October 2016 The Agricultural Sector Report The Agricultural Sector Report ‘Land-The Silver Lining in a world of Illiquidity and Uncertainty Agricultural companies account for a paltry 0.7% of the market cap on the NSE, with a total of six listings. Eaagads Ltd (EGDL KN), Kapchorua Ltd (KPTC KN), Limuru Tea (LMTC KN), and Williamson Tea (GWKL KN) are listed on the Alternative Investment Market Segment (AIMS); while Kakuzi Ltd (KKZI KN) and Sasini Ltd (STCL KN) are listed on the Main Market Segment. Their principal activities revolve around the cultivation, processing and sale of tea, coffee and horticultural produce. Most institutional investors have shied away from investing in these companies mainly because of illiquidity and poor corporate access, a challenge we experienced heavily during the compila- tion of this report. We lacked access to Limuru Tea‟s annual reports so we omitted it entirely from our universe of coverage. Our efforts to interact with all the 6 companies were also futile. Despite the challenges, we still felt the need to use the limited resources we had to analyze the companies (with the exception of Limuru Tea) in a bid to establish what value they possess. In this report, we take you through an overview of the Agricultural Sector and break down the indi- vidual listed companies. Inside the report: Overview of Agriculture in Kenya. How important is agriculture to the economy? (Pg.2) Key agricultural crops and their contribution to export earnings (Pg.3) Industry Analysis The hidden goldmine that is substantial land holdings (Pg.4) The impending threat on Freehold Titles and 999 year land leases (Pg.5) The gains and losses arising from changes in fair value of biological assets (Pg. 6) The Brexit Effect (Pg. 8) SWOT Analysis (Pg. 9) An in-depth analysis of the Listed Agricultural Companies (Pg. 10) KEY METRICS * Kakuzi Sasini Williamson Kapchorua Eaagads Land (Ha) 12,109 2,238 2,127 625 429 Gross margin (%) 49.2 26.3 29.3 23.7 29.3 EBITDA margin (%) 27.3 10.7 25.3 27.4 7.7 Profit margin (%) 21.3 9.7 21.8 19.4 0.4 EPS (KES) 26.92 4.27 40.30 37.05 0.01 DPS (KES) 5.00 1.25 20.00 6.00 - BVPS (KES) 175.7 57.7 385.5 209.9 21.5 P/E (x) 11.8 4.6 4.5 2.5 1,719.1 P/B (x) 1.8 0.3 0.5 0.4 1.2 EV/EBITDA (x) 7.4 12.2 2.5 1.9 84.5 ROE (%) 15.3 2.0 10.5 14.3 0.1 ROA (%) 12.6 1.7 8.0 10.1 0.1 Dividend yield (%) 1.6 6.4 10.9 6.4 - *The key metrics are based on the most recent financials Source: Company, ApexAfrica estimates Kakuzi Limited Bloomberg Ticker : KKZI KN Reuters Ticker: KUKZ.NR Recommendation Buy Fair Value (KES) 303.60 Price (KES) 265.00 Land size (Ha) 12,109 Sasini Limited Bloomberg Ticker : STCL KN Reuters Ticker: SASN.NR Recommendations Buy Fair Value (KES) 23.15 Price (KES) 18.80 Land size (Ha) 2,238 Williamson Tea Co. Ltd Bloomberg Ticker : GWKL KN Reuters Ticker: WTK.NR Recommendation Buy Fair Value (KES) 235.65 Price (KES) 183.00 Land size (Ha) 2,127 Kapchorua Tea Co. Ltd Bloomberg Ticker : KPTC .KN Reuters Ticker: KAPC.NR Recommendation Hold Fair Value (KES) 86.70 Price (KES) 85.00 Land size (Ha) 625 Eaagads Limited Bloomberg Ticker : EGDL.KN Reuters Ticker: EGAD NR Recommendation Hold Fair Value (KES) 19.35 Price (KES) 18.80 Land size (Ha) 429 Rosemary Kanyoro Research Analyst [email protected]+254 (20) 760 2533 0716 388 584
28
Embed
The Agricultural Sector Report - Apex Africa · 2018-08-27 · SWOT Analysis (Pg. 9) An in-depth analysis of the Listed Agricultural Companies ... and Unilever, which owns estates
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
October 2016
The Agricultural Sector Report
The Agricultural Sector Report
‘Land-The Silver Lining in a world of Illiquidity and Uncertainty
Agricultural companies account for a paltry 0.7% of the market cap on the NSE, with a total of
An Overview of the Agricultural Sector in Kenya Year after year, agriculture contributes the lion’s share to Kenya’s GDP The backbone of Kenya‟s economy, agriculture remains the country‟s largest generator of na-
tional output, accounting for 30.0% of Kenya‟s GDP as at 2015. It has, in fact, contributed over
26% to the GDP in the last 5 years, in addition to employing about 75% of the population. In
2015, agricultural exports also accounted for about 55.0% of total domestic exports, highlighting
its importance as a source of revenue.
