the agricultural sector report - apex africa · 2018-08-27 · swot analysis (pg. 9) an in-depth...

October 2016

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


Price (KES) 18.80


Williamson Tea Co. Ltd

Bloomberg Ticker : GWKL KN

Reuters Ticker: WTK.NR

Recommendation Buy


Price (KES) 183.00


Kapchorua Tea Co. Ltd

Bloomberg Ticker : KPTC .KN

Reuters Ticker: KAPC.NR

Recommendation Hold


Price (KES) 85.00

Land size (Ha) 625

Eaagads Limited

Bloomberg Ticker : EGDL.KN

Reuters Ticker: EGAD NR

Recommendation Hold


Price (KES) 18.80

Land size (Ha) 429

Rosemary Kanyoro Research Analyst [email protected] +254 (20) 760 2533 0716 388 584

mailto:[email protected]


2

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


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


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


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

issued shares. See the breakdown below:

Majority ownership .

Kakuzi Limited 50.7% (Camellia Plc-UK)

Williamson Tea 51.5% (Ngong Tea Holdings Limited-UK)

Sasini Tea 41.8% (Legend Investments )

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


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


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


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.

Source: World Bank

Source: Y-Charts

Tea revenues: Williamson

(98.6% of total revenues), Sasini

(57.4%), Kakuzi (11.9%),

Limuru (100%) Kapchorua

(100%)

Source: Y-Charts

Coffee revenues: Eaagads

(100%), Sasini (36.25%)

Source: US Hass Avocado Board (HAB)

Avocado producer: Kakuzi

(72.5% of revenues)

0

1

2

3

4

5

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Kenya Tea Auction Prices (USD/Kg)

0

1

2

3

4

5

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Coffee Auction Prices (USD/Kg)

3.08

4.42

3.533.3 3.32 3.34 3.37 3.39 3.41 3.43 3.45 3.48 3.5

2.86 2.72 2.71 2.6 2.65 2.7 2.762.81 2.87 2.92 2.98 3.04 3.1

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Worldbank Tea and Coffee Price Forecasts (USD/Kg)

Coffee Tea

1.151.2

1.251.3

1.351.4

1.451.5

1.551.6

Hass Avocado Prices (USD/Unit)


8

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


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


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

coffee products; coffee mill operations; lifestyle coffee lounges and export trade operations

based in Mombasa.

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


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


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


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



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)


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

in the PBT (3 year CAGR of –19.7%) to KES 208.5M.


Source: Company, ApexAfrica Estimates


0.0%

4.0%

8.0%

12.0%

16.0%

FY13 FY14 FY15 FY16F FY17F FY18F

EBITDA MARGIN

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2011 2012 2013 2014 2015

Revenue Contribution (KES m)

Tea sales Coffee salesRetail and coffee lounge sales Coffee millDairy Operations Marketing commisionOthers

8.0

508.0

1,008.0

1,508.0

2,008.0

2,508.0

3,008.0

3,508.0

FY13 FY14 FY15 FY16E FY17F FY18F

Tea and Coffee Revenue Forecasts(KES m)

Tea sales Coffee sales


13

Valuation Summary

Financials Summary Income statement (KES m) FY13 FY14 FY15 FY16E FY17F FY18F 1 yr %ch 3 yr CAGR%

Revenue 2,817 2,763 2,786 2,857 3,087 3,300 2.5% 5.8%

Gross profit 773 685 733 757 815 873 3.2% 6.0%

Operating profit 277 85 147 157 167 180 7.2% 7.1%

Finance cost/income 14 (26) 75 44 49 52 -40.5% -11.4%

Profit before tax 158 62 1,039 79 121 108 -92.4% -53.0%

Taxation (67) (16) 62 (24) (36) (32)

