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 today, I'll be taking you through a short presentation of what's transpired at Zeder over the last financial year. On the agenda for today, I'll discuss some noteworthy transactions. These have all been announced to the market already. I'll touch on our strategy, the financial results, how it's going in Zeder and some of the parts post these transactions, and then I'll touch on our portfolio assets, the 2 remaining assets in our portfolio, Zaad and Capespan, and then I'll be available to answer your questions. And I'm asking you please e-mail your questions throughout the presentations to the e-mail address on the bottom of the screen. In terms of the noteworthy transactions, the disposal of our investment in Agrivision Africa, as was announced to the market in August last year. We managed to close this transaction in January this year. We received about ZAR 160 million. That's included in our cash balance on the balance sheet. In terms of the transaction terms, there were no warranties or indemnities relating to Agrivision Africa. And as I mentioned before, it's been a difficult investment for Zeder, but we've managed to negotiate a clean exit. The disposal of our investment in The Logistics Group, that closed in March last year. We received 2 payments so far, an amount of ZAR 1.35 billion and then a further amount of about ZAR 178 million. There's still one additional earn-out that's due to TLG shareholders, mainly Zeder of about ZAR 30 million. This earn-out does not relate to a profit guarantee. It relates to a lease extension. And even though it's uncertain, we anticipate that extension will be obtained through the current financial year, the February 2024 financial year. The unbundling of Kaap Agri, that transaction took place in April last year. We believe the unbundling was in the best interest to Zeder shareholders. They now earn a direct interest in Kaap Agri. And then unbundling value in terms of a Zeder share price was about ZAR 1.03 that was distributed to Zeder shareholders. When we look at all the dividends paid over the past 5 years in terms of the transactions done, that means over ZAR 5.8 billion has been returned to shareholders. The 4 main dividends paid over this period related to the Pioneer Foods transaction, the Quantum Foods transaction and The Logistics Group's disposal. And, obviously, there has been a significant amount of cash paid and, obviously, resulted in a smaller Zeder. So how did these transactions affect and have the impact on the Zeder shareholder? If you were a shareholder in Zeder, on the 28th of February in 2029, you would have had a Zeder share that was worth ZAR 4.23 in terms of the share price for the sum-of-parts value of ZAR 5.64. Subsequent to that, if one takes the special dividends paid, the ZAR 5.8 billion I just mentioned and also the Kaap Agri unbundling, that means that about ZAR 7.4 billion has been returned to Zeder shareholders either in a listed share or in dividends. And that would equate to about ZAR 4.56 per share. So if you were a shareholder in February 2029, you had a Zeder share of ZAR 4.23, you would have received ZAR 4.56 so far, and you would still have a Zeder share at the current share price of about ZAR 1.70 or the sum-of-the-parts value of ZAR 2.60 at February 2023. In terms of our strategy, our strategy objective remains to maximize shareholder wealth. The big question is, how did we do in the past financial year? We normally measure it on 3 points. Our ability to grow our investment portfolio. The recurring headline earnings of our 2 remaining investments is Zaad for the financial year 30 June 2022, there was decent growth there. And also Capespan had a very good year and a very difficult circumstances the year-end 31st of December 2022. Dividends to shareholders, over the past financial year, ZAR 1.03 returned. It was in 2 dividends of ZAR 0.925 and also have ZAR 0.10 that we paid to shareholders. And then in terms of corporate transactions, the disposals I just mentioned that took place during the year and, obviously, it's created some value for Zeder shareholders. Zaad and Capespan, our remaining portfolio companies. We remain engaged with several parties on these remaining assets. I think the environment to dispose of potentially companies with a value of over ZAR 1 billion is quite difficult. It's not easy, especially in South Africa, things like load-shedding, obviously, has a significant impact. So the environment is tough out there. But we remain engaged. We're evaluating various options, and we'll obviously communicate to the market on any progress in relation to that. In terms of our financial results, the business environment, this is quite an interesting graph done by Agbiz. You'll note, if you look at the graph, in June '20, this is a confidence index that was below the 50% margin. That was also pre-COVID. And if you look at where the graph is today, it's actually at the lowest level since then, and that was prior to the COVID-19 lockdown restrictions. The view is that, the agri business is generally are slightly pessimistic and downbeat about business conditions. There's obviously increased pressure on farmers as a result of the Russia-Ukraine conflict. There's a significant pressure on input costs. Obviously, the currency has an effect in South Africa. So the price of