Sector contribution to GDP (2011-2015)
Source: KNBS, CBK
The sector’s growth was nothing but impressive The agriculture sector growth increased steadily from 2.0% in 2011 to 5.5% in 2013. However, it
declined to 3.5% in 2014 due to erratic rains and depressed rainfall in most regions. Growth ac-
celerated by 210 bps to 5.6% in 2015 largely influenced by improved crop and livestock produc-
tion due to favorable weather patterns, with heavy and well spread long rains being experienced
in most parts of the country.
Source: KNBS
Source: Kenya National Bureau of Statistics
(KNBS)
Source: KNBS
26.3% 26.1%26.4%
27.3%
30.0%
24.0%
25.0%
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
2011 2012 2013 2014 2015
Contribution of Agriculture to GDP
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
2015
2014
2013
2012
2011
Agriculture Manufacturing Transport and Storage Real Estate Education Construction
6.1%4.6%
5.7% 5.3%5.6%
2.0%
2.6%
5.5%
3.5%
5.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2011 2012 2013 2014 2015
Trends in GDP and Agriculture Sector Growth
GDP Growth Agricultural Sector Growth
22.4%
5.0%
0.6%1.3% 0.7%
Growing of cropsAnimal production
Support activities to agriculture
Forestry & loggingFishing & aquaculture
Breakdown of Sector’s Contribution to
GDP
The Agricultural Sector Report
3
Key Agricultural Crops: Tea, Coffee and Horticulture Kenya is the world's leading exporter of black tea; and the commodity is a leading export
earner with revenues totaling KES 123.0B (+30.9% y/y) in 2015. Over 60.0% of Kenyan tea is
grown by smallholder farmers, with the remaining 40.0% being sourced from estates owned by
either multinational corporations or their out-growers on locally owned estates. Tea is often pro-
cessed into black tea by Kenya‟s popular „crush, tear, curl‟ method (CTC), which makes it suita-
ble for use in blends favored in most black-tea markets.
Over 85.0% of Kenya tea is sold through the public Mombasa Tea Auction, the second larg-
est auction in the world. Producers also sell about 10.0% tea directly through private arrange-
ments with global tea importers, while about 5.0% is consumed locally. The main players at the
auction are the Kenya Tea Development Agency (KTDA) controlling over 65.0% of the volumes
and Unilever, which owns estates from which it exports directly. Unilever is also usually respon-
sible for about 15-20% of purchases at the auction. Some of Unilever‟s out-growers include Li-
muru Tea, Williamson Tea and Kapchorua Tea. At present, around 77.0% of the country‟s output
is sold to a handful of source markets namely, Pakistan, Egypt, the UK, the United Arab Emir-
ates; with plans being put in place to expand to high-growth markets like China and Iran.
On the other hand coffee’s share of Kenya’s exports has plunged five-fold in the last three
decades. From highs of 128,700 tonnes in 1988, coffee production has dropped by 67.7% to
41,600 tonnes in 2015 (-16.0% y/y). Kenya‟s production on both large and small scale farms is
still less than 1.0% of the world‟s coffee. Over 85.0% of the coffee is sold through auctions at the
spot market, the Nairobi Coffee Exchange (NCE), while the rest is sold through direct sales con-
tracts. Annual domestic coffee consumption in Kenya remains low at 3.0% of the total produc-
tion attributed mainly to the predominant tea drinking culture.
The last five years have seen farmers dump coffee farming for the real estate boom and
more profitable crops. They have for long blamed cartels of coffee barons with rigged market-
ing systems at the NCE for poor returns. Unable to sell their coffee directly to the market, they
get a meager 1.0% return on coffee sales compared to farmers from neighboring countries like
Uganda who get up to 80.0% on the sale of the crop. It is therefore no surprise that majority of
coffee farm owners have opted to construct rentals flats on their land or sell to interested buyers.
In Central Kenya for example, most have sold land to investors setting up gated community pro-
jects. Key examples are the multibillion shilling Tatu City (more than 1,000 hectares), Migaa
(313 hectares) and Eden Ville (60 hectares) which were previously coffee farms. In a bid to re-
vive the country‟s third largest export earner, the government has even contemplated leasing land
to foreign investors to boost coffee production and has appointed a taskforce specifically tasked
with finding solutions for the deep-running problems facing the sector.
