BROKERS’ NOTES: Buy KAL Group, sell Kumba

Rowan Williams, portfolio manager: Nitrogen Fund Managers 

Buy: KAL Group

KAL Group is traditionally what you’d call an agri-supplier but it has diversified. It’s always been strong in fuel distribution and has made an acquisition of a company called PEG, which has given it a strong network of quick-service restaurants on fuel forecourts. About three quarters of its sales are now non-agri based, so it has diversified to become a speciality retailer in peri-urban and rural areas. Its core agri-stores are branded Agrimark, and those are becoming much more broad-based in terms of servicing rural communities. KAL Group is also expanding into pet food. Results were credible in a tough environment, and the management team has done a great job with the challenges of load-shedding and the impact that’s had on farmers. The share looks cheap on a forward p:e of 5 and as load-shedding becomes less severe, the company will have some tailwinds in terms of costs and turnover.

Sell: Kumba

Kumba Iron Ore has had a strong run up because of the positive outlook in iron ore futures, driven by optimism on Chinese stimulus measures. But the iron ore price looks a bit stretched here, and the Kumba valuation relative to the iron ore futures price is also stretched. It seems the market became overexcited and extrapolated too much of future prices into Kumba’s valuation, both fundamentally and also relative to its peers, so we’d be selling it.