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

Good morning, ladies and gentlemen. Welcome to the Zeder Full Year Results Presentation. Today, I'll be doing a very short presentation on what's transpired at Zeder over the past financial year. On the agenda today, some noteworthy transactions. These are transactions that have mostly been announced to the market for the past year. I'll also spend some time on some internal strategic transactions that's taking place within Zaad. I'll spend some time on our cash flow movements, where we're sitting today and our Board's view on our current cash and our balance sheet. In terms of the financial results, some view of the operating environment that we're currently in and also our Sum-of-the-Parts value, which has had some adjustments to our unlisted valuations. And then in terms of our portfolio review, provide you with some color of how it's been going at Zaad and some of the operational subsidiaries within the group. And then just touch on our strategy, how we've done in the past year and where we see the strategy going, going forward. In terms of questions, please, if you can e-mail your questions to the e-mail address on the screen, and then I'll be available to answer your questions at the end of the presentation. In terms of the noteworthy transactions, I think we're all aware of the Pome asset disposals during the year. Agreements were signed in June and July. They all closed in November and December of 2025. These were obviously big transactions and also property transfers that took place, so it took a little bit longer. And the cash proceeds of all 4 these disposals were about ZAR 713 million to Capespan Agri. There were obviously quite a bit of transaction costs involved in the transaction. And when I say transaction costs, not necessarily adviser fees, but obviously, there's costs involved when one transfers properties. I mean these were big farms, farms of 280 hectares will need to do dam inspections. And then there was also a head office that obviously was no longer part of the group where people had to leave the business because of the disposal of those assets. So all in all, it pretty much meant about ZAR 602 million for Zeder's portion. We're only an 87.1% shareholder in that business. And so far, up to our year-end, we received dividends of ZAR 483 million from Capespan Agri and Pome Investments as a result of these disposals. Zeder then took those money that we received in November and December, and we paid the majority of those dividends to shareholders, an amount of ZAR 477 million in 2 separate special dividends, and that results in our current Sum-of-the-Parts balance at the end of February of ZAR 119 million for the Pome Investments. In terms of further cash flows, we received an additional dividend post year-end of ZAR 54 million. It had no impact on our Sum-of-the-Parts per share balance, but it did have an impact on our cash balance and obviously resulted in lower Sum-of-the-Parts balance for Pome Investments that now in April is at ZAR 65 million. So Pome Investments is really a company that's sitting on cash. In terms of the transaction terms there, the warranty is for a 12-month period from closing. So that will be November and December. So those warranty periods will run out in the first week of December. That means that cash will become available. It's not restricted cash. It's cash that's under our control. But obviously, in terms of our agreement, we do have this warranty period. That's, however, limited to 10% of the purchase price. So on the ZAR 713 million, the maximum warranty can be ZAR 71 million, of which Zeder's portion is ZAR 62 million. Our Sum-of-the-Parts balance currently is ZAR 65 million. So we're just playing it on the safe side. But it's important to note that we don't expect any material claims. We've not had any of our previous transactions, and we don't expect them in this instance either. In terms of further transactions at Zaad, there's been a focus on disposing and exiting nonstrategic assets or assets that are operating under very difficult trading environments. I think the first one is the South African associates that we closed and exited. So we've signed agreements. It was a small transaction, so it did not have to be categorized. And just for some context, if you look at the June results of Zaad, the full year results, this operation incurred a ZAR 19 million loss. So it's good that we've managed to exit that business and the proceeds of that was ZAR 35 million. Then another transaction that was announced to the market, it was a Category 2 transaction, the exit of our African operations. So we've signed agreements to exit our Zimbabwe, Zambia and Mozambique operation and also the IP related to these African operations. There are quite a few CPs that needed to be fulfilled here. We're confident that we will be able to get over the line with them. But there's obviously comp comm approvals required in all these various jurisdictions, but we still anticipate closing in July of this year. And there, the purchase consideration, ZAR 135 million. Then we're working on a further transaction. Once again, it's a smaller transaction. So there's no need to categorize it. We anticipate signing of those agreements