's a commodity boom. So there's been lots of commodities flowing out of the country. Agriculture is also in a good space. So agri bulk fertilizer has been coming in the country. So that's been very, very promising for the business. But the management team has also come up with great new initiatives, and we're excited by this group. As a result, the valuation of TLG has increased in Zeder to ZAR 1.43 billion. The valuation consideration is very similar to what we applied Zaad, a comparable EV/EBITDA multiple. We use the prior year audited numbers as a base, obviously taking into account the current interim numbers. Then we apply the market-related EBITDA and deducted the net debt. This business has got very low debt, it generates very good cash. And as you see, the net debt of this business at the end of June was only about ZAR 100 million. Business has been resilient. As I mentioned, good recovery, the Ressano Garcia terminal, that's a rail terminal, just past the Komatipoort border was opened in July, very, very excited about that initiative. It pretty much means that tracks have come through the border and Komatipoort no longer need to drive all the way to Maputo Harbor. They can stop at our terminal. We'll load it on a train and we'll send it straight into the harbor. It's a great initiative by management. It's a new asset. Did not contribute to earnings at year-end, but will now going forward and management is in discussions with similar initiatives on other African corridors. The KwaZulu-Natal i, fortunately for us, there were some disruptions in Durban at our port facility, but it was of a short-term nature and that's since been restored to normal. As I mentioned, this business has got a very, very strong balance sheet, good cash generation and growth can be funded from its own balance sheet without the assistance from Zeder. Capespan, our fruit business. This business has got global marketing reach into North America, Europe and also into Asia. It's run by Tonie Fuchs. This business reported a loss for the first 6 months, which is normal. As I said, it is part of the agri input cycle, the loss is slightly bigger than the prior year, but there's a good reason for that, and I'll explain it now in a little bit more detail. In terms of the numbers, you'll see the balance sheet NAV there, the ZAR 1.3 billion, ZAR 1.4 billion and just putting it in context in terms of the Zeder valuation and our Sum-of-the-Parts. Business also has no long-term debt, and the net debt currently on the balance sheet is about ZAR 66 million. As a result of the agri input cycle, it's very difficult to revalue Capespan at this stage. We obviously look at the balance sheet at half year look for permanent impairment indicators if there are any, there were none of those. So we kept the valuation the same. This valuation is done differently than TLG and Zaad because it's got a strong asset base. So we look at the NAV-based valuation. We do obtain independent third-party valuations on our farms and our associated investments, we apply p/e multiple and then we apply a market-related discount to the group NAV in terms of our valuations. So just in terms of why the higher loss compared to the prior year. In the prior year, the decision was made to, during COVID, to push us much fruit into the market that we can, especially on the [indiscernible] side, and that obviously resulted in revenue being realized earlier than normal in the prior year. And that's why the result and loss in this year is slightly higher. In terms of KwaZulu-Natal unrest, it was during the key citrus season. Citrus on the farming side is probably the smaller part of Capespan's business, so it had a limited impact. But it did have and will have an impact on citrus growers going forward, in terms of price and whether the appropriate window was achieved. But I think this business, Capespan, after the restructuring of the global marketing position. There's a much more leaner, meaner business, agriculture in the Western Cape, where most of our farms are located are still looking promising. But in terms of COVID, because we need to get fresh fruit from Southern Hemisphere into Northern Hemisphere shipping rates, availability of containers, especially cold storage containers has been a concern for us. Hopefully, this will normalize in time for the grape season that's upcoming. But once again, management has been proactive in putting in measures to try and mitigate this potential risk. In terms of Kaap Agri, the agri retailer run by Sean Walsh, a great management team, Kaap Agri's footprint is mostly in the Western Cape, also in the Southern Cape, but also grown into KwaZulu-Natal with an acquisition of Forge Agri about 2 years ago, also operates in the Nelspruit area. And for Kaap Agri at the half year, which has really been reported to the market, had a 23% increase in interim earnings, also restored the interim dividend and the business is doing well, and it's also nice to see the share price increasing over time. As a result of the increase in the JSE listed share price, the valuation of Kaap Agri is also increased in our books to ZAR 1.39 billion. On the right-hand side, you'll see the valuation approach we follow. We literally marketed to the JSE listed price at our interim in our full year end, and there you can see the share price movement over time. As I mentioned, the dividend was restored. Decision previously taken not to pay the dividend and be cautious during COVID, but the business is doing well. And I said, this management team has really been proactive during COVID. Being in the Western Cape, largely, conditions here are favorable. We've had a very good winter. Dams are still full. So it bodes well for farmers in this area and Kaap Agri is obviously well positioned to benefit from that. In terms of the wheat harvest, it's currently in the lands in the Swartland area also looks promising. So that should also bode well for Kaap Agri going forward. In terms of the transaction, Kaap Agri, on Monday, announced that they sold their shares in the fuel property business. That would mean about ZAR 446 million that goes to Kaap Agri. And as they since indicated, in the meantime, the funds when received, will reduce gearing and also enable Kaap Agri to invest in higher-yielding projects over time going forward. And I'd refer you to the SENS and if you want any more information, I would invite you to speak to the management team at Kaap Agri directly. In terms of Agrivision, our vertical farming business or integrated business in Zambia, lots of changes in Zambia. This business is actually in a very good place at the moment. If you'll remember, we've always had a bit of a water problem in the Mkushi area. This is the first year in many years that we were able to plant full hectares in the Mkushi area and has done very, very well for this business. As a result of the improved performance, we've managed to reduce gearing at this business. You'll see if you compare the June '20 numbers to June '21, gearing reduced by almost 33%. So that's a significant achievement. So the business is really doing well and just indication of the balance sheet. Now there, these numbers are in U.S. dollars. That's the currency that this business operates in. And just to also put that into perspective with the Zeder valuation. As a result of the annual input cost cycle, very similar to Capespan, we've not adjusted the valuation at year-end. The valuation approach is the same as what we would use at Capespan. You do -- we once again do independent third-party valuations, but we do apply a different discount to this that we do in Capespan, taking obviously into account additional investment risk factors. The improved results as a result of promising yields on soya. The commodity prices are favorable in the market currently, and we were able to plant a full crop of wheat on our Mkushi farming block, which enabled us to probably generate better returns. The Zambian elections, recent Zambian elections, we view it as positive. You can probably see that from the strengthening of the kwacha against major currencies. And so we're excited about the changes in the country. But this is still a small investment in Zeder's books. If you compare it to our Sum-of-the-Parts, it's probably less than 2.5% of our Sum-of-the-Parts. In terms of prospects and strategy for Zeder, I think we're in a good position. We've got good assets, good portfolio investments run by good management teams. I think agricultural conditions in South Africa is promising. Obviously, a business like Zaad got reaches and other areas as well. But the promising conditions should bode well for business like Capespan and Kaap Agri specifically. The demand for agri inputs as a result of the favorable conditions means fertilizer and big items, bulk and breakbulk items coming into the country, which is good for TLG, as well as commodity boom. I know there's been some pressure on some commodity prices and demand, but it's still in a good space for us. But I think also with farmers, there will be increased pressure on farmers going forward. Agri input surprises have really gone up, things like fertilizer fuel other agri inputs. So there will probably be some margin pressure on farmers going forward. And I think in terms of COVID, the impact on supply chains is a key item, but it's being monitored by all of our management teams on a constant basis. So I think all in all, our portfolio is well positioned to benefit from mostly the positive trading conditions going forward, and I'm very optimistic about the prospects for our portfolio in the short term. In terms of our strategy, we mentioned also at the end of our interim results last year. We're still going to focus on our current investment portfolio. We've done that from last year, August to this year, August, we've added by ZAR 1.4 billion to our Sum-of-the-Parts. We are ever trading under cautionary since April. It's been almost 6 months, and we trade on the caution. We've renewed our cautionary at the end of September. And the Board is still evaluating those approaches we received on various assets. We've made some very, very good progress in some cases, but COVID has delayed it in certain instances. And I think it just takes longer to look at these approaches currently. I think it's normal in the industry currently. And if we're going to do a transaction, we want to do what's good for our shareholders, we want to maximize shareholder value. And in order to do that, we need to act in a responsible manner in evaluating these approaches. So I think our overall strategy remains. We need to create shareholder value. For us, what does that mean? It means we need to grow our portfolio. I think we've done that in the last 12 months. I think the prospects still looks promising for our portfolio. We need to pay dividends to our shareholders. We've returned capital as part of the Pioneer transaction, but also a further special dividend if our portfolio does well at year-end, there will be further dividends from operational cash flows. And then in terms of other value unlocked strategies, evaluating these approaches and we're going to see where it goes. And we'll be responsible and we'll communicate to the market at the right time. And as I mentioned before, we'll do what's right for shareholders in order to maximize shareholder value. That brings me to the end of my presentation. I'll hand over now to the Q&A session. If you can maybe just give us a minute or so just to collate the questions, and then I'll be available to answer your questions. Thank you very much.