Profit after tax 92 45 1,101 55 85 76 -95.0% -59.1%

No of shares 228 228 228 228 228 228

EPS 0.54 0.10 4.27 0.32 0.38 0.40

DPS 0.25 0.25 1.25 0.25 0.25 0.25

Balance sheet (KES m) FY13 FY14 FY15 FY16E FY17F FY18F 1 yr %ch 3 yr CAGR%

Property Plant and Equipment 2,343 8,362 8,771 8,787 8,928 9,176 0.2% 1.5%

Biological Assets 5,291 5,241 5,077 5,048 5,020 4,991 -0.6% -0.6%

Other non-current assets 125 82 138 137 136 135 -0.5% -0.6%

Current assets 1,295 1,245 2,059 2,387 2,699 3,012 16.0% 13.5%

Total assets 9,054 14,929 16,045 16,360 16,782 17,315 2.0% 2.6%

Shareholder equity 6,383 12,120 13,559 13,382 13,553 13,507 -1.3% -0.1%

Non current liabilities 1,678 2,003 1,801 2,216 2,426 2,967 23.0% 18.1%

Current liabilities 731 535 468 545 587 624 16.5% 10.1%

Total equity and liabilities 9,054 14,929 16,045 16,360 16,782 17,315 2.0% 2.6%

Cash flow statement (KES m) FY13 FY14 FY15 FY16E FY17F FY18F 1 yr %ch 3 yr CAGR%

Operating cash flow 189 315 128 358 300 308 179.1% 33.9%

Net cash used in investing activities (191) (62) 1,077 5 6 6 -99.5% -81.8%

Free cash flow (2) 253 1,205 363 306 314 -69.9% -36.1%

Net financing cash flow 1 (188) (322) (64) (65) (65) -80.0% -41.2%

Net cash flow for the year (1) 64 883 298 241 249 -66.2% -34.4%

Opening cash balance 268 275 326 1,210 1,508 1,749 271.3% 75.1%

Closing cash balance 275 326 1,210 1,508 1,749 1,998 24.6% 18.2%

Source: Company Reports, ApexAfrica Estimates

Risks to valuation

Currency fluctuations

Adverse weather changes

Tea oversupply in global

markets due to a surge in Sri

-Lanka and China’s tea pro-

duction

Illiquidity at the bourse

Top Ten Shareholders % shareholding

Legend Investments Limited 41.84%

Yana Towers Limited 12.60%

East African Batteries Limited 9.94%

Gulamali Ismail 8.42%

Gidjoy Investments Limited 2.73%

Karim Jamal 2.01%

Bid Plantations Limited 1.10%

Shardaben Vithaldas Morjaria 0.93%

Joseph Schwartzman 0.86%

Jubilee Insurance Company 0.65%

Source: Sasini Annual Report

Source: Company Reports

EV/EBITDA METHOD______________ _________________

EBITDA 336.34

Weighted EV/EBITDA 9.23

EV 3,104

Net Debt 0

Market Cap 4,853

Fair Value 21.30

ASSET BASED METHOD WEIGHTS .

BVPS 56.6

Company P/B average 0.4 90.0%

Industrial comparatives average 0.8 10.0%

Weighted sum 0.4

Fair Value 25.15 .

DCF VALUATION__________________________________

Sum of discounted free cash flows (KES m) 820.9

Terminal value (KES m) 2,296.6

Cumulative PV free cash flow (KES m) 3,117.5

Net cash (KES m) 1,210

Firm value (KES m) 4,327.6

Fair Value 19.00

Source: ApexAfrica Estimates

BLENDED FAIR VALUE ___ __________

EV/EBITDA 21.30

Asset Based Method 25.15

DCF Valuation 19.00

Fair Value 23.15

1.72

(0.30)

0.54 0.10

4.27

(1.00)

-

1.00

2.00

3.00

4.00

5.00 EPS


14

Kakuzi Limited

Recommendation: BUY

The Company

Kakuzi is a listed agricultural company on both the Nairobi Stock Exchange and the London

Stock Exchange. It is engaged in the cultivation of tea; growing, packing and selling of avoca-

dos; livestock farming; forestry, and the growing and processing of macadamia. It also has a joint

venture initiative with Del Monte, a world leader in the growing, canning and marketing of pine-

apples. The company is controlled by Camellia Plc (50.7%) incorporated in England; by virtue of

its interest in Bordure Limited (26.1%) incorporated in England and Lintak Investments Ltd

(24.6%) incorporated in Kenya.

Initiation of Coverage

We initiate coverage on Kakuzi with a BUY recommendation based on a Fair Value of KES

303.60, implying a 15.0% upside potential from the current market price of KES 265.00.

Kakuzi„s „Hass‟ avocado has managed to curve it a niche market in the EU where it exports

98.1% of its fruit year on year. Compared to the other LACs, Kakuzi also has the largest parcel

of land at 12,109 hectares with management having expressly stated that they are eyeing the real

estate option going forward. In addition, it has KES 4.2B worth of assets, KES 1.2B in cash; and

we believe it will remain unlevered in the medium term.

Positives

Owns an estimated 12,109 hectares of land, the largest among the listed agricultural compa-

nies.

The largest producer of avocado in East Africa, exporting approximately 45% of the total

volume from Kenya.

Ample cash, no leverage and a wealth of assets

Challenges

Revenues and earnings are vulnerable to external factors

Foreign exchange risks

Adverse competition from Peru and South Africa; top avocado exporters


Gross margin (%) 29.8 33.0 49.2 49.2 49.2 49.2

EBITDA margin (%) 11.7 9.2 27.3 26.7 26.4 26.1

Profit margin (%) 11.9 9.5 21.3 21.2 21.3 21.4

EPS (KES) 8.42 8.17 26.92 28.49 30.91 33.45

DPS (KES) 3.75 3.75 5.00 5.00 5.00 5.00

BVPS (KES) 148.2 52.3 175.7 209.2 245.1 283.6

P/E (x) 11.3 22.0 11.8 9.7 8.9 8.2

P/B (x) 0.6 1.2 1.8 1.3 1.1 1.0

EV/EBITDA (x) 5.9 16.4 7.4 5.6 4.9 4.2

ROE (%) 5.7 5.4 15.3 13.6 12.6 11.8

ROA (%) 4.6 4.4 12.6 11.5 10.9 10.4

Dividend yield (%) 3.9 2.1 1.6 1.8 1.8 1.8


Bloomberg Ticker : KKZI KN

Reuters Ticker: KUKZ.NR

Share Statistics

Recommendation Buy


Price (KES) 265.00

52-week range (KES ) 350.00-250.00

Issued shares (m) 19.6

Market cap (KES bn) 5, 194.0



Year end Dec

Float (% ) 18.06%



Price Return______________

Absolute Relative

3m -16.2% -4.9%

6m -16.8% 2.1%

12m -19.4% 1.7%

Price Trend

Source: NSE

60.00

80.00

100.00

120.00KKZI NSE-20


15

Investment case

Kakuzi owns an estimated 12,109 Hectares of land, the largest among the listed agricultur-

al companies. The net book value of its buildings, freehold land, dams and improvements as at

FY15 was KES 487.8M. This roughly translates to an average price per hectare of KES 40,282

of its land, albeit inclusive of the buildings dams and improvements. This shows its land is high-

ly undervalued, and would fetch a much better price as a real estate option.

