- Kaap Agri has produced a "robust" financial performance amid a Covid-19 resurgence during the first quarter of its current financial year.
- All the catalysts for a good earnings recovery this year are there, says an analyst.
- Much depends, however, on whether there is a third Covid-19 wave and the reaction of government to that wave.
Kaap Agri has traded well during the first quarter of its financial year, driven by a strong operational performance across all divisions, as well as an increase in grain trading income, CEO Sean Walsh said during its online annual general meeting (AGM) on Thursday.
The JSE-listed Kaap Agri Group trades in agricultural, fuel and related retail markets in Southern Africa. It has has 217 operating points located in eight SA provinces, as well as Namibia.
According to Walsh, the group has produced a "robust" financial performance amid a Covid-19 resurgence during the first quarter of its current financial year, which ends in September 2021. He foresees a recovery from the impact of Covid-19 in the second half of the 2021 financial year as probable, but cautioned against relying on first-quarter results for full-year expectations.
Group statutory revenue increased by 16.9% and gross profit by 19.6% compared to the first quarter of the previous financial year. Recurring headline earnings for the first quarter grew by 35.4% from R84.0 million to R113.7 million. Headline earnings increased by 38.2% from R82.2 million to R113.6 million.
Agri-related revenue grew by 3.5%, compared to the previous year. The group regards expectations for fruit farming as very positive, for example.
A record wheat, barley and canola harvest is currently in storage. Kaap Agri's grain division operates 14 silo complexes which experienced their largest wheat harvest intake in ten years. The group expects that wine grape farmers may, however, experience cashflow pressure as a result of the impact of Covid-19 bans and related regulations.
Retail fuel sales are expected to perform positively. Retail related revenue grew by 14.5% during the first quarter compared to the previous year.
According to Walsh, Kaap Agri delivered strong cashflow from operations in the first quarter. The group focused on good working capital management and enhanced return on invested capital. Capital investment was less than R10 million.
Kaap Agri recently consolidated its trade and retail businesses under one brand - Agrimark.
After the online presentation, Anthony Clark, an independent analyst at Small Talk Daily Research, commented that he remains bullish about Kaap Agri and maintains his "buy" of the share.
Ahead of the Kaap Agri financial year 2020 results, Clark published an opinion note stating that he believed that earnings for the year ended September 2020 would be better than market expectations.
"I think the market was pleasantly surprised at the trading update, which I believe was significantly better than market expectations - that is why the share price is now up 8% to about R39," said Clark.
"What the presentation detailed, is that the company has seen significant recovery across all its operating divisions and the core base inside agriculture has been supporting the company during the Covid-19 pandemic."
He added that - considering that most retail companies saw 2020 earnings drop by 2.3% in a Covid-19-racked economy - this shows the resilience of the business model and strategy of Kaap Agri and the balance between its general retail business and its agricultural retail business.
With agriculture currently performing well and a wheat and fruit harvest expected to be great this year, Clark forecasts that Kaap Agri is going to have "a very pleasing performance" and that is why he raised his price target from R35 to R46 on Thursday morning.
"I wrote a note on the 19 November 2020 at R23.8, stating the stock was going to run. It did run when results came out a few weeks after that and it got to my R35 target within a month," says Clark.
"With this trading update and this AGM update, all the catalysts in the business for a good earnings recovery this year are there. Much depends on if there is a third Covid-19 wave and the reaction of government to that wave. But as it stands right now, the company was very bullish on its prospects."