Time for Zeder to germinate its seeds
Zeder will be cash-flush once the sale of Pioneer Foods goes through. But what’s next for its leftover assets?
The executive team at PSG-controlled agri-business investor Zeder will need to plough their furrows more profitably after cashing in on the sale of the company’s "kingmaker" stake in consumer brands giant Pioneer Foods.
The proposed sale of Pioneer Foods — which makes up around half the portfolio value — to food and beverage icon PepsiCo has gone some way to deflect market frustration at the pedestrian returns notched up by Zeder over the past six years under CEO Norman Celliers.
For those who need reminding, the sale of Zeder’s 28% stake in Pioneer will bring in more than R6bn, and leave the company in a net cash position of around R4.8bn after roughly R1.5bn of debt is settled.
Zeder has reiterated its intention to pay out the bulk of the cash to shareholders, and hold back R500m-R750m to bolster its existing portfolio and perhaps seek new opportunities.
That means a much greater focus on a clutch of investments that Pioneer has overshadowed, and that the market has mostly overlooked.
By the FM’s calculation — which assumes R4.75bn is returned to shareholders — Zeder’s post-Pioneer portfolio will carry an official value of around R6.25bn.
Celliers told shareholders at a recent investment presentation that management hoped to build a R10bn portfolio within a few years. This would require considerable success for Zeder in growing the existing portfolio components, because the leftover cash holding certainly would not allow it to chase large new opportunities, at least not without tapping shareholders for fresh funding.
The market does not appear to be terribly enthusiastic about the remaining Zeder portfolio, and Celliers conceded that investors were questioning the directors’ valuation of the largely unlisted holdings.
If the net Pioneer proceeds — which equate to around 269c a share — are removed, then the Zeder share price is placing a value of around 185c a share on the remaining portfolio. Zeder estimates a value of around 300c a share on its four biggest holdings — seed business Zaad (roughly 128c a share), fruit marketing company Capespan (64c), The Logistics Group, or TLC, (58c) and JSE-listed agri-services business Kaap Agri (51c).
The retained cash from the Pioneer sale might add another 30c a share, though it would be prudent to disregard the difficult Zambian investment Agrivision and the R121m of "other investments" (where there is a paucity of detail).
So working off an indicative valuation of 330c a share after the Pioneer disposal, the market is effectively slapping a discount of more than 40% on Zeder.
These days a 40% discount on an investment trust-type counter is not that uncommon. But one suspects the discount at Zeder — which holds some market interest thanks to the pending large dividend — might widen after the Pioneer deal is concluded.
Reading between the lines, Zeder appears to be putting much store in developing the 95%-owned Zaad into a global agri-inputs cluster. Whether this will grow market interest in Zeder remains to be seen.
Zaad — headed by former Zeder boss Antonie Jacobs — must be given credit for reconfiguring itself as a strategic holding company that invests and operates in the specialised agri-inputs industry (mainly seed genetics) with a focus on emerging markets, especially Africa.
Currently the bulk of the business is undertaken outside SA with key operations in East Africa, the Middle East, Turkey and the Netherlands. A key development recently has been the addition of strategic plant nutrition and agrochemicals to the Zaad portfolio via Farm-Ag and Hygrotech.
The business generated more than R1.6bn in revenue in the year to end-January with earnings before interest and tax coming in at R200m and recurring headline earnings at R191m.
That said, the R2.2bn valuation placed on Zaad is probably a contentious issue due to the cyclical nature of the business.
Interim numbers at end-July showed revenue of R570m yielding headline earnings before interest, tax, depreciation and amortisation of only R20m and a headline loss of almost R9m.
Celliers stressed the interim performance is not reflective of the full-year performance. "The summer season still lies ahead, and we are hopeful of full-year profits that are acceptable."
Zeder is putting its money where its mouth is, and has pumped another R130m (via a rights issue) into Zaad to help fund the first instalment of the acquisition of the remaining 50% in Gap Chemicals.
Celliers concedes that in time Zaad, which is now getting to the size where it could attract international interest, could justify a separate listing on the JSE.
While Zaad is a medium-to long-term story, investors are also itching to know if management will prioritise the reduction of the discount Zeder’s shares offer on the sum-of-the-parts valuation.
Celliers says closing the discount is high on management’s list, given the potential to mobilise the leftover portion of the Pioneer cash for share buybacks.
However, a key question raised by Charles Boles, a portfolio manager at Titanium Capital, is around the wisdom of paying out a large special dividend to shareholders at a low point in the agri-cycle, when a well-priced deal might be bountiful.
The FM reckons the proposed Pioneer dividend is probably set in stone with controlling shareholder PSG likely to be keen for an infusion of fresh capital. Celliers says that if a big deal does present itself, Zeder can always engage with shareholders for a capital raise.
A more obvious development, though, might be another disposal in the form of the strongly profitable TLC, which has broadened its services to the extent that it might no longer be regarded as an agriculturally aligned business. Securing a good price for the logistics operation could lend credibility to the valuations of other significant parts of Zeder’s portfolio.