in May. And just in terms of context, once again, for the June results for Zaad, this business incurred a loss of ZAR 5 million. And currently, the purchase price that's being considered is about ZAR 55 million. So I think these are strategic transactions that make sense for the business. I think we've had lots of questions after the Category 2 announcements in terms of the disposal of those operations because it was at a discounted NAV. Our view is that it's an opportunity to exit a very difficult jurisdiction. And also, we feel that these transactions, specifically the African operations, can assist in our discussions in transactions at a higher Zaad level. The proceeds of all the transactions will be used to reduce debt or settle some of the Zeder loans that we provided. Most of our loans were provided to increase equity interest, especially in our Turkish business over the last few years. So a reduction of debt is also the right strategy based on the proceeds of these transactions. Then in terms of our cash flow movements for the year, we've declared quite a few special dividends. The first one as a result of the disposal of Capespan that actually took place in January. But that dividend of ZAR 308 million was paid in this financial year. The TLG restricted funds, there were funds being restricted over a period of time. Those large funds were unrestricted in end of March. So that allowed us to pay a further ZAR 0.10 special dividend. And then obviously, I mentioned the Pome disposals and the ZAR 477 million that was paid from that. So in terms of all the special dividends paid during the year, we've managed to return ZAR 939 million to shareholders during this financial year. In terms of further cash flows, there was that TLG final earn-out of about ZAR 30 million. That condition was met, and we received that ZAR 30 million in December. And as I mentioned before, we've also received a further special dividend from Pome Investments in March that's increased our cash balance post year-end. Our Board is taking a conservative view at this stage. We are sitting on cash of just over ZAR 200 million. But I think with all the uncertainty and volatility in the markets, the Board has taken a decision not to declare a further special dividend at this time. That's still our plan to do that, but we're just taking a conservative approach. In terms of our financial results, the business and operating environment, we always like the agribusiness, Agbiz index to give a reflection of what's -- how it's going in the agribusiness sector. Obviously, a lot of this is not necessarily that relevant to Zeder anymore. I mean our biggest remaining asset is Zaad, that's a seed and chemical business. So a lot of the South African nuances does not have an impact. But just in terms of the index itself for the first quarter of the year, an increase to 70 points. It's the third consecutive improvement that we've seen in this index, and there's obviously lots of optimism and especially with the La Nina rains that should normally support 2024 -- early 2024, early 2025 agricultural summer season. We've seen some improvement in port efficiencies, also other options. For example, Namibian grapes are now being exported mostly through [ Buffelsbaai ]. So there's alternative options. And obviously, there was a continued optimism around the Government of National Unity. I think important to note, this index was compiled prior to certain big movements in the markets, one being the budget approval process, which obviously could pose a risk to the Government of National Unity. We're not sure. I think the dispute around VAT increase was once again changed overnight. So obviously, there's lots of uncertainty and then obviously, from across the ocean, there's tariffs being announced on various products that also affects South Africa, especially on the fresh produce side, we are a relatively big exporter of citrus to the American markets. And obviously, I think there is a concern that the AGOA trade agreement could be at risk. I think also important to note, people often ask how big is our trade in certain of these markets. It's not necessarily just always how big the trade is, especially on a product like fresh produce, fresh fruit, if you -- if it's no longer viable for you to export your fresh produce to maybe an American market, your food needs to find a different home. And if your different home is the U.K. or the EU, that means more fruit into those markets, which obviously puts those markets also under pressure. So it's not just a simple sum of how big is the trade in terms of agriculture with America. We obviously expect the volatility to continue and uncertainty and also another reason why our Board is taking a conservative view in terms of dividends. In terms of Sum-of-the-Parts for the year, there's been a decrease of ZAR 0.71. It's mainly attributable to all the special dividends that were paid during the year of ZAR 0.61. There's also a downward adjustment in our valuation of Zaad. And then after end of February, you'll see there's a movement between Pome investment and cash, and that was as a result of the further special dividend that we received. Our discount at the end of February at 11% compared to the prior year at 28% is much