Kenya is the largest horticulture exporter in sub-Saharan Africa with export earnings hav-
ing grown by 21.2% to KES 90.4B in the last 5 years. The sector mainly comprises 5 com-
modities; vegetables, which account for 44.6% the total value of horticultural produce, fruits-
29.6%, flowers-20.3% and the remaining 5.5% nuts and Medicinal and Aromatic Plants (MAPS).
About 95.0% of horticultural production goes to the domestic market and 5.0% to the export
market by exporters registered with the Horticulture Crops Development Authority (HCDA).
Source: KNBS
Source: East Africa Tea Trade Association
(EATTA)
Source: Coffee Board of Kenya
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2011 2012 2013 2014 2015
Principal Agri-Exports in Kenya (KES B)
Tea Horticulture Coffee
36.6%
24.3%
14.2%
13.1%11.9%
Kenya's Top Tea Export Destinations
Pakistan EgyptUK AfghanistanUAE
33.8%
25.3%
20.9%
12.9%
7.1%
Top Coffee Export Destinations
Germany Belgium USA
Sweden Finland
The Agricultural Sector Report
4
Industry Analysis
The hidden goldmine that is substantial land holdings. The acquisition of Rea Vipingo by Centum Investments in 2015 exposed the potential un-
dervaluation of land assets held by the Listed Agricultural Companies (LACs). In the deal,
Centum acquired 9,646 acres of prime Rea Vipingo land located in Kilifi County from REA
Trading at a price of KES 180,000 per acre. It also acquired RVP‟s subsidiary, Vipingo Estates,
which owned approximately 900 acres of land, at a price of approximately KES 340M bringing
the total to 10,546 acres of prime Rea Vipingo land for KES 2.0B. It plans to combined the much
coveted mix of real estate and agriculture.
Consequently, more and more investors are willing to pay a premium and ignore draw-
backs such as fluctuations in earnings and paltry dividends (or lack thereof) as they eye the
longer term value of these companies’ land and biological assets. In the past, speculations
of agricultural companies switching to real estate have triggered price rallies as investors
anticipate the assured higher returns. Case in point Sasini.
Sasini share price benefited from the sale of land. As at 30th September 2015, the group had
a total of 2,238 Hectares under tea and coffee. Earlier on in the year it had revealed its plans to
dispose a huge portion of its land, a move that sparked off a price rally, aimed at booking some
of its revaluation gains. In a bid to restructure some of its non-performing assets it sold a total of
207.9 hectares in two of its estates in central Kenya. As anticipated, its income statement reveals
that following the successful disposal of these assets in 2H15 the company booked KES 830.7M
which contributed to a jump in its bottom line to KES 1.1B (FY14: KES 45M). This is despite
the assets having been carried in its books at a highly conservative value of KES 1.4M.
Sasini has also put up one of its prime properties on Loita Street Nairobi up for sale. The
building houses corporate firms and sits on 0.2159 acres and the company is targeting a bottom
price of KES 600M, bound to attract a lot of interest and book substantial gains once sold. This
goes to show that real estate is a ripe opportunity for LACs because asset sales could compensate
for weaker performance in agricultural operations in periods of low production and poor market
prices.
The geographical locations of some of these companies’ land relative to Nairobi is also an
enticing factor. Limuru Tea owns 275 hectares of land (mature tea bushes) located 4 kilometers
to the east of Limuru town, about 30KM from Nairobi. Detailed information on its land is re-
vealed in its FY14 annual report, where it values its land at KES 9.9M. This translates to KES
14,559 per hectare, albeit inclusive of buildings and property. Given its proximity to the capital,
this fails to capture the immense value of its 275 hectares of land, which makes it a more attrac-
tive real estate play.
The sale of land and buildings has also been known to boost the dividend payment. In 2012,
Williamson sold off a 50% stake in Williamson House, its former headquarters building in the
capital, for KES 450M. In the same year, it declared a record KES 50 per share interim dividend
payment, the highest in the company‟s history.