The Group operates in two geographical areas in Kenya: Thika and Nandi Hills. Given its im-

mense land acreage; and the strategic location of the land near the capital, real estate develop-

ment is a viable option for the company which increases its value and could supplement its in-

come if the need arises. In line with our expectations, Kakuzi‟s board announced in the FY15

annual report that they are reviewing further development opportunities being cognizant of the

rapid infrastructure development in particular roads planned for areas close to Thika town which

when complete could open up diversified opportunities

It is a leading producer of Avocado in East Africa and the largest grower and exporter in

Kenya. Kenya and South Africa are one of the major exporters of African avocados, whose main

varieties are Hass, Fuerte and Pinkerton. Kakuzi produces the Hass variety of avocado, which is

in high demand in European Union (EU) markets. It is also the largest player on the Hass local

market, exporting approximately 45% of the total volume. Kenyan avocados sell in Europe at

roughly three times their domestic price, making the export opportunity extremely attractive.

This will continue giving Kakuzi a great competitive advantage over the other 5 LACs going

forward. It also leaves it largely unaffected by the demand-and-supply based market price vola-

tility common with tea and coffee.

Kakuzi has a lot of biological assets, sits on a healthy pile of cash and is unencumbered by

debt. The net book value of Kakuzi‟s PPE is KES 767M while its biological assets have a carry-

ing value is KES 2.2B. Both collectively account for 97.4% of its total assets. Kakuzi has the

highest ROA at 12.6%, compared to a peer average of 5.6%. This indicates the company is get-

ting an adequate return for its investments in both PPE and biological assets.

With a current ratio of 4.1, the current assets are sufficient enough to pay its liabilities and leave

enough cash to be paid out as dividend. As at FY15, Kakuzi had KES 1.2B (+20.7% y/y ) in cash

and cash equivalents, expected to increase steadily in the medium term (3yr CAGR of 19.2%),

which will support expansion projects and plans. Kakuzi is also unlevered, and we expect it to

maintain its debt policy in the medium term given the anticipated increase in both earnings and

cash with no information about new projects.

With a dividend yield lower than its peers, the dividend is still attractive. Kakuzi seems to

be shunning paying out high dividends and could be choosing to re-invest in itself for future

growth. In FY15, its DPS was KES 5.00 with a payout ratio of 18.6% after maintaining the DPS

at KES 3.75 since 2012. In FY16F, we expect a 5.8% y/y rise in earnings and a 24.1% y/y im-

provement in cash, which will be sufficient to maintain the dividend at KES 5.00.

Land Breakdown Hectares

Tea 959

Avocados 408

Macadamia nuts 480

Fresh Pineaple 64

Forestry 1,282

Cattle Bomas 2,511

Ranch Lands 5,294

Joint Pineapple Project 1,111

Total 12,109

Source: Kakuzi website

KES (M)

Source: Kakuzi Reports, ApexAfrica

Estimates


Estimates

5.00

3.75 3.75 3.75

5.00 5.00 5.00 5.00

-

1.00

2.00

3.00

4.00

5.00

6.00

DPS


16

Financial Outlook

Hass avocado to remain dominant in returns in the medium term. Kakuzi‟s principal operat-

ing segments currently consist of Avocados, Tea and Forestry. The avocado segment mainly

involves the growing, packing and marketing of Hass avocados and avocado revenues account

for the largest share of revenues at 72.5% (KES 1.8B) in FY15. We forecast an increase of 5.9%

y/y in FY16F based mainly on reports of a shortage in avocado supply in the EU which could

work in its favor given that it is the largest local producer.

Tea and forestry to continue with minimal contribution to profits. The Tea segment involves

the cultivation, manufacture and marketing of tea; with tea revenues as the second largest con-

tributors to revenues at 11.9% (KES 233M). However, Kakuzi stopped exporting tea in 2008 and

only sells it locally. Tea revenue had jumped 27.2% y/y in FY15 following increased production

due to improved weather. We expect it to improve by a paltry 1.6% y/y in FY16F considering the

consequent surge in supply and anticipated low prices. Forestry development, on the other hand,

is expected to improve by 7.5% y/y in FY16F (2015:+7.3% y/y) following the opening of a new

sales outlet in Central Kenya that has been increasing the timber sold.

We estimate a 3 year CAGR of 19.9% growth in the minority segments -The business activi-

ties of livestock, fresh pineapples, macadamia and joint projects are included under “all other

segments” as they collectively account for only 8.7% of Group sales. We expect macadamia

sales to improve by 15.0% y/y in F16F and to contribute majority of this growth in the medium

term. This is informed by the group‟s investment in a macadamia de-husking facility and a

cracking facility that was commissioned in July 2016. It is aimed at processing the nuts with

speed and efficiency to meet a rising export demand for the crop. The macadamia project is

aimed at adding to the existing Camellia Groups investments in Malawi and South Africa.

Costs to increase in FY16F on the back of increased labor wages - At least 11 tea factories in

Nandi County, where Kakuzi‟s tea estates are located, had been shut due to a tea workers' strike

over the implementation of salary increments. We therefore forecast an increase in employee

benefit expenses following instructions to tea companies to effect a 30% pay increase awarded to

the workers by the courts. Distribution costs are also expected to grow by 8.6% y/y in FY16F

due to persistent problem in port and shipping logistics of avocado especially to Southern France.

Assets to remain strong as it remains unlevered - We forecast that PPE will grow at a steady 3

year CAGR of 8.8% and the biological assets will grow at a lower 3 year CAGR of 7.2% mainly

due to decreases that are associated with harvests. With cash expected to grow at a 3 year CAGR

of 19.2%, Kakuzi is highly likely to remain unlevered in the medium term. Based on its fore-

casted earnings, Kakuzi will continue giving a tidy return on its assets (FY16F:11.5%; FY17F:

10.9%). With the macadamia de-husking and cracking facility having been completed this year,

we also expect the company to remain unlevered in the medium term in the absence of infor-

mation on any new capital intensive projects.

