The share price went higher than R9 in February, thanks to the expectation of a stronger domestic economy, but then started losing steam. The fact that Steinhoff holds a sizeable stake and will have to sell it all at some time in the future also took its toll, and the share price dropped to R7.
In March Steinhoff reduced its stake from 43 percent to 26 percent in a bookbuild at a price of R8.15. Steinhoff has given no further indication of what their plans are with the balance.
Last week KAP surprised the market with a decent set of results, and achieving such good growth despite the stagnant state of our economy is something. Imagine what they can do if we get the eagerly awaited improvement in economic growth? Even without this, they are positioned close to some pockets of growth, like the car manufacturing industry.
Just last week it was reported that the government is close to agreeing to new tax breaks for international carmakers, including Toyota, Ford and BMW.
A deal on a 15-year incentive programme that will replace one that expires in 2020 should be reached soon.
The car manufacturing industry accounts for about 7 percent of SA’s gross domestic product, with carmakers building a combined 600 000 vehicles in the country in 2017, and is still expanding. This is good news for KAP’s automotive components business, which manufactures vehicle retail accessories and components used in new vehicle assembly.
The good results were achieved despite some significant shocks the company faced. Cutting the ties with Steinhoff came with its pain, and there was an immediate loss of corporate service functionality. There was a R569 million project overspend, 81 percent profit reduction in a major business, and 10 percent of their forest holdings burnt down.
Operating profit before capital items from continuing operations was up 15 percent to R2.9 billion, while cash generated from operations increased 12 percent to R3.3bn. KAP’s operating profit margin remained stable at 12.5 percent.
The company is divided into three segments, the industrial division contributed 38percent to operating profit, chemicals contributed 32 percent, and logistics 30percent.
The chemicals division was the star performer with a 111 percent increase in revenue. The recently acquired Safripol performed ahead of their acquisition parameters, and polypropylene sales volumes were up 94 percent. High-density polyethylene sales increased by 108percent. Global demand and margins remain buoyant for both polymer and resin.
High entry barriers
KAP operates in industries where high barriers to entry exist. Thanks to their diversity they have created sustainable earnings. They completed several major projects, which positioned it well for future growth.
These included the R1.3bn expansion to its polyethylene terephthalate facility in Durban, following the R4bn acquisition of Safripol, the manufacturer of polypropylene and high-density polyethylene.
To improve the fortunes of its logistics business, it has concluded an empowerment deal with Sakhumzi Foundation Empowerment Trust and the FWG Pieters Trust. They will each buy a stake of 22 percent and 23 percent respectively in KAP subsidiary Unitrans Supply Chain Solutions, for a total of R1.2bn. Unitrans services the petroleum, chemical, mining, cement, food and general freight sectors. KAP hopes to implement its BEE transaction at the beginning of September.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. KAP shares are held in her own capacity and on behalf of clients.