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SENWES, South Africa’s biggest agricultural business in terms of turnover, is preparing itself for listing, probably early next year. For many shareholders in the old Sentraal-Wes agricultural co-operative based in Klerksdorp, that will be the end of a long process that started 15 years ago when the co-op switched to a company and subsequently plummeted to the brink of insolvency before recovering well over the past few years. (See box.)
This move is good news for its shareholders. But be careful not to be over-optimistic. Senwes’s shares are currently trading at 830c on the informal market – but that already looks rather fully priced compared to those of its competitors, such as Afgri, and other listed companies with a market capitalisation of around R2bn. For the financial year to 30 April 2010, the group recorded earnings of 120c/share, out of which an ordinary dividend of 40c/share was declared. According to its balance sheet, its net asset value is 586c/share. Investment analysts will note the shares are now trading at an earnings multiple of seven times the previous year’s profit, a dividend yield of 4,8% and a significant premium of more than 40% above NAV. That’s not excessively expensive, but at the same time it’s not a valuation that will take your breath away.
Afgri, which was listed quite a number of years ago and has undoubtedly been a more successful and steady business over the past two or even three decades, is currently trading at a PE of just more than 10 and a very attractive dividend yield of almost 6%.
Senwes will also have to learn how to emphasise its financial figures that are important to investors rather than concentrating on performances that would have impressed members in the old days. It’s no good saying its latest profit of R208m is the second-best in Senwes’s history, especially not if investors can see it’s more than 40% lower than the R368m profit chalked up in its previous financial year. Admittedly, some of its activities have closed down, but it’s still quite a big fall in profits.
Investors also like to look at return on equity. It’s the best – some say the only – yardstick to measure how well a management is doing its job. And here Senwes’s management isn’t doing too badly. The return on equity in 2007 was only 16,4%. Then it rose to 20,7% in 2008 and a hefty 32% in 2009, before dropping back to 19,7% in 2010. That’s still not bad. Anything around 20%/year is very good in SA.
Investors don’t like excessive interest-bearing debt in a company. Both Afgri and Senwes fail that test. Their traditional business model is one of borrowing from the Land Bank and giving the money to the farmers/members, now shareholders, as production credit or some other kind of advance. But Senwes is currently improving its cash management. The graphs show profit currently covers its annual interest commitment slightly more than five times. That’s better than in the past, but still nothing to write home about.
Hopefully, if the listing does go ahead, its prospectus will provide more clarity on prospects. Currently, a record maize crop of more than 13m t is being harvested in SA. Senwes will handle 30% to 35% of that, which should be very good for the group’s income statement for the year to April 2011. However, the prospects after that don’t look so good. At the current maize price of just more than R1 000/t, very few of Senwes’s traditional producers can still plant maize profitably. The prospects for 2012 and later may look completely different from the current acceptable financial performance.
THE HISTORY
The struggle for control
ONE OF THE ASPECTS Senwes will probably have to look at before its listing is its control structure – especially the role played by Senwes Beleggings. To understand that intrigue properly, prospective investors in Senwes need to look deeply into South Africa’s history.
Years ago – especially during the time of the Great Depression of 1930 – the farmers felt Jewish shopkeepers in rural towns were cheating them. They always paid too little for the maize and the skins the farmers brought to them but charged too much for meal.
After the National Party came into power in 1948, with the aid of loaded rural votes, several agricultural control boards were created to ensure farmers would never again be exploited by outsiders. When these control boards began to be scrapped in 1996 it suddenly became fashionable for agricultural co-ops to switch to being companies and to list on the JSE. So farmers again feared outsiders would strike and gain control of the JSE. On the one hand, they liked the idea of the so-called value that listing would bring but were very worried about outsiders gaining control.
The first co-op to risk that move was OTK, the top one in SA, which is based in Mpumalanga in the middle of our best maize-producing region. Initially, things went well. But just when the dominantly Afrikaner board started spending more time squabbling among themselves than managing the OTK, the outsiders (in this case, Allan Gray and friends) struck and took over.