lower. So it's good for us to see the discount narrowing. That was a big part of our strategy. But also subsequent to year-end, you can see that the discount has opened up again. And I mean, obviously, we've seen a fall or at least lots of volatility in share prices since our year-end, not only in our Zeder share, but obviously also in shares worldwide. In terms of our portfolio, Zaad business run by Antonie Jacobs. If I look at the first 6 months of the year, these are now 12 months comparative. But if we look at the first 6 months of the year, the financial year ended June, it actually had an increase of 18% in recurring earnings. If you look at the 12 months because obviously, these are agribusinesses with a 12-month cycle, there's been an 8% increase in recurring earnings to ZAR 172 million. Because of the 6 months, it's 18% up. It's obviously countering a negative -- relatively negative 6 months -- the first 6 months of the year. So I think we're in a good cycle currently. Most of the South African seed and chemical businesses have performed very, very well. And unfortunately, this was countered by difficult trading conditions at our Turkish associates. In terms of the EBITDA numbers, pretty flat. I just want to make the note that the EBIT from our associates to the associate earnings is probably not aligned, and that's as a result of higher finance charges that we specifically see in Turkey. For our May Seed business, for example, the interest for this year on a 12-month basis is just over ZAR 60 million more than it was in the previous year, and that's obviously an indication of the inflation and high interest rate in that environment. So when I talk about the business on a continued basis, obviously, the ZAR 172 million for the 12 months, but if we exclude those 2 transactions that we're working on in terms of our associates, that would actually bring that ZAR 172 million to ZAR 204 million. And then if I compare that to the prior year number, if I strip those 2 associates out, that would have been ZAR 186 million. So it's on a like-for-like 12-month basis, it would be a 10% increase. I've mentioned that there is a focus to exit noncore assets. And all in all, our valuation of our interest in Zaad has decreased by about 8% to just over ZAR 2.1 billion. This decrease was mainly driven just by downwards valuation of 2 assets mainly our associate investment in Turkey. It's a very difficult market there currently for us, not only economically, but also it's been a very difficult season for them in the prior year. And then also a lower valuation of our African operations as part of our transaction, we have already communicated that to the market at interim. So that was already included in our low valuation at that time. And this has all been countered by strong performances from the South African seed and chemical operations. Our valuation methodologies remain the same. We draw third-party comparable EBITDA multiples that we adjust for company-specific factors. These are always adjusted downwards. Most of our businesses operate in emerging markets that's normally got high risk associated with them. We do split the multiples between chemicals and seed. And then obviously, where we have assets that are not cash generating, we follow a discounted NAV approach. In terms of IAS29, the [ IFRS ] statement for hyperinflation, it's very difficult to judge the company's performance based on that. So we try to strip out the noise and provide a true reflection of the business in terms of a normalized EBITDA where it's applicable. And then the net debt and cash is deducted from the valuation. In terms of the operations of Zaad, if I just touch on the biggest components, Agricol had a very good first 6 months. There was some late rains in the summer rainfall season that led to lower-than-expected sunflower sales. Our May sales were in line. We had a very, very good season in terms of soya. This business has diversified over the past few years, and it actually has got a focus on 4 key crops now soya, wheat, canola and also sunflower. But even with the lower sunflower crops, there's quite a few opportunities opening up for Agricol in terms of the export market for sunflower. Farm-Ag has gone through a very difficult phase in the prior period. We can see a significant improvement in performance. We were in a position last year at this stage where we were sitting on high-cost inventory levels where there was a significant drop in raw material prices. We're sitting on the other side now where we're actually sitting on low-cost inventory levels, which is obviously leading to improved margins and improved earnings. There's been a massive focus for this business to rather focus on South African than some of the more risky African markets. I think a couple of years ago, it was about a 50-50 split, but currently, 70% of the revenue is coming from South African markets. In terms of the crop industry, Farm-Ag has a small -- relatively small market share of just over 6%. The crop protection market is expected to grow by over 6% a year. So we think there's still good opportunity for this business to grow in that market. Our African subsidiaries remain under pressure. There's obviously still lots of challenges. But as I