*All other segments comprise: Livestock,

fresh pineapples, macadamia, joint

projects

KES (M)


Estimates

-

500

1,000

1,500

2,000

2,500


Revenue Forecasts

Avocado revenue Tea revenues Forestry All other segments*

11.9%

72.5%

6.8%

8.7%

Tea Avocado Forestry All other segments*

Contributions to Revenue


17

Valuation Summary


Financial Summary Income statement (KES m) FY13 FY14 FY15 FY16F FY17F FY18F 1 yr ch% 3yr-CAGR%

Revenue 1,384 1,690 2,482 2,638 2,840 3,070 6.3% 7.3%

Gross profit 412 557 1,221 1,298 1,398 1,511 6.3% 7.3%


Finance cost/income 78 77 87 93 115 135 6.3% 15.8%

Profit before tax 239 233 764 798 865 936 4.4% 7.0%

Taxation (74) (73) (237) (239) (260) (281) 1.1%

Profit after tax 165 160 528 558 606 656 5.8% 7.5%

No of shares (M) 19.6 19.6 19.6 19.6 19.6 19.6 0.0%

EPS 8.42 8.17 26.92 28.49 30.91 33.45 5.8%

DPS 3.75 3.75 5.00 5.00 5.00 5.00 0.0%

Balance sheet (KES m) FY13 FY14 FY15 FY16F FY17F FY18F 1 yr ch% 3yr-CAGR%

Property Plant and Equipment 545 560 767 792 884 989 3.2% 8.8%

Biological Assets 1,906 2,028 2,184 2,345 2,517 2,689 7.4% 7.2%

Other non-current assets 96 88 74 60 47 33 -19.0% -23.6%

Current assets 1,171 1,181 1,530 1,835 2,112 2,428 19.9% 16.6%

Total assets 3,570 3,680 4,186 4,842 5,546 6,300 15.7% 14.6%

Shareholder equity 2,904 2,985 3,444 4,100 4,804 5,558 19.1% 17.3%

Non current liabilities 666 695 742 742 742 742 0.0% 0.0%



Cash flow statement (KES m) FY13 FY14 FY15 FY16F FY17F FY18F 1 yr ch% 3yr-CAGR%

Operating cash flow 458 493 874 821 892 974 -6.0% 3.7%

Net cash used in investing activities (378) (350) (599) (440) (545) (591) -26.6% -0.4%

Free cash flow 81 142 275 381 347 383 38.6% 11.7%

Net financing cash flow (74) (74) (74) (98) (98) (98) 33.3% 10.1%

Net cash flow for the year 7 69 202 283 249 285 40.5% 12.2%

Opening cash balance 898 905 974 1,175 1,459 1,708 20.7% 20.6%

Closing cash balance 905 974 1,175 1,459 1,708 1,993 24.1% 19.2%


Risks to Valuation



Avocado oversupply in

global markets due to

increased production in

South Africa and Peru


Top 10 shareholders %

John Kibunga Kimani 27.76%

Bordure Limited 26.06%

Lintak Investments Ltd 24.64%

Standard Chartered Nominees 1.73%

GH Kluge & Sons 1.22%

Kenyalogy.com Ltd 1.10%

CFC Stanbic Nominees Ltd 1.02%

HBSC Global Custody Nominee1.02%

Joe Barrage Wanjui 0.62%

John Okuna Ogango 0.53%

Source: Kakuzi Annual Reports

EV/EBITDA METHOD_________ P/E Method

EBITDA 749.9 EPS 30.91

Weighted EV/EBITDA 5.76 Weighted P/E 8.0

EV 4,063.9 Fair Value 247.45

Net Debt 0

Market Cap 5,781.7

Fair Value 295.00

ASSET BASED METHOD ________ ___WEIGHTS __

BVPS 245.1



Weighted sum 1.4

Fair Value 336.85_______________

DCF VALUATION__________________________________




Net cash (KES m) 1,175.4


Fair Value 219.30


P/E Method 247.45

EV/EBITDA 295.00


DCF Valuation 219.30

Fair Value 303.60


18

Williamson Tea Kenya

Recommendation: BUY

The company Williamson Tea has specialized in the cultivation, processing and sale of tea. It also engages in

property investment activities; and the sale and servicing of generators. The company‟s immedi-

ate holding company is Ngong Tea Holdings Limited (51.5%), incorporated in the UK. Its farms

are located in the Kenyan highlands of Tinderet, Kapchorua, Kaimosi and Changoi; and it owns

39.6% of Kapchorua Tea Company, also listed at the NSE.

Initiation of coverage We initiate coverage on Williamson with a BUY recommendation based on a Fair Value of KES

235.65, implying 28.8% upside potential from the current market price of KES 183.00. William-

son has specialized in the production and sale of tea and is maximizing its sales having entered

into a contract with Unilever, and is also looking to produce more orthodox teas in a bid expand

to new markets. The company is known for its generous dividend policy and its dividend yield at

10.9% is the highest among the LACs. It has a comfortable level of debt, with a debt to equity

ratio of 3.0% and this, coupled with a forecasted uptick in earnings (+1.7% y/y) and its strong

cash reserves (FY16: KES 1.2B) could translate to more cash being paid back as dividends.

Positives

Owns an estimated 2,127 Hectares of land

High dividend yield of 10.9%, one of the best in the market .

