KAL Group

Research note on agriculture company and retailer KAL Group

Introduction

Company Name: KAL Group (formerly Kaap Agri)

Ticker: KAL

Market Capitalisation: R2.75b

Industry: Agriculture, Retail, Manufacturing, Fuel 

Company Overview

KAL Group is a diversified trader and retailer across the agricultural, manufacturing, retail, and fuel & convenience markets. KAL Group operates under the following core business segments:

1. Agrimark has more than 70 outlets in SA and Namibia and sells agriculture and lifestyle products such as building material and irrigation systems to hardware and paint, gardening equipment, appliances, pet food and accessories, as well as outdoor gear.
2. TEGO Plastics is a manufacturer and wholly-owned subsidiary of the KAL Group. They produce quality, fit-for-purpose plastic solutions using injection molding machines and state-of-the-art robotics. Their flagship product range consists of the Tego Bulk Bins. They are superior food grade plastic injection molded bins made for use in the harvesting and post-harvesting processes of fresh fruit and vegetables, as well as other commercial storage applications.
3. The Fuel Company provides a full retail fuel service including a range of convenience stores and quick service restaurants to a diverse range of customers across South Africa. TFC operates numerous petrol stations and convenience stores across SA mainly under the Total brand. 
4. Agriplas specializes in manufacturing and selling irrigation equipment to the agricultural sector, with additional focus on industrial water filtration.
5. Expressmark is a chain of convenience stores located at petrol stations run by The Fuel Company.
6. Forge outlets provide competitive pricing on fertilizers, seed, feed, and all other farming inputs for year-round successful farming. Both brands consist of retail stores with agri-sheds and/or building yards. Forge Agri specializes in products and services related to pasture-based dairy farming, whereas Forge Build primarily functions as a building material and hardware business.
7. Kaap Agri Namibia offers everything from irrigation systems and gardening equipment to animal feeds, pet accessories, quality building materials, hardware and fencing, fuel and lubricants, as well as outdoor and camping gear.

Investment Thesis Summary

• KAL Group is a classic SA Inc stock trading at a modest valuation multiple with growing revenue and earnings
• Trading below book value for a quality company with growing earnings base
• Recently acquired a new company called PEG which has resulted in a big contribution to the jump in revenue and earnings for H1 2023
• PEG Retail Holdings is a 100% subsidiary of The Fuel Group
• The Fuel Co not impacted by petrol price as margin is regulated thus profit driven by volume (fixed margin of R2.42 per liter) 
• Capex spend is mostly expansionary (71% for expansion) and should improve future cash flows 

Key Risks

• Operating cash flow not closely tracking revenue and earnings 
• Cash flow for H1 2023 didnt look great on paper but was due to repayment of R978m of creditors thus repayment of creditors has improved the balance sheet
• Debt has been increasing but likely to fund expansions as shown by revenue growth (NAV per share still growing even though debt increasing)
• Effectively an SA only business thus no rand hedge or protection against a struggling SA consumer
• Load Shedding impact on costs 

Financial Performance and Financial Position 

Revenue CAGR: 24.5%

Operating Income CAGR: 12.32%

Net Income CAGR : 10.3%

NAV CAGR: 7.33%

Gross Margin HY 2023: 12.6%

ROE HY 2023: 10.3% (lower than previous years which was around 14-15%)

TTM performance

Gross Margin: 12.33%

Operating Margin: 2.87%

Net Margin: 1.98% (typically around 3% margins have been lower due to rising costs from inflation which is a sector wide trend as inflation eases margins should improve, similar margins to a good quality retailer like shoprite at a much better valuation) 

Balance Sheet Health (H1 2023)

Interest coverage ratio: 4 times (lower than historical)

Debt Equity: 73.8%

Debt to Assets: 62.11%

Current Ratio: 1.24

Quick Ratio: 0.81

Consistent dividend with a conservative payout ratio of around 25-30% a year

Yield currently at 4.5% but typically closer to 3.5% to 4% in the past
 

Management have bought back some shares in the past 12 months (buyback yield of 0.85%)

Key Metrics

Days sales outstanding, inventory days and days payable all are coming down indicative of a healthy and improving working capital cycle 

ROA: 5.71%

ROE: 15.11%

ROIC: 7.82%

Valuation

Multiples

Net Asset Value: R3.035b vs market cap R2.75b

NAV per share R40.9 vs share price of R37

P/S: 0.17

P/E: 6.67

P/FCF: 12.44

P/B: 0.97

EV/EBIT: 7.14

FinBox FV 

When using a multiple approach FinBox is giving a FV estimates of mostly around R48 to R50

Share price history - 5 years

YTD: -10.09%

1 YR: -18.14%

5 YR: -20.43%

Max: -40.31%

Conclusion

My overall conclusion is that KAL Group is a good business that is expanding and thus growing earnings and revenue at an impressive CAGR. Debt has largely been used to expand (instead of equity) and thus debt levels have been rising but this appears to be sustainable as NAV per share is growing constantly. However I worry about high debt levels impacting margins and the ICR has come down to 4 (not terrible but not amazing). If they can improve debt levels and inflation eases margins should improve. It is a low margin business as they operate similar to a retailer like Shoprite and Bidvest just with some diversification in the stable like the fuel business which has good fixed margins. The group is an SA Inc stock with limited foreign hedging and the outlook of the business will be largely subject to the outlook of the SA economy. Key supplier to the SA farming and agri industry which is not going to disappear anytime soon. Buying the share below book value offers a good margin of safety and limited downside. I would look to buy around 6 times earnings and trim my position if it had to run to 8 times earnings. My main concern about the business would the debt levels (although appears to be normal compared to other retail type businesses) and the inconsistent cash flow relevant to earnings