mentioned, we've signed agreements and hope to have exited these investments by the end of July of this year. In terms of Bakker Brothers, it remains on its journey to become a fully fledged IP research company. The vegetable seed industry is growing also by 6% to 8% that's promising growth for this specific industry. We think Bakker is very well positioned to do well in certain of those crops. And we can see that they're moving along in terms of their own strategy because the percentage of own IP is increasing on a continuous basis. As I mentioned, the Turkish economy, where we have our associate investment, May Seed, experiencing high inflation, high interest rates and also to a certain extent, some political uncertainty. I think in addition, May Seed in the previous 12 months had a very difficult year in terms of weather. I think it was the first in 7 years that this business did not reach its budget. It's currently in its agri-input cycle. So the sales season is lying ahead for the year. And we remain confident that the markets this business trades in will do well because May Seed is a very good company. They've got good management and is definitely a market leader in that area with a very, very strong product portfolio in canola, in maize and also in sunflower. EA Seeds is our associate investment based in Kenya, operates in Kenya, Tanzania, Uganda and Rwanda mainly. We're confident and very excited about this business. We've seen a significant improvement in earnings coming through, not only because of weather, but also growth in some of these neighboring markets. And we feel that the Eastern and Central African market is an important growth area for seed and chemicals and that there are lots of opportunities for those that EA Seeds poses for the bigger Zaad picture. In terms of our strategy, important to look back how we've done. Our strategy remains the same. Our objective remains to maximize shareholder wealth. If you look at how we did during the year, obviously, all the disposals we've done, we've returned ZAR 939 million to shareholders. That's a big amount of money. And obviously, given the uncertainty, as I've mentioned, we've taken a decision not to declare a dividend at this stage. It's similar that we did last year at our year-end results. And it doesn't mean that we have to wait until our next Board meeting to declare a dividend. We can very easily declare dividend at some time, but we just want to kind of see how the uncertainty affects our businesses, impacts our businesses and obviously also just manage the progress of some of the internal transactions that we're currently busy with. But we do anticipate further dividends at the appropriate time. In terms of the corporate actions, I've mentioned in one of the few slides in the beginning. We managed to dispose of Capespan and also all the individual pome assets at very good values. We received the final TLG earn-out. So combined with the prior corporate action, there's been significant value created for shareholders. If you map the start of this kind of, let's call it, a slightly revised strategy in August 2020, it's almost 5 years ago. If you take the share price at that time and you add what's been given to shareholders and deduct the current share price and then there's been value over ZAR 3 billion created for shareholders. Then obviously, importantly for us, we're still a big focus on Zaad. We're still speaking to third parties. I mentioned that I think some of these internal transactions will make some of those discussions a little bit easier, but we're also in discussions within assets within the group. And obviously, we're acting in a responsible manner to all parties, not only to the third parties we're speaking to, but obviously, definitely to Zeder and our shareholders and obviously, the management teams of these underlying businesses. But we remain well positioned. We've got a strong balance sheet, and we're confident that there will be progress in the near future. Just in terms of the last 5 years and our strategy, if you take it over the last 5 years from February '20 to February 2025, the discount has narrowed from about ZAR 3 billion to the current ZAR 300 million at the end of February. I must just mention that discount has opened up since February as a result of a lower share price. But we will continue with the strategy. It creates shareholder value, which is obviously our key focus area. And as I mentioned, we anticipate further special dividends in the near future. That's it from my side, ladies and gentlemen. Thank you. If you can maybe just give us a few seconds so we can just have a look at all the questions, and we'll be back in a minute to answer your questions. Thank you.

Gentlemen, it doesn't seem like there are any questions this morning. Maybe the result presentation at 8:00 was too early for some of our shareholders and analysts. But I think you all have my e-mail address. You've got our phone number. If there's any questions that you do have after the presentation and maybe after you've reviewed the results, please get in touch with me, always open to answering questions from shareholders and from analysts. Thank you for your time today. I appreciate it. Have a good week. Enjoy the rest of the week. Thank you.