Estimated Land (Hectares)
Kakuzi Ltd 12,109
Sasini Ltd 2,238
Williamson Tea 2,127
Kapchorua 625
Eaagads 429
Limuru Tea 275
Source: Company Annual Reports
Source: Sasini Annual Reports
10
12
14
16
18
20
22
24
Jan
-15
Fe
b-1
5
Ma
r-1
5
Ap
r-1
5
Ma
y-1
5
Jun
-15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Sasini Price Trend 2015
The Agricultural Sector Report
5
The impending threat on Freehold Titles and 999 year land leases
The Kenyan Constitution Article 65 (1) and the Lands Act (Act No. 6 of 2012) provide that :
“Any person who is not a citizen may hold land on the basis of leasehold tenure
only and any such lease however granted shall not exceed ninety nine (99)years”
The law reduces the maximum leasehold tenure from 999 years to 99 years. The motivation be-
hind the crafting of this law was to provide an opportunity for the government and county gov-
ernments to earn revenue in the form of land rent and rates, and not to forcefully take away land
from foreigners as has been perceived.
Ideally, effective August 27, 2010, all such land was automatically converted to 99 year lease-
hold property. However, given that the mechanisms for implementation of this law are not yet in
place, such property continue to operate under freehold terms and would only pose a challenge in
the event there‟s need to transfer the title from one name to another.
Also, upon expiry of the 99-year lease, the county governments would essentially renew the
lease should the lessor apply for renewal, unless there‟s enough reason to justify a decline of the
same e.g land not providing economic value, failure to pay rent and rates etc. We therefore do
not believe that there‟s enough cause for concern over any of these listed companies losing their
land to the county government and putting an end to their existence.
However, of concern is the impact that the new charges would have on the companies‟ net mar-
gin. Once a clear conversion structure has been established, we may see the government and
county governments applying the law retrospectively and slapping the lessors with land rents and
rates dating back to August 2010 when the constitution came into force, which may be quite a
burden to bear. They could also provide the option of renewing the leaseholds sooner, of course
at a higher cost.
Majority of the agricultural companies are controlled by foreign investors that c.50.0% of the
Kapchorua Tea 28.5% (Ngong Tea Holdings -23.96% Satchu Khan-1.61%; Ronald Buxton-0.86%) UK
Limuru Tea 52% owned by Unilever Kenya
Eaagads Limited 61.7% Kofinaf Limited (Kenya)*
*Eaagads’ ultimate holding Company is East African Real Estate Holdings Limited (previously RG African Land Limited), which is
incorporated and domiciled in Bermuda.
The new constitution reduces the maximum leasehold ten-ure from 999 years to 99 years
Not much concern over any of the listed agricultural com-panies losing their land to the county government and put-ting an end to their existence.
Majority of the agricultural
companies are controlled by
foreign investors
The Agricultural Sector Report
6
Mother nature’s double edged sword
Historically, investors have shied away from agricultural stocks owing to the cyclical nature of
the sector, a situation that is often exacerbated by unpredictable weather which affects crop
yields.
Source: Annual Reports
An analysis of Williamson‟s tea production and that of its subsidiary Kapchorua over the last 5
years demonstrates the effects of erratic weather patterns on crop production. In particular, ad-
verse weather leaves little scope for the companies to benefit agriculturally and overcome any
other shortfalls that may be experienced during the year. Favorable weather often leads to bump-
er harvests and the unwelcome luxury of too much produce with one huge caveat: a rapid decline
in prices. This highlights another problem of the detrimental effect of an obsession with key
crops like tea and coffee once harvests coincide leading to market oversupply.
The gains and losses arising from changes in fair value of biolog-
ical assets
As required by the International Financial Reporting Standards, the fair valuation of biological
assets is performed annually where plantation and livestock are measured on initial recognition
and at each reporting date at fair value less costs to sell. More specifically, gains or losses that
may arise on initial recognition and from subsequent changes in fair value less costs to sell are
often recognized in the income statement in the given financial year. These figures fluctuate y-o-
y depending on market prices and often have a huge impact on the total earnings reported for the
period for any of the listed companies. Nevertheless, it is vital to note that the results of the annu-
al revaluation change are not realizable for distribution; and are often included in the PBT repre-
senting estimated book figures for accounting compliance.
Revenues earned by listed
agricultural companies in a
given financial year highly
depend on the weather
Williamson: The largest tea
producer among the listed
agricultural companies
Source: Sasini Annual Reports
Gains from revaluation of
biological assets are not
realizable for distribution
-
10,000
20,000
30,000
2011 2012 2013 2014 2015 2016
Tea production (tonnes)
Williamson Kapchorua
Dryweather Prolonged
dry spell
El nino season Satisfactory
weather
(600)
(400)
(200)
-
200
400
600
2011 2012 2013 2014 2015
Sasini's gains/losses arising from changes in fair value of biological
assets
The Agricultural Sector Report
7
Market price volatility
The listed companies are exposed to extreme changes in prices depending on prevalent demand and supply. Majority export both directly and through the Mombasa auction and the Nairobi Cof-
fee Exchange (NCE) hence are subjected to the volatility of both international and local prices.
