The Problem with Kaap Agri

Kaap Agri (KAL) listed on the JSE recently. I am going to keep this short, but it is worth reading through their history (here) and browsing through their website (here) for background.

The temptation is to look at Kaap Agri as a rural, Western Cape-focussed Cashbuild (CSB). Or, even, a rural Massmart-type business.

In that comparison, the temptation is to try to apply the same market multiples as these businesses to Kaap Agri.

The temptation then would be to say that Kaap Agri is cheap.

But there is one major difference: financing.

Unlike the cash-generate businesses of Cashbuild and Massmart, Kaap Agri earned R183m in interest on its sales during FY 16 (= R87m in finance margin + R96m interest received; see notes 20 and 21 in their FY 16 AFS).

Let me put this in context, if Kaap Agri had not charged interest on its credit sales, it’s Profits Before Tax of R290m would have been 63% lower.

It makes sense that Kaap Agri extends a lot of credit to the farmers that come into its stores. The agri-sector has long working capital cycles and, if Kaap Agri did not extend credit, most farmers would not be able to buy things through the year from them.

But how different is this to Cashbuild and Massmart?

Well, both Cashbuild and Massmart convert the majority of their profits into cash flow, as the majority of their sales are cash-based. Kaap Agri is the opposite, with operating profit of R338m converting into only R180m of operating cash flow. Likewise, Cashbuild’s latest Debtors Days is 3.8 (i.e. most debtors pay cash immediately) while Kaap Agri’s Debtors Days is a whopping 93.1 (i.e. most debtors pay back over three-month payment terms).

In other words, Kaap Agri is closer to a finance house than it is to a retailer.

And, therefore, I believe that it cannot be compared to a Cashbuild or Massmart. Kaap Agri is actually much closer to the credit retailers Truworths (TRU), The Foschini Group (TFG) and Lewis (LEW), just with a rural-twist and a Western Cape concentration of stores.

The real problem here is that we know nothing of Kaap Agri’s credit policy, the quality of its massive R.1.4bn debtor book or how they manage it? Nothing. Literally nothing.

This is just my initial take on the Group, but they have results coming up. I am hoping that we will get a bit more insight into this major, hidden credit-side of Kaap Agri’s rather fascinating business.

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