Long term contract with the world‟s most dominant buyer, Unilever

Low gearing coupled with strong assets that preserve shareholder wealth

Challenges

Vulnerability of earnings to external factors


Competition from Sri-Lanka and India; top tea producers


Land (Ha) 2,129 2,112 2,127 2,127 2,127 2,127

Gross margin (%) 27.6 18.6 29.3 29.4 29.5 29.6

EBITDA margin (%) 28.2 -14.1 25.3 25.1 24.6 24.3

Profit margin (%) 21.1 -8.8 21.8 21.8 21.8 22.1

EPS (KES) 40.68 -11.88 40.30 41.05 44.26 47.63

DPS (KES) 7.00 40.00 20.00 20.00 20.00 20.00

BVPS (KES) 727.1 730.3 385.5 408.2 442.4 472.6

P/E (x) 3.6 -16.2 4.5 4.4 4.1 3.8

P/B (x) 0.2 0.3 0.5 0.4 0.4 0.4

EV/EBITDA (x) 0.2 -2.5 2.5 2.2 1.9 1.6

ROE (%) 11.2 -3.3 10.5 10.1 10.0 10.1

ROA (%) 8.7 -2.7 8.0 7.7 7.8 7.8

Dividend yield (%) 4.8 20.8 10.9 11.1 11.1 11.1


Bloomberg Ticker : GWKL KN

Reuters Ticker: WTK.NR

Share Statistics

Recommendation Buy


Price (KES) 183.00

52-week range (KES ) 162.00-410.00


Market cap (KES bn) 3,204.8



Year end March

Float (% ) 62.7%



Price Return

Absolute Relative

3m -8.0% -1.8%

6m -0.7% 16.9%

12m 4.3% 24.1%

Price Trend

Source: NSE

50.00

80.00

110.00

140.00

170.00

200.00

230.00

260.00

Oct-

15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Jun

-16

Jul-

16

Au

g-1

6

Se

p-1

6

Oct-

16

WTK NSE20


19

Investment case

Williamson owns an estimated 2,127 Hectares of land. The company‟s land, building and ma-

chinery were last revalued in 2015 on an open market basis. According to the FY16 annual re-

port, the net book value of the land , including buildings, is KES 1.1B indicating a price per hec-

tare of land (including buildings) of KES 536,005. This could also be an undervaluation of its

land. Williamson tea uses majority of its land and buildings to secure its loans (2016:KES 206M

asset finance loan) and is in a prime position to diversify its income streams with its strategically

placed huge chunks of land that could be developed into real estate developments.

With a dividend yield of 10.9% the company is a good dividend play. Williamson employs a

rather generous dividend payout policy. In FY12, a special dividend of KES 50.00 (total divi-

dend KES 57.50) was paid after it sold Williamson House to Lion of Kenya Insurance Company,

in which it holds a 50% stake. In 2015, the DPS was KES 40.00 funded from reserves which had

totaled to KES 5.5B. The company also declared a bonus of 1 share for every 1 share held. The

current DPS is KES 20.00 which was also paid out of its KES 5.9B retained earnings. This

makes the dividend yield at 10.9%, one of the highest in the market. The historicals point to a

dividend hike after every 2 years and there is the possibility of another in FY18.

Williamson entered into a long term contract with the world’s most dominant buyer, Unile-

ver. In addition to sales at the Mombasa Auction and direct exports, Unilever‟s contract allows

the company to mitigate against violent price fluctuations. In the contract, tea prices are set at

prevailing market rates, which protects Williamson whenever they fall sharply when supply in-

creases, as was in the case in FY16. The contract, entered into at the beginning of FY16 contrib-

uted to a 30.7% y/y boost in revenues (2014: -26.2% y/y) to KES 3.4B. Contrasted to the other

LACs, Williamson‟s sales diversification gives it an edge as it guarantees a steady stream of rev-

enues at any given season.

The potential of green tea and orthodox production. Williamson has indicated its intentions to

invest more in green tea and orthodox production. It is currently seeking new and reliable mar-

kets; and to expand its green tea reach by investigating new customer requirements and exploring

methods of providing those customers with specialized varieties and type of tea. Without a

breakdown of how much the orthodox teas contribute to the total revenues, it is safe to assume

that if successful, this could boost its sales going forward as they fetch higher prices in the inter-

national market.

Strong cash reserves

As at 31st March 2016, Williamson had KES 1.2B in cash (+25.4% y/y) and remains well fund-

ed for its future operations. It has a comfortable level of debt, with a debt to equity ratio of 3.0%

and a debt to capital ratio of 2.9%. Its capital expenditure remains within its means and has been

reducing in the last 2 years (2014: -21.5% y/y; 2015 -51.1% y/y). With minimal debt, stable

capex and no major working capital requirements, we see a large portion of free cash flows being

returned to shareholders in the form of dividends.




Historical EPS and DPS

2,223

2,142

2,151

2,129

2,112

2,127

2,050

2,100

2,150

2,200

2,250

2011 2012 2013 2014 2015 2016

Land (Ha)

-20

-10

0

10

20

30

40

50

60

70

FY12 FY13 FY14 FY15 FY16

EPS DPS

-

1,000

2,000

3,000

4,000

5,000


Revenue Forecasts(KES m)

Tea revenues Property Generator trading


20

Financial Outlook

Tea revenues to jump 1.7% y/y in FY17F as revenues from properties and generator trad-

ing remain flat. The sales of tea contributes the largest chunk of Williamson‟s revenues at

98.6% while investments in property and the sale and servicing of generators contribute only

0.04% and 1.4% respectively. We expect tea revenues to increase by a measly 1.7% y/y in

FY17F as the expected boost in production due to satisfactory weather will be offset by an ex-

pected 4.1% decline in tea prices as forecasted by the World Bank. In the absence of clear plans

of efforts to boost the two other revenue streams, we assumed they will continue contributing the

same to the overall profits. Overall, total revenues are expected to grow at a 3 year CAGR of

5.2% considering the unavoidable fluctuations in production.