Coffee Prices In the YTD prices for coffee have risen because of high demand at the New York Exchange, which has played a significant role in boosting the local sales. Prices have increased 15.4% y/y to USD 3.689/Kg. The prices, however, are yet to meet 2015‟s highs of USD 4.189/Kg owing
to poor quality coffee coming in from farmers due to pests and diseases. Eaagads, the only com-pany whose sole operating segment is the growing and selling coffee could see a boost in FY17
revenues following the uptick. Sasini will also benefit since its coffee segment contributes 36.3% (FY15) to total revenues once its retail and coffee lounge sales are considered.
Tea Prices Tea auction prices, however, are on a free-fall, having declined by 12.4% from January to July
2016 at USD 2.801/Kg (-30.5% y/y). This has been attributed to a sharp increase in production that led to an oversupply at the auction market, a result of the good crop witnessed at the 2015 due to El-Nino rains. With much more tea available to buyers, we expect to see weak prices go-
ing forward, which is bad news for tea producing companies Williamson, Sasini, Limuru and Kapchorua.
Avocado Prices In 2016, international avocado prices have hit record highs due to increased demand and scarce
supply following an acute shortage in the European Union (EU). The shortage has been attribut-ed to poor production from top exporters Mexico and Peru due to adverse weather in the two
countries. In August 2016, avocado from South Africa, Kenya and Peru sold at 13.50 Euro/ctn compared to 10 Euro/ctn in January. Following the shortage there has been a higher demand for
Kenyan avocados in the EU. Moreover, Peru and South Africa share the same export window which generally runs from May until the end of September. This gives Kenya a competitive ad-vantage over the two because its harvesting season extends to December, granting it a window
of opportunity in the export market.
Kakuzi is the only avocado producer among the listed companies, which accounted for 75.2% of its revenues in FY15. Kakuzi could gain from this shortage considering that in FY15;
its revenues had jumped 46.9% after it exported 360 container loads due to an improvement in the EU countries where it exports 98.1% of its avocados.
Exchange rate volatility: One industry’s loss is another’s gain The weakening of the shilling to the USD is often good news for commodity exporters as the two
main exports, tea and coffee are usually priced in terms of USD/Kg sold. In 2015, the KES
weakened against the dollar by 11.7% contributing to a 30.9% earnings boost from tea export to
KES 123B, and a 3.3% increase in coffee earnings to KES 21B. In 2016, however, the Shilling
has been quite resilient against the dollar currently exchanging at KES 101.35/USD. This makes
Kenyan products more expensive for other countries to buy compared with products sourced
from countries like South Africa whose currencies are undervalued. So far, the slightly stronger
shilling has led to a downgrading of tea earnings forecasts from KES 123B to about KES 115B -
KES 120B. The CBK has confirmed that forex reserves are sufficient to support the KES from
volatility and global shocks.
The Brexit Effect: Kenya’s long standing bilateral relations with
the UK might pay off
Out of the 11 major export destinations for Kenya (64.3% of total exports), the EU and UK
accounted for 25.0% of total exports in 1Q16 (18.0% and 7.0% to the EU and UK respective-
ly). In particular, Kenya ships horticultural exports of c. 300 to 400 tonnes a day to both EU and
UK, with the UK accounting for more than half of the fresh produce exports. Kakuzi, the only
horticulture exporter among the LACs, exports 98.1% of its avocado to the UK and Europe
alone.
Aside from the losses associated with the currency fluctuations, it is likely that the UK will
continue to prioritize trade negotiations with Kenya given the two countries‟ long-standing bilat-
eral relations and its dependence on its Kenyan exports.
The tea industry could fare better from the Brexit decision. The UK imports about 65,460
metric tons a year from Kenya, with the other half sourced from overseas markets. Blenders from
the UK then repackage the leaves with tea from other destinations and re-export about 17.0% of
it to European countries like Germany, Spain, the Netherlands and France. Following Brexit,
Kenyan exporters now have the opportunity of taking away the UK‟s market share to the compa-
nies it re-exports to, enhancing direct trading arrangements with the other European Countries
and increasing its export destinations. The plan, if well executed could result to more tea export
revenues which will bode well with the tea producing LACs.