fuel has gone up. Things like fertilizers heavily impacted by fuel prices. So the inputs and the margins on the farm for farmers is obviously something that's a concern. Load-shedding in South Africa, I think we all can experience it every day. At Zeder and our portfolio companies at the head office level doesn't have any impact. We're actually, at the moment, sitting in a load-shedding environment. So we have facilities and plans in place. But if you're more specific in terms of our portfolio companies, I would say, at our seed business, it's where one clean seed when you have your manufacturing ability, obviously, has an impact there. And a business like Capespan, where you have farms, where you've got pumps and irrigation equipment that needs to run and also cold storage units, it has an impact. But the management teams are proactive. We've got measures in place, but obviously, it does have a financial impact on the various portfolio companies. And then also protection in certain export markets. I think if one follows the press, there is a bit of a challenge on the citrus side in terms of e-regulations for our portfolio. Citrus is the smallest part of Capespan's business. But, obviously, there's a concern in [ Agbiz ] sector. Disruptive supply chains, I think we're still experiencing port inefficiencies. We, obviously, had the floods in Durban a year or so ago that had an additional impact. But, obviously, the weaknesses in service delivery definitely has an effect on farmers, especially if you need to export your products through ports. So that has definitely a disruptive effect on supply chains. I must say that there are signs of supply chains alleviating across the world. Things like shipping rates are coming down. It's not coming down to previously restored levels, but there's definitely been a bit of an improvement in terms of that aspect. And then just, obviously, being an agribusiness, weather is also an important metric for us. If one looks at the predictions, it does seem like we will be moving more to El Nino cycle, which obviously will mean dry conditions. In the Western Cape, we have our upcoming winter season, which is our rainy season. And hopefully, the dams can get to levels where there won't be serious concerns. But the indications are that we're going into an El Nino cycle. So just in terms of our results, if you take the February 2022 numbers and compare the sum-of-the-parts to our current numbers, there hasn't been changes in the valuations. I'll touch on that a little bit now. But there has been a decrease in our sum-of-the-parts by about ZAR 2.06. And that's a direct result of the corporate actions undertaken throughout the special dividends of ZAR 1.03 and also the value of the Kaap Agri unbundling that also equated around ZAR 1.03 per Zeder share. So we're a much smaller group now. Kaap Agri, TLG and Agrivision no longer part of Zeder. We have significant discount still to our sum-of-the-parts. It's between 30% and 35% at [ any given ] day. It's not unique to Zeder. It's obviously prevalent in listed markets and in investment holding companies. So in terms of our cash and our balance sheet, we've got a strong balance sheet. Our Board decided not to pay a dividend on our year-end results. We've obviously paid dividends throughout the year, but also given the unrestricted available cash on our balance sheet, we are in a position to assist our portfolio companies, and they've all got their own growth plans. Zeder's committed a further ZAR 100 million to Zaad to increase its equity stake in May Seed. We believe that's a good business with some growth prospects. And if there are no further portfolio requirements, I think the Board will definitely consider further special dividends throughout the year. In terms of the sum-of-the-parts, we have the Zeder bridge loan desire that was converted in the current year and obviously had an impact on the increase in the Zaad equity valuation from ZAR 2,037 million to ZAR 2,384 million. We only have the 2 remaining assets. You'll see the valuations apart from the ZAR 330 million has remained relatively flat. And we're obviously a much smaller business than what we were with a strong cash balance and sum-of-the-parts value of just over ZAR 4 billion. In terms of our portfolio, I mentioned our 2 remaining assets, Zaad, the business run by Antonie Jacobs, the seed and agrochemical business. These are all the brands we've had. There has been no further acquisitions in the year. We think we've got a strong portfolio now for growth. We've got all the building blocks. It's now about optimizing, extracting synergies and enhancing margins at this business. And if one measures this business on a 12-month rolling basis compared to the previous 12-month periods, there's been a pretty flat year in terms of EBITDA, EBIT earnings slightly lower, and that's mainly as a result of higher interest rates and therefore, increased finance charges at our African operations. Debt levels have remained more or less the same, and we're cautiously optimistic for the rest of the year for this business. But just dive a little bit deeper. The valuation has been unchanged. We do a bottom-up valuation in terms of all the moving parts. So if I look at the valuation consideration on the right, there's an EBITDA multiple that's used, different multiples for seed and for chemicals. And