EBITDA margin to remain under moderate pressure. Management‟s insistence on prudent

financial management notwithstanding, operating costs had surged 15.3% y/y in FY16 following

a 13.9% y/y increase in administration expenses coupled with a 15.8% y/y increase in distribu-

tion costs. We forecast a 4.1% y/y leap in operating costs in FY17F and 8.0% y/y in FY18F fol-

lowing persistent industrial action due to wage increase demands, coupled with the usual costs of

essential inputs like electricity and fertilizers which the company grapples with. The surge in

costs will strain the EBITDA margin in the medium term. Management voiced its intentions to

invest in more solar power and other renewable energy schemes in a bid to control the costs.

Net finance income to improve steadily in the medium term. In light of the Banking Act

(Amendment), 2016, which stipulates the minimum interest rate to be accorded to interest earn-

ing deposits we anticipate an increase in interest income given Williamson‟s strong cash posi-

tion. The company also uses it vast land and buildings to secure its loans, a bargaining chip that

could increase highly favorable among lenders. Consequently we expect finance costs to drop by

33.7 % y/y to KES 13.1M in FY17F (3 year CAGR of –39.5%). On the other hand, we expect

the interest income to increase by 17.6% y/y to KES in FY17F (3 year CAGR of 18.4%.) which

will support a 25.6% y/y increase in the net finance income to KES 82.3M (3 year CAGR of

26.1%).

Assets to grow steadily as corporate debt remains at a comfortable level. Williamson‟s bal-

ance sheet is in reasonably good shape. The company saw its borrowings reduce by 47.5% y/y to

KES 140.0M in FY16 with the net debt/equity ratio at just 3.0% compared to 3.5% in FY15. We

do not expect Williamson to take up any capital intensive projects hence we could see the debt

reduce further in the medium term and we expect the debt/equity ratio fall 250bps to 0.5% in

FY19F.

As at FY16, Williamson had PPE with a NBV of KES 2.0B while its biological assets had a car-

rying value is KES 2.8B, which collectively account for 51.5% of its total assets. Considering the

decline in capex in the last two years and the decreases associated with biological assets, we ex-

pect a 3 year CAGR of 5.5% for both. We also anticipate a 11.3% y/y in cash and cash equiva-

lents in FY17F following a 2.9% y/y boost in PBT coupled with an improvement in working

capital efficiency. Considering Williamson‟s aggressive payout policy, this cash is bound to be

returned to shareholders in form of dividends.


Source: Williamson, Apex Africa Esti-

mates

Contributions to Revenue

98.6%

0.04%1.4%

Tea Property Generator trading

-

1,000

2,000

3,000

4,000

5,000

6,000

FY15 FY16 FY17FFY18F FY19F

PPE vs Biological Assets

PPE Biological Assets


21

Risks to valuation




markets due to a surge in

Sri-Lanka and China’s

tea production

Illiquidity at the NSE

Top Shareholders %

Ngong tea Holdings Ltd 51.5%

Upstream Investments Ltd 3.7%

Kirtesh P. Shah 3.0%

Amarjeet Patel & B.C Patel 2.6%

Galot International Ltd 2.6%


AAKS Nominees Ltd 1.9%


Rakesh Prakash Gadani 1.0%

Phoenix of E.A Assurance 1.0%

Source: Williamson Tea Limited

Valuation Summary


Financial Summary Income statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr %ch CAGR%

Revenue 3,512 2,590 3,386 3,445 3,720 3,943 1.7% 5.2%

Gross profit 969 481 991 1,013 1,097 1,167 2.2% 5.6%


Finance cost/income 52 71 82 103 127 165 25.6% 26.1%

Profit before tax 1,041 (296) 940 968 1,043 1,123 2.9% 6.1%

Taxation (300) 68 (202) (216) (232) (250) 6.6% 7.3%

Profit after tax 741 (228) 738 752 811 872 1.9% 5.7%

No of shares 8.8 8.8 17.5 17.5 17.5 17.5

EPS 40.68 (11.88) 40.30 41.05 44.26 47.63

DPS 7.00 40.00 20.00 20.00 20.00 20.00

Balance sheet (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr %ch CAGR%

Property Plant and Equipment 1,794 2,182 2,010 2,042 2,090 2,143 1.6% 2.2%

Biological Assets 3,019 2,574 2,775 2,979 3,185 3,393 7.4% 6.9%

Other non-current assets 1,006 1,053 1,152 1,240 1,336 1,434 7.7% 7.6%

Current assets 2,730 2,749 3,348 3,533 3,824 4,173 5.5% 7.6%

Total assets 8,549 8,559 9,285 9,794 10,434 11,143 5.5% 6.3%


Non current liabilities 1,636 1,655 1,633 1,768 1,751 1,858 8.3% 4.4%

Current liabilities 333 320 682 625 648 682 -8.4% 0.0%


Cash flow statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr %ch CAGR%

Operating cash flow 273 34 766 852 815 952 11.2% 7.5%

Net cash used in investing activities (258) (226) (115) (288) (310) (327) 151.6% 41.9%

Free cash flow 15 (192) 652 564 505 625 -13.5% -1.4%

Net financing cash flow 99 (30) (404) (421) (386) (415) 4.4% 0.9%

Net cash flow for the year 114 (222) 248 142 119 210 -42.7% -5.5%

Opening cash balance 1,098 1,212 993 1,242 1,384 1,503 25.0% 14.8%

Closing cash balance 1,212 990 1,242 1,384 1,503 1,713 11.5% 11.3%


EV/EBITDA METHOD_________ P/E Method

EBITDA 862.4 EPS 40.98

Weighted EV/EBITDA 3.23 Weighted P/E 4.9

EV 2,786.1 Fair Value 201.80

Net Debt 0

Market Cap 4,310.0

Fair Value 246.10

ASSET BASED METHOD ______ _WEIGHTS__

BVPS 408.2



Weighted sum 0.5

Fair Value 208.70___________

DCF VALUATION__________________________________




Net cash (KES m) 1,035.9


Fair Value 263.55


P/E Method 201.80

EV/EBITDA 246.10


DCF Valuation 263.55

Fair Value 235.65


22

Kapchorua Tea Limited

Recommendation: HOLD

The Company

Kapchorua Tea is engaged in the cultivation, processing and sale of tea and is majority owned by

Williamson Tea Company (39.6%). The Company's ultimate holding company Ngong Tea Hold-

ings Limited, incorporated in the UK both directly (24.0%) and through its control of Williamson

Tea. The Company has 625 hectares under tea production.