Kenya, however, is bound to feel the pinch of UK’s depressed economy. Uncertainty and loss
of confidence in UK‟s future could translate into lower investment, a surge in unemployment and
higher inflation which points to an economic slow down. Owing to the anticipated depressed
economic period, there remains the possibility that the UK will consume less of Kenya‟s tea and
horticultural exports.
Source: KNBS
Source: Kakuzi Annual Reports
Source: Kapchorua Annual Reports
Source: Williamson Annual Reports
98.1%
1.9%
Kakuzi Avocado Sales
UK and Europe Kenya
98.0%
2.0%
Williamson Tea Revenues
Global Markets Kenya
98.7%
1.3%
Kapchorua Tea Revenues
Global markets Kenya
28%
9%
42%
6%
15%
Europe America Africa Middle East Far East & Australasia
Kenya’s Top Export Destinations
The Agricultural Sector Report
9
An overview of the Strengths Weaknesses Opportunities and Threats of the Sector
SWOT Summary Impact on the LACs
Significant land assets that are often conservatively held in books and sometimes underutilized
Minimal debt coupled with strong asset bases
Shares do not easily exchange hands
Tea and coffee subsectors continue to get the necessary impetus to boost economic growth
Land and property revaluation gains and easy change of business model to include real-estate development
Reduced financial risk
Protects them from sharp falls based on speculative trading
Reductions in costs of production
Majority of the agricultural companies are con-trolled by foreign investors that hold more than 50% of the issued shares:
Crop yields highly dependent on externalities
Agriculture stocks have low liquidity in the market due to fewer issued shares
This results in extremely low free float posing liquid-ity challenges
Fluctuating earnings year on year resulting in diffi-culty in predicting stock movements
Largely to blame for minimal activity at the bourse
Reduced reliance on seasonal agriculture and the same markets; diversification into real estate
Processing of orthodox teas as well as purple, green handmade and specialty teas
The use of modern technology in operations
Trading of commodities option and futures contracts
Resilience in times of unexpected weather and mar-ket conditions
Improved topline-a Kg of black CTC tea sells at an average of KES 300 while the same quantity of orthodox tea attracts more than KES 400.
Production of higher yielding, more resilient crop and improved dairy operations
Organized trade and marketing will facilitate stable and predictable prices and allow companies to hedge against price volatility
Any adverse change in weather, both local and international prices and a stronger shilling will have a negative impact on earnings
All land titles belonging to agricultural companies were converted to 99 year leases without compensa-tion
Export from Sri-Lanka (tea), Brazil (coffee) and South Africa (avocado) compete with Kenya‟s in the global market.
Difficulties in planning stemming from difficulties in predicting earnings
Potential but highly unlikely loss of valuable land once the leases expire
High production from these countries facilitates supply-driven drops in prices in international mar-kets denting the top-lines.
SRENGTHS
Substantial land holdings
Strong Balance Sheets
Low liquidity in the market
Plenty of government support
OPPORTUNITIES
New business models and
markets
Variety and value addition
Embracing Technology
Commodity exchanges
WEAKNESSES
Foreign investor strangle-holds
The cyclical and uncertain nature of the sector
Low liquidity
THREATS
Adverse weather changes,
possible declines in
commodity prices and cur-
rency fluctuations
Expiry of leases
Competition from other tea,
coffee and horticulture ex-
porters
The Agricultural Sector Report
10
Sasini Limited
Recommendation: BUY
The Company Having listed in 1960, Sasini is one of the oldest companies at the Nairobi Securities Exchange
(NSE) and one of the largest tea producers in the country. It is the agricultural arm of the Sameer
Group of companies and majority owned by Legend Investments (41.8%). It is engaged in the
growing, processing and sale of tea and coffee; dairy operations; retailing of branded tea and
Initiation of coverage We initiate coverage on Sasini with a BUY recommendation based on a Fair Value of KES
23.15, implying 23.1% upside potential from the current market price of KES 18.80. Sasini has
invested heavily in tea and coffee production. We believe that its tea ( 3 year CAGR of 5.8% )
and coffee (3 year CAGR of 3.8%) sales will continue driving its growth going forward. We also
believe that its 2,238 hectares of land, coupled with a strong balance sheet that lacks debt and a
strong cash position (FY15: KES 1.2B) will continue supporting growth in the medium term.