as I've said, in terms of our bottom-up valuation, we'll obviously apply a lower multiple to a specific jurisdiction, for instance, African operations, [indiscernible] operations, Zimbabwe will apply a lower multiple to other earnings. We normalized EBITDA, obviously, certain of operations operate in hyperinflation environments, Zimbabwe and Turkey. So in terms of the terms to get to our recurring nature, we adjust and we exclude the effect of IAS 29, which is the hyperinflation statement. And then, obviously, net debt is deducted from the valuation. In terms of the results, we've had -- we've seen a very good year for Agricol. It's a sunflower business, FarmAg, our chemicals business and May Seed, our Turkish business. There has been price increases in the oil seed industry, which has obviously benefited Agricol. Also in the sunflower industry that needs less fertilizers, so there were decent hectares planted. And also, FarmAg has achieved decent growth. And our focus there is to obtain further growth in South African market. We see there's good opportunities. FarmAg historically was very much a [indiscernible] based business, focused on sugarcane, but it's managed to obtain various registration in the Western Capes, and it's making good inroads in this market and also good growth. In terms of operations in Turkey, yes, it's in close proximity to the Ukraine, Russian conflict. Lots of multinationals are withdrawing from that area where they have operations in specifically Ukraine, and we believe it poses specific opportunities for May Seed. We don't have any operations in the Ukraine or in Russia, although some of those are trading partners of May Seed and if one looks at the revenue of the business, it's only about 7% of that. Bakker Brothers, our Dutch business. It remains in a transitional phase from a trading company to a fully fledged IP company. We're in the process of opening new sales channels for these products. All our IP, our vegetable seed in our African maize IPs located in the Netherlands and the acquisition we made in the past financial EA Seeds is now also part of this business. The business struggled a little bit in the last 12 months, and it was mainly as a result of the drought conditions experienced in East Africa. As I mentioned before, our African subsidiaries, unfortunately negatively affected by high interest rates, high interest rate environment, and this obviously puts pressure on operating margins. In terms of Capespan, our fruit farming and distribution marketing business run by [ 20 folks ]. This business had a very, very good year. This is their audited 12 months of December 2022, where they managed to increase their recurring earnings, headline earnings by 65%. And I think this is a fantastic performance in a very difficult environment. If you look at all the metrics, EBITDA, EBIT and earnings, all up and their debt remained more or less constant. That debt is more working capital as you go into the cycle and none of that relates to long-term debt, but a very good performance. If I break down the Capespan valuation, the valuations also remain unchanged. And even despite the increase in recurring earnings, earnings is obviously a good indicator for us of how it can underpin -- how the asset value gets underpinned by earnings, but it's not the driver of our valuation. Our valuation is done on a market-related NAV basis where we do third-party independent valuation on all our farms and all our packhouses. That full valuation was done in Jan 2022. And as a result of minimal changes, we've done some [ desktop ] valuations, also by independent third parties this year. And our associates are valued on a P/E multiple. We currently only have 2 remaining associates. And then, obviously, we apply a market-related discount to this NAV. So just in terms generally for Capespan, I think the global fresh fruit industry has experienced challenges and remains to be challenged on the supply chain side and on the input cost side. We can see some pressure being alleviating on the shipping rates, but there are some challenges. In terms of Capespan's farming performance, their diversification strategy to focus on 3 commodities really working in their favor. I think many of the farms had very, very good export volumes. I think on the grape farms, mixed portions, very good results in Namibia. Unfortunately, unseasonal late rains in Jan, which affected the volumes being packed in the Northern Cape, but decent prices obtained in the market. It did very well for our grapes. I think our pome did quite well with decent volumes. And the citrus side, I think, is probably the one area where we did not get the yields that we expected. But in most cases, unfortunately, the good yields are negatively affected by cost challenges and lower prices in the market. As I said, I think in grapes, we obtained very good prices, but there is margin pressure as a result of the higher supply chain costs in the system, and this is an industry-wide challenge at the moment. In terms of Capespan sales and distribution division, they continue to grow. We're very, very happy with this division's performance in the last financial year. There has been a massive restructuring that's gone on at Capespan in terms of this division over the past few years and now it's starting to bear the fruit has improved efficiencies and a significant focus on service levels. And we're confident that we can grow these volumes as a result of the service levels offered, not only to our own farms, but also to third-party fruit. And there's, as I said, good growth in all 3 core product areas, that's pome, apple and some pears, citrus and also our grape area. Thank you, ladies and gentlemen. That actually brings me to the end of my presentation. I know it's a short presentation. I think a few years ago, we had 8 investments, currently only 2. I hope it was useful. If you can maybe just give us a few minutes that we relate the questions and then I'll be back shortly. Thank you. 