Thank you, Johann. There's a couple of questions. The first is what is included in other net assets in the Sum-of-the-Parts break down?

Thank you, Jan. The other assets, it's mainly bridge loans that we offered to Kaap Agri. So I think in that balance, just over ZAR 300 million is loans. We extended to Zaad for the EAC transaction, but also when we bought 100% of the Farm-Ag transaction. So the majority of that is loans to Zaad.

Okay. So Kaap Agri to Zaad.

Zaad, yes.

The second question is thank you for unlocking value for shareholders. We really appreciate it. How does the African prospects look of TLG going forward?

Thank you. I think for TLG, that is where we see the growth. We've opened that Ressano Garcia terminal now in Mozambique. It's almost like a test for us. It's working very, very well. It's immediately profitable, and we can see the growth as clients see the benefits of us managing these bottleneck assets. We're currently looking at the key corridor between Zambia and in Tanzania, [indiscernible] and Dar es Salaam, which is also a key corridor for mining. So we're very optimistic about the prospects our management team knows how to operate in Africa, and they can find these sweet spots in terms of bottleneck assets. I'm very optimistic about the growth prospects.

Okay. Thank you, Johann. The next question is, why has Kaap Agri, for example, not being spun out to Zeder's shareholders?

That's an interesting question. I mean it's obviously an option that we have. It's not been considered by the Board. But I think for now, we need to get clarity on where we will go with all the approaches being received. So I think that's our focus area currently.

Another question, Johann is, I don't know to what extent it can be answered here. But can you elaborate on what the nature of TLG's contracts are with its customers, for example, take or pay duration, et cetera? I don't think that, that is necessarily for discussion, but you can elaborate if you know.