Initiation of Coverage

We initiate coverage on Kapchorua with a HOLD recommendation based on a Fair Value of

KES 86.70, implying a minimal 3.0% upside potential from the current market price of KES

85.00. Majority of Kapchorua‟s projects, investments and activities shadow those of Williamson

Tea. Like its sister company it specializes solely on the production and sale of tea and it also

entered into a contract with Unilever in a bid to diversify its sales. Kapchorua fails to divulge

details of its land on its annual reports hence, it is impossible to assess its suitability for real es-

tate. However, at 6.4%, Kapchorua‟s dividend yield is still the second highest among the LACs

and its assets are sufficient to support its growth in the medium term. Kapchorua and Williamson

are the best in terms of dividend among the LACs hence the share is worth holding in the medi-

um term.

Positives

High dividend yield at 6.4% in FY16.

Long term contract with the world‟s most dominant buyer, Unilever

Kapchorua is unlevered and has sufficient assets to support its growth

Positive influence from stronger sister company Williamson

Challenges



Competition from Sri-Lanka and India; top tea producers


Land (Ha) 633 628 625 628 628 628

Gross margin (%) 17.8 14.8 23.7 24.0 25.0 25.0

EBITDA margin (%) 14.9 -2.3 27.4 27.7 27.6 26.9

Profit margin (%) 10.6 -2.1 19.4 19.7 19.6 19.1

EPS (KES) 32.21 -3.60 37.05 30.47 32.70 33.79

DPS (KES) 5.00 5.00 6.00 6.00 6.00 7.00

BVPS (KES) 352.9 225.8 209.9 264.8 316.9 370.4

P/E (x) 2.2 -18.0 2.5 2.5 2.3 2.2

P/B (x) 0.2 0.3 0.4 0.3 0.2 0.2

EV/EBITDA (x) 0.8 -14.9 1.9 1.1 0.7 0.4

ROE (%) 9.1 -1.6 14.3 11.5 10.3 9.1

ROA (%) 6.5 -1.1 10.1 8.7 8.1 7.3

Dividend yield (%) 6.9 7.7 6.4 6.6 7.1 7.3


Bloomberg Ticker : KPTC .KN

Reuters Ticker: KAPC.NR

Share Statistics

Recommendation Hold


Price (KES) 85.00

52-week range (KES ) 71.50-240.00


Market cap (KES m) 657.2


Land size (Ha) 625

Year end March

Av daily trading value(USD) 2.6

Price Return

Absolute Relative

3m -16.7% -6.9%

6m -20.2% -2.7%

12m -62.1% -42.3%

Price Trend

Source: NSE

20.00

40.00

60.00

80.00

100.00

120.00

140.00 KPTC NSE-20


23

Investment Case Kapchorua owns 625 hectares of land under tea production- Kapchorua has completely omit-

ted details of its land in its financial statements. We therefore lack the value of the hectares under

tea, and a basis for assessing value of the company‟s land holding. Regardless, its still has the

option of diversifying into real estate to supplement its earnings.

Attractive dividend yield of 6.4%- In FY15, Kapchorua‟s accumulated retained earnings stood

at KES 1.2B, which facilitated the issuing of a dividend of KES 5.00 per share placing its divi-

dend yield at 7.7%. It also declared a bonus of 1 share for every 1 share held. In FY16 it issued a

dividend of KES 6.00 placing the dividend yield at 6.4% the second in the market after William-

son‟s 10.9%. We expect it to maintain the KES 7.00 DPS in FY17F following an expected

49.1% leap in earnings to KES 349.5M and consequently, an expected 11.7% improvement in

reserves to KES 1.6B. The FY17F dividend yield at 6.3% is highly attractive also making the

company a suitable dividend play.

Long term contract with the world’s most dominant buyer, Unilever. Like Williamson, Kap-

chorua also entered into a sales contract with Unilever, to mitigate against violent price fluctua-

tions. The contract, entered into at the beginning of FY16 contributed to a 12.6% y/y boost in

revenues (2014: -9.9%% y/y) to KES 1.2B. Sales to Unilever, in addition to sales at the Momba-

sa Auction and direct exports will guarantee Kapchorua a steady stream of income during times

of low prices both locally and internationally, which will support a steady growth in earnings (3

year CAGR of 5.2%)

Its assets are sufficient enough to support its growth going forward. As at the end of FY16,

Kapchorua had PPE with a net book value of KES 581M and biological assets with a carrying

value of KES 952M. Albeit less than those of its peers, the two make up 98.4% of its total assets

and with a ROaA of 10.1% in FY16, it is evident they are worth the investment. Its current ratio

of 4.2% also points to a healthy balance sheet. Kakuzi is unlevered, a policy we expect it to

maintain in the medium term.