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Thank you, ladies and gentlemen. We have a few questions has come in. The first question is relates to the potential warranty claims at TLG, the risks for that and the unrestricted cash or the restricted cash. I think maybe just a few points. The warranties in that transactions are standard for a transaction of that nature. There has not been a warranting claim lodged. This transaction closed in March this year. So 13 months of past since then. We don't anticipate the claim. It's not really material term to the agreement. I mean, the cash is on Zeder's balance sheet and is in our control. And it actually only relates to the timing of potential distributions. And as you know, any dividend decision is a decision of the Zeder Board. So we don't think there's risk in that. It's really more a timing of it. I mean, the cash is on Zeder's balance sheet. And we don't anticipate any claims. Then there's a question about, please, can you compare your estimated daily operating cost, your daily interest received? Sure, it's probably easy for me to do on an annual basis. I think our recurring costs at Zeder to manage head office is about ZAR 25 million. I think if you look at our results, that cost is slightly higher. There's obviously transactions have taken place with transactional costs. And then the interest that we can earn on that balance is probably in the region of about ZAR 40 million. If one deducts tax from that, it probably brings you down to about ZAR 32 million. So let's say, the interest income after tax is about ZAR 32 million on an annual basis, and our recurring cost is about ZAR 25 million. There's a question about our valuations, especially at Zaad and the feeling that it could be quite low compared to the previous valuations. We believe our valuations are fair. I think we always try to take a conservative approach, but also a realistic approach. We do a bottom-up valuation on Zaad. And in our opinion, it fairly reflects the business as it currently is. There's a question about management's efforts to unlock value during the last 12 months post unbundling of Kaap Agri and TLG. Yes, well, we managed to sell Agrivision Africa and that was completed in January this year, and we set in discussions on both of our remaining portfolio actions. There's a question here about whether Zaad and Capespan is for sale. As I mentioned, we're considering options on those 2 assets. We want to do good transactions for Zeder shareholders. That's our mandate. So if we can't do good transactions, we won't continue. But where we stand now, we're engaging with parties. And the next question, why we did not distribute the Agrivision sale proceeds? I think from the presentation, you can see that there has been a commitment made to Zaad to increase their stake in May Seeds. I mean, as I mentioned, I think the Board will obviously consider further dividends later in the year. Then there's a question around the tax implications if we were to dispose of all the remaining assets. That's always a difficult one to answer because you can obviously dispose of assets in certain ways. You can also potentially dispose a part of an asset distributed dividend up. So it's that all depends on the structure. There will be tax payable if we sell our assets at the remaining, some of the parts values. But if you look at our discount, it definitely doesn't warrant over ZAR 1 billion discount in terms of any potential tax liability. What are the expectation for the net debt in the underlying companies in the short- to medium-term? I think for Capespan, I think the debt will decrease. They've had a good year. There's obviously grapes income that must still come in. The -- obviously, with all the supply chain challenges, there is always slightly later payments than one normally would expect. So we think Capespan is in a very good position. And there's obviously a massive focus at Zaad in terms of managing their cash flows, their margins and their debt remained pretty flat compared to the December or the last June year-end. Then there's a question, it's a question about the increase in the Zaad valuation. So yes, well, the main reason for the increase in the Zaad valuation from February '22 related to the equity conversion or the loan conversion into equity. And yes, I mean, like I said, there's also a question about the debt levels at Zaad, we believe it's still -- it's manageable. There's a question at Capespan about the Russia and the citrus sectors battling locally, internationally, if I can give some color as to the steps that we take in the channel product of new growth markets. Citrus in Capespan's life is very small. There's obviously been challenges in those markets. I