That bit of history is necessary in order to understand the shareholding structure of Senwes and many other co-ops. To make it a bit more difficult for outsiders to take over, at the time when it switched from a co-op to a company, Sentraalwes created the classic structure of Senwes Beleggings and the ordinary operating company, Senwes.
The farmers took some of the shares in Senwes they were entitled to and used them for Senwesbel shares. The articles of association state the Senwesbel shares may only be sold to bona fide farmers in the area. Everything went well and Senwesbel, with its 32% interest in Senwes, effectively controlled the latter. The farmers – the old members of the co-op – still controlled the new company of Senwes, but now via Senwesbel.
Things went so well that by 1998/1999 there was even talk of listing Senwes. But then suddenly everything went haywire. Interest rates climbed, debt-burdened farmers threw in the towel one after the other and Senwes itself looked very unsteady.
The shares in Senwes – and especially in Senwesbel, with their limited trading possibilities – became almost worthless. In 2002, auctioneers Hugo and Terblanche advertised it had been instructed to sell 2,4m Senwesbel and 2,2m Senwes shares. My own offer was 1c/share for the Senwesbel shares and there were jokes going around the market Senwes shares wouldn’t fetch more than 10c each. However, a farmer, Willem Schutte, succeeded in obtaining a court order to halt the auction, bringing an end to that bit of history.
But the extremely low price at which Senwesbel shares were offered at the time attracted attention. Senwes chairman Japie Grobler and three of his fellow directors used the opportunity to buy Senwesbel shares. They also later supported Senwesbel’s rights issue. Now they owned 25% of Senwesbel, which in turn owned 38% of Senwes. Grobler and his fellow directors were firmly in control.
Treacle – a group that in turn became involved, along with an empowerment transaction, and now holds 17% of Senwes – doesn’t like this at all. Wanting to make things sticky for Senwesbel, Grobler and his friends Treacle are now turning to the courts to force them to give 8,3m Senwes shares, which they allegedly obtained too cheaply, back to Senwes or the original owners.
Well, Finweek has no comment about that case. The advice to speculators/investors, of which I’m one, is: don’t go off and buy Senwes shares now for 830c (or even more) in the expectation of a big profit early next year as a result of the listing. The share already looks rather fully priced.
This move is good news for its shareholders. But be careful not to be over-optimistic. Senwes’s shares are currently trading at 830c on the informal market – but that already looks rather fully priced compared to those of its competitors, such as Afgri, and other listed companies with a market capitalisation of around R2bn. For the financial year to 30 April 2010, the group recorded earnings of 120c/share, out of which an ordinary dividend of 40c/share was declared. According to its balance sheet, its net asset value is 586c/share. Investment analysts will note the shares are now trading at an earnings multiple of seven times the previous year’s profit, a dividend yield of 4,8% and a significant premium of more than 40% above NAV. That’s not excessively expensive, but at the same time it’s not a valuation that will take your breath away.
Afgri, which was listed quite a number of years ago and has undoubtedly been a more successful and steady business over the past two or even three decades, is currently trading at a PE of just more than 10 and a very attractive dividend yield of almost 6%.
Senwes will also have to learn how to emphasise its financial figures that are important to investors rather than concentrating on performances that would have impressed members in the old days. It’s no good saying its latest profit of R208m is the second-best in Senwes’s history, especially not if investors can see it’s more than 40% lower than the R368m profit chalked up in its previous financial year. Admittedly, some of its activities have closed down, but it’s still quite a big fall in profits.
Investors also like to look at return on equity. It’s the best – some say the only – yardstick to measure how well a management is doing its job. And here Senwes’s management isn’t doing too badly. The return on equity in 2007 was only 16,4%. Then it rose to 20,7% in 2008 and a hefty 32% in 2009, before dropping back to 19,7% in 2010. That’s still not bad. Anything around 20%/year is very good in SA.
Investors don’t like excessive interest-bearing debt in a company. Both Afgri and Senwes fail that test. Their traditional business model is one of borrowing from the Land Bank and giving the money to the farmers/members, now shareholders, as production credit or some other kind of advance. But Senwes is currently improving its cash management. The graphs show profit currently covers its annual interest commitment slightly more than five times. That’s better than in the past, but still nothing to write home about.