Positives
Owns an estimated 2,238 hectares of land presenting more real estate opportunities
One of the leading tea producers with heavy investments in both tea and coffee production
High dividend yield of 6.4% in FY15
Strong balance sheet: Healthy cash position and no debt which protects shareholder wealth
Challenges
Revenues and earnings are vulnerable to external factors
Foreign exchange risks
Adverse competition from Sri-Lanka and India; top tea exporters
Key Ratios FY13 FY14 FY15 FY16F FY17F FY18F
Land (Ha) 2,377 2,377 2,238 2,238 2,238 2,238
Gross margin (%) 27.4 24.8 26.3 26.5 26.4 26.5
EBITDA margin (%) 13.0 9.9 10.7 10.4 10.9 10.3
Profit margin (%) 3.3 1.6 9.7 1.9 2.7 2.3
EPS (KES) 0.54 0.10 4.27 0.32 0.38 0.40
DPS (KES) 0.25 0.25 1.25 0.25 0.25 0.25
BVPS (KES) 27.5 52.0 57.7 57.4 57.4 57.5
P/E (x) 27.3 124.4 4.6 59.2 50.1 47.1
P/B (x) 0.5 0.2 0.3 0.3 0.3 0.3
EV/EBITDA (x) 9.2 10.4 12.2 10.3 8.9 8.0
ROE (%) 1.4 0.4 2.0 0.4 0.6 0.6
ROA (%) 1.0 0.3 1.7 0.3 0.5 0.4
Dividend yield (%) 1.7 1.9 6.4 1.3 1.3 1.3
Source: Company, Apex Africa Estimates
Bloomberg Ticker : STCL KN
Reuters Ticker: SASN.NR
Share Statistics
Recommendation Buy
Fair Value (KES) 23.15
Price (KES) 18.80
52-week range (KES ) 23.25-14.00
Issued shares (m) 228
Market cap (KES bn) 4,287.4
Market cap (USD m) 42.2
Land size (Ha) 2,238
Year end Sept
Float (% ) 27.8%
Foreign ownership (%) 41.8%
Av daily trading value (USD) 9,777
Price Return
Absolute Relative
3m -14.5% -3.3%
6m -0.7% 18.2%
12m 17.9% 29.0%
Price Trend
Source: NSE
60.00
90.00
120.00
150.00
STCL NSE-20
The Agricultural Sector Report
11
Investment case Large parcels of land guarantee a way out in times of financial turmoil According to the company‟s FY15 report, Sasini has a total of 2,238 Hectares of land whose re-
valued net book value stands at KES 6.8B, after recognizing revaluation gains of KES 5.7B. Sas-
ini‟s net asset value stands at KES 228M, hence the value of its freehold land translates to about
KES 29.82 per share which exceeds the market price per share of KES 18.45. Considering the
2,333.7% y/y earnings boost in FY15 following the sale of two parcels of land, the company can
always increase its investments in land and revert to this option in periods of consistent adverse
weather and low market prices. Sasini is well diversified and despite minimal contributions from substitute sources of reve-
nue, it has heavily invested in its flagship products, tea and coffee. In 2007 it invested in a
tea packaging facility in Mombasa and a coffee roasting and packaging facility in Central Kenya
which produce its branded tea and coffee products. Sasini also owns two large Crush to Curl
(CTC) tea factories with a combined capacity of 10M Kgs of black CTC tea annually. In addi-
tion, it owns one of the top rated coffee mills in the country with a daily capacity to mill 4,800
bags of clean coffee. Quality tea and coffee, which is a key challenge at the NCE and Mombasa
Auction is also guaranteed as Sasini also owns a fully equipped coffee-liquoring laboratory
where coffee is analyzed in preparation for export and has also shifted emphasis towards manu-
facture of higher quality tea leaf. Tea and coffee earned it a total of KES 3.6B, and we believe
the heavy investments in the two products will continue boosting its earnings. Strong assets, coupled with no leverage, will continue to preserve shareholder value. With
an estimated KES 1.2B in cash and cash equivalents and no debt, we believe Sasini is well capi-
talized to carry out its planned expansion activities and to take viable projects in future. The net
book value of its 2,238 Hectares of land is KES 6.8B while its biological assets have a carrying
value of KES 5.1B, which collectively account for 73.9% of its total assets. This, coupled with
an ROaA of 1.7% points to well managed assets that will continue preserving shareholder
wealth. Sasini is keen on continuous improvement and continues to monitor new areas of business
for ongoing business expansion. In 2015 a number of strategic initiatives were commissioned
where it restructured non-performing assets which included the sale of land and it put prime Nai-
robi property on sale for KES 600M, expected to raise cash for expansion plans. It also restruc-
tured and rationalized its dairy herd to boost profitability as well as restructuring and staffing of
Savannah Coffee Houses and Sasini Retail businesses to deliver more value to the bottom line. It
plans to use modern technology to boost revenues from its dairy operations. This will be
achieved by increasing the production of high quality dairy using technology that will involve
Artificial Insemination and establishment of a „cow hotel‟ where individuals who may desire to
own high quality dairy cattle but lack the necessary resources like land, time and knowhow will
be enabled to purchase and own the cattle jointly with Sasini. Dividends
Sasini has issued a constant dividend of KES 0.25 in FY13 and FY14; which was hiked to KES
1.25 in FY15 following increased profitability. Its dividend yield at 6.4% is quite attractive.