think Russia is probably a bigger market for pome, especially for pears Africa. But we have luckily with Capespan, there is a massive distribution channel and network in the world. So for us, we have the ability to move fruit into North America, into Europe, into the U.K., into India, we have an associate there and also into the Far East. So there's a question about the market-related net asset value for Capespan, that is significantly higher than a sum-of-the-parts valuation. There's a transaction of the citrus business where percentage stake has been sold if there's value for Capespan, actually realistic given fruit assets currently are not gaining anything like that value is considered to be your comment on Capespan, please. And that's exactly why we apply the discount. So when I talk about the market-related net asset value, I must remember on your balance sheet, one carries your farms at historical costs. So we obviously mark that to third-party valuations, but then we apply discount. And in this case, our discount is around 31%. So we actually take 31% off the market-related valuations to get to the valuations of our Capespan Group. Has Zeder had any approaches on either of its 2 assets as with only 2 investments left in the pot, investors must question the need for listed structure and cost of such? Yes, I agree. We do have 2 remaining assets left. I think having an investment holding company is a challenge, and that's obviously also part of the reason why our Board's embarked on a strategy review process. We're speaking to people. We have a big discount, and we've tried lots of initiatives over the past few years to get that discount smaller. It's unfortunately not in our control. But yes, we're giving it all we can in terms of the approaches on the 2 remaining assets. Given the unrestricted cash, it would seem Zeder shareholders might not be gaining a dividend in some time. Well, I think half of that unrestricted cash will lapse in September this year. So that's -- of that ZAR 300 million or ZAR 154 million of that will be available for dividends if our Board wishes to make the decision at our interim results and then the remaining balance in March, which obviously falls within our year-end period. So for all internal purposes, half of the restricted cash will be available for potential dividends at our interim reporting and then the balance at our full year reporting next year. There's a question about Zaad listing on a foreign exchange and the valuations of seed companies, if there's any progress in this regard? We've obviously looking at all options. I think it is a difficult market to list businesses. If one looks at a business in South Africa, that's valued in rand. You've been converted to euro. It's actually a very, very small business to listed in the foreign jurisdiction. So I think if a listing is on cards, it could probably rather be considered in the South African context and a European context. I think the business is just too small and to list in overseas jurisdiction. But it's not something that we seriously consider at this stage. There's another question on the CGT liability. I think I've responded to that. There will be a liability, but not to the extent of the discount currently on some of the parts. And then there's a question about the compounded return of Zeder over the last 4 years, that, in this view, is slightly lower than the top 40. Yes. So I think if one takes for 4 years, we -- there's about a 56% growth. That's probably a 10% to 12% growth over the last 4 years. I think if one looks at the top 40 that you compare it to one probably needs to be a bit more specific to compare it to agribusinesses, that's a sector we play in. It's been a resilient market throughout the COVID period. Obviously, if one looks at the top 40, you've got mining businesses in there, that's in recent times, done very well. So it's probably not a like-to-like comparison. But yes, if one looks at the 4-year CAGR of Zeder, it's probably closer to the 11%, 12% that the return I mentioned in my slide relates to the return over that 4-year period. There's a question about the Zeder Board and the dividend we declared in the prior year. Yes, well, I think at that stage and the reason for it, that dividend, I think, related to the TLG initial earn-out that we received, and that's the cash was returned to shareholders at that time. I think if one looks at our cash balance, it's a balance of about ZAR 600 million. Of that, the ZAR 300 million is restricted, ZAR 150 million to September this year, the other ZAR 50 million to next year. So we still have ZAR 300 million on our balance sheet, ZAR 100 million of that has been committed to Zaad to increase their stake, which still leaves us with a healthy cash balance. But these uncertainty in the market things like load-shedding will have a cost implication on our businesses. It's obviously not fully factored into the past financial year. So we're taking a bit of a cautious view. But as I mentioned, the Board will consider further dividends during the rest of the year. Ladies and gentlemen, it doesn't seem like we have any more questions. Thank you for your time today. If you've got any more questions, you can still send the questions through to the e-mail that was on the first or the second slide, and I will respond to them. Thank you very much for your time today.