Hopefully, if the listing does go ahead, its prospectus will provide more clarity on prospects. Currently, a record maize crop of more than 13m t is being harvested in SA. Senwes will handle 30% to 35% of that, which should be very good for the group’s income statement for the year to April 2011. However, the prospects after that don’t look so good. At the current maize price of just more than R1 000/t, very few of Senwes’s traditional producers can still plant maize profitably. The prospects for 2012 and later may look completely different from the current acceptable financial performance.
THE HISTORY
The struggle for control
ONE OF THE ASPECTS Senwes will probably have to look at before its listing is its control structure – especially the role played by Senwes Beleggings. To understand that intrigue properly, prospective investors in Senwes need to look deeply into South Africa’s history.
Years ago – especially during the time of the Great Depression of 1930 – the farmers felt Jewish shopkeepers in rural towns were cheating them. They always paid too little for the maize and the skins the farmers brought to them but charged too much for meal.
After the National Party came into power in 1948, with the aid of loaded rural votes, several agricultural control boards were created to ensure farmers would never again be exploited by outsiders. When these control boards began to be scrapped in 1996 it suddenly became fashionable for agricultural co-ops to switch to being companies and to list on the JSE. So farmers again feared outsiders would strike and gain control of the JSE. On the one hand, they liked the idea of the so-called value that listing would bring but were very worried about outsiders gaining control.
The first co-op to risk that move was OTK, the top one in SA, which is based in Mpumalanga in the middle of our best maize-producing region. Initially, things went well. But just when the dominantly Afrikaner board started spending more time squabbling among themselves than managing the OTK, the outsiders (in this case, Allan Gray and friends) struck and took over.
That bit of history is necessary in order to understand the shareholding structure of Senwes and many other co-ops. To make it a bit more difficult for outsiders to take over, at the time when it switched from a co-op to a company, Sentraalwes created the classic structure of Senwes Beleggings and the ordinary operating company, Senwes.
The farmers took some of the shares in Senwes they were entitled to and used them for Senwesbel shares. The articles of association state the Senwesbel shares may only be sold to bona fide farmers in the area. Everything went well and Senwesbel, with its 32% interest in Senwes, effectively controlled the latter. The farmers – the old members of the co-op – still controlled the new company of Senwes, but now via Senwesbel.
Things went so well that by 1998/1999 there was even talk of listing Senwes. But then suddenly everything went haywire. Interest rates climbed, debt-burdened farmers threw in the towel one after the other and Senwes itself looked very unsteady.
The shares in Senwes – and especially in Senwesbel, with their limited trading possibilities – became almost worthless. In 2002, auctioneers Hugo and Terblanche advertised it had been instructed to sell 2,4m Senwesbel and 2,2m Senwes shares. My own offer was 1c/share for the Senwesbel shares and there were jokes going around the market Senwes shares wouldn’t fetch more than 10c each. However, a farmer, Willem Schutte, succeeded in obtaining a court order to halt the auction, bringing an end to that bit of history.
But the extremely low price at which Senwesbel shares were offered at the time attracted attention. Senwes chairman Japie Grobler and three of his fellow directors used the opportunity to buy Senwesbel shares. They also later supported Senwesbel’s rights issue. Now they owned 25% of Senwesbel, which in turn owned 38% of Senwes. Grobler and his fellow directors were firmly in control.
Treacle – a group that in turn became involved, along with an empowerment transaction, and now holds 17% of Senwes – doesn’t like this at all. Wanting to make things sticky for Senwesbel, Grobler and his friends Treacle are now turning to the courts to force them to give 8,3m Senwes shares, which they allegedly obtained too cheaply, back to Senwes or the original owners.
Well, Finweek has no comment about that case. The advice to speculators/investors, of which I’m one, is: don’t go off and buy Senwes shares now for 830c (or even more) in the expectation of a big profit early next year as a result of the listing. The share already looks rather fully priced.