Without management guidance we made an assumption that investors will continue receiving the
comfortable KES 0.25, as the company reserves excess cash for times of low profits.
Land breakdown (Hectares)
Tea estates 1,463
Mature tea 1,434
Immature tea 29
Coffee estates 775
Source: Sasini Annual Reports
Source: Sasini Annual Reports
KES (M)
In 2014, Sasini revalued its
land upward by KES 5.7M
0.0% 20.0% 40.0% 60.0% 80.0%
Others
Dairy operations
Coffee mill
Retail & coffee lounge
Coffee sales
Tea sales
Revenues (KES M)
The Agricultural Sector Report
12
Financial Outlook Tea and coffee sales to continue driving top line growth in the medium term
Tea sales contribute the lions share to Sasini’s bottom line at 57.4% (KES 1.6B) in
FY15. Its tea operations involve the growing, processing, warehousing and marketing of
bulk tea through the Mombasa auction and through direct sales to export customers. Our
estimates highlight a 2.5% y/y increase in tea sales in FY16E (3 year CAGR of 5.8%) sup-
ported by an expected boost in production due to satisfactory weather for the most part of
the year. This will offset an expected 4.1% y/y decline in tea prices as forecasted by the
World Bank. The projections are conservative considering the exposure to unforeseen exter-
nalities such as adverse weather, foreign exchange fluctuations and low market prices.
Coffee sales are the second largest revenue earners at 29.1% (KES 809.9M) in FY15.
Sasini‟s coffee operations include coffee growing, coffee milling, coffee trading and market-
ing through its trading arm Aristocrats Coffee and Tea Exporters Limited. Coffee sales are
expected to remain unchanged in FY16E (3 year CAGR of 3.8%) based on an anticipated
6.5% y/y decline in prices that will neutralize an expected boost in production.
The Group has also been rolling out its Savannah lifestyle coffee lounges within the en-
virons of Nairobi, and currently has 7 outlets whose sales contribute 7.5% (KES 208.0M) to
the total revenues. Sales are expected contribute more to topline growth (3 year CAGR of
19.0%) as they target regional expansion. On the other hand, the commercial milling and
marketing of coffee contributes a paltry 3.2% (KES 88.4M) and we forecast a 7.3% y/y
jump in revenues from this segment in FY16E following the expected boost in production in
2016.
Dairy operations, however, perform poorly due to challenges stemming mainly from poor
demand for its produce, high cost of inputs and low producer prices from processors. Both
livestock and dairy produce sales combined contribute a paltry 0.3% to total revenues and
we expect minimal improvement in the medium term (3 year CAGR of 5.5% ).
Contributions from renting of growing land, the leasing of plant and machinery, marketing
commission and export trade operations contributed 3.7% (KES 41.8M) to total sales in
FY15 and are expected to remain flat in the next 3 years based on historical trends; and lack
of clear strategies for boosting their growth going forward. Stringent control on costs to continue-Synergies arising from the restructuring and staffing of
the coffee lounges, coupled with an investment in a biogas plant in FY15, which is aimed at as-
sisting in cutting down the cost of electricity and supporting the expansion of irrigation facilities
will help keep costs at sustainable levels. Management is keen on containing costs and this, in
addition to the growth in revenues, will see operating cost go up a slight 2.2% y/y in FY16E.
However, we expect operating costs to jump to 8.1% y/y in FY17F based on persistent tea farm-
ers‟ strikes over salary increments which could necessitate a hike in labor wages. PBT to resume to typical levels-In FY16 the PBT had been boosted immensely by the sale of
the two parcels of land for KES 830.7M and realized foreign exchange gains amounting to KES
48.1M. A tax credit of KES 62.0M also boosted the PAT. To make an accurate forecast, we have
normalized the financials, excluding the one time land sale. Consequently, we expect the
EBITDA margin to weaken to the usual levels of 10.4% (-3bps) in FY16E and a 62.3y/y % drop