The drought will slow growth, warns Kaap Agri boss
Agriservices specialist Kaap Agri — which has a strong retail offering — expects prolonged drought conditions in certain farming areas of the Western Cape to slow earnings growth in the first half of the financial year to end September 2018.
Speaking at Kaap Agri’s annual general meeting in Malmesbury on Thursday, CEO Sean Walsh expected growth to slow to single-digit gains in the first half.
He noted the drought in the Western Cape — where Kaap Agri has its roots — was the most severe in the past 10 years. "Farmers are under pressure and cutting back on spending on their farms," said Walsh.
He said that Kaap Agri’s businesses were feeling the most pressure in rural areas. "In the country areas, the entire business community is related to the health of the farmers." However, he pointed out that sales in Kaap Agri’s urban stores were growing at a sprightly 20% a year — mitigating the effect of the drought.
Walsh was still hopeful of a strong outcome for the full year. "If circumstances return to normal we think it’s still possible for Kaap Agri to produce double-digit growth for the full financial year." He said the company would only be in a position to provide more accurate full-year growth guidance around July.
Asked to quantify the effect of the drought on the bottom line, Walsh said expected compound annual growth rates of about 15% would be tempered by between 5% and 6%. "We would get growth of 9%-10%, meaning the drought would take away roughly a third of our growth rate. That’s a third of our growth rate — and not a third of our earnings!" he said. Walsh also indicated that in first-quarter trading, Kaap Agri’s retail segment, which includes the Agrimark stores, convenience stores, liquor stores and building supplies, for the first time contributed more than the traditional agriservices segment. Although agriservices (irrigation and grain storage) represented 44% of turnover, the segment accounted for only 33% of trading profit. Retail only accounted for 20% of turnover, but represented a chunky 34% of trading profit.
Walsh reiterated that Kaap Agri was on "a very acquisitive strategy in the retail fuel space".
He said shareholders could expect the portion of capital expenditure earmarked for acquisitions to increase, but said that strict feasibility criteria needed to be met before any deals were struck.