Financial outlook; Not so rosy Tea prices to improve by a measly 1.7% y/y in FY17F. Following an anticipated 6.1% y/y

boost in tea production on the back of good weather, and an expected 4.1% y/y decline in tea

prices as forecasted by the World Bank we expect a slight 1.7% y/y improvement in tea sales, the

main revenue stream for Kapchorua. Its timber operations remain largely unprofitable contrib-

uting only 0.04% in FY16 (KES 0.4M) to total revenues, which we expect to maintain in the

medium term.

We expect the PBT to improve by 3.2% y/y to KES 346.9M in FY17F as operating costs

remain within its means. We expect management‟s commitment to cost containment to pay off

in FY17F with an expected 1.3% y/y decline in operating costs to KES 120.7M (FY16, +13.2%

y/y). The EDITDA is expected to see a 2.9% y/y to KES 331.4 in FY17F due to a slight 1.7% y/y

improvement in sales and the dip in operating costs. The PBT, on the other hand, is expected to

grow by 3.2% y/y to KES 346.9M and the PAT by a slight 3.6% y/y to KES 242.8M.


Source: Kapchorua Annual Reports,

ApexAfrica Estimates

Source: Kapchorua Annual Reports ,


1,192 1,074

1,209 1,229 1,328 1,408

0.1 -

0.4 0.4 0.4 0.4

100%

100%


Revenue Forecasts (KES m)

Tea sales Timber sales

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

PPE & Biological Assets (KESm)

PPE Biological Assets

8.75

7.50 7.50

5.00 5.00 6.00

0

2

4

6

8

10

FY11 FY12 FY13 FY14 FY15 FY16

DPS


24

Valuation Summary


Financial Summary Income statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr ch 3 yr CAGR%

Revenue 1,192 1,074 1,209 1,230 1,328 1,408 1.7% 5.2%

Gross profit 212 159 287 295 332 352 2.8% 7.0%


Finance cost/income 4.3 (5.1) 4.5 5.8 5.7 5.7 27.1% 7.9%

Profit before tax 182 (30) 336 347 372 384 3.2% 4.6%

Taxation (56) 7 (102) 81 81 81

Profit after tax 126 (23) 234 243 260 269 3.6% 4.7%

No of shares 3.9 6.3 7.8 7.8 7.8 7.8

EPS 32.21 (3.60) 37.05 44.66 44.78 44.92

DPS 5.00 5.00 6.00 6.00 6.00 7.00

Balance sheet (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr ch 3 yr CAGR%


Biological Assets 889 796 952 1,104 1,258 1,412 16.0% 14.1%

Other non-current assets 22 23 23 23 23 23 0.0% 0.0%

Current assets 622 644 888 1,005 1,139 1,277 13.2% 12.9%

Total assets 1,929 1,983 2,329 2,636 3,000 3,379 13.2% 13.2%


Non current liabilities 427 441 476 685 961 1,341 43.8% 41.2%

Current liabilities 122 114 210 170 182 192 -19.3% -2.9%


Cash flow statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr %ch 3 yr CAGR%

Operating cash flow (101) (11) 147 202 198 238 37.7% 17.5%

Net cash used in investing activities (46) (58) (53) (56) (62) (66) 5.2% 7.4%

Free cash flow (54) 47 200 258 260 304 29.0% 15.0%

Net financing cash flow (29) (19) (20) (39) (41) (43) 91.5% 28.5%

Net cash flow for the year (176) (88) 73 107 95 129 46.4% 20.7%

Opening cash balance 311 135 47 120 228 323 156.5% 90.2%

Closing cash balance 135 47 120 228 323 451 89.3% 55.5%


Risks to valuation




markets due to a surge in

Sri-Lanka and China’s

tea production



Top 10 shareholders % shareholding

Williamson Tea Kenya 39.6%

Ngong Tea Holdings 24.0%

Shawmut Limited 12.5%

Satchu Aly-Khan 1.6%

Eric Charles Simons 1.5%

Minesh Mulchand 1.1%

Kanaiyalal Mansukhlal 1.1%

Ronald Carlile Buxton 0.9%

Bijal Mulchand Shah 0.8%

Dr. Minesh M Shah 0.8%

Source: Annual Reports

P/E METHOD______________________________________

EPS 30.5

Weighted PE 2.6

Fair Value 78.65

ASSET BASED METHOD _____________ WEIGHTS__

BVPS 264.8



Weighted sum 0.4

Fair Value 109.90_____________

EV/EBITDA METHOD______________ _________________

EBITDA 341.1

Weighted EV/EBITDA 1.53

EV 521.4

Net Debt 0

Market Cap 748.9

Fair Value 95.70


P/E Method 78.65

EV/EBITDA 95.70


Fair Value 86.70

29.57

12.33

28.42

19.92

(3.60)

37.05

-10

0

10

20

30

40

FY11 FY12 FY13 FY14 FY15 FY16

EPS


25

Eaagads Limited

Recommendation: HOLD The company Eaagads is engaged in the growing, blending, and selling of coffee products both locally and in

the international market. The company has 429 hectares in Central Kenya where it grows its cof-

fee. It is controlled by Kofinaf Company Limited, incorporated and domiciled in Kenya, but its

ultimate holding Company is East African Real Estate Holdings Limited (previously RG African

Land Limited), which is incorporated and domiciled in Bermuda.

Initiation of coverage We initiate coverage on Eaagads with a HOLD recommendation based on a Fair Value of KES

19.35, implying a meager 2.9% upside potential from the current market price of KES 18.80.

Eaagads‟ revenues totaled KES 126M in FY16 (+24.6% y/y) which failed to trickle down to its

net income (FY16: KES 0.4M). In addition to a low EPS of 0.01; and both an ROA and ROE of

0.1% the company has also not issued a dividend in the last 5 years. Its 429 hectares of land,

however, is valued at approximately KES 3.9B which also provides it with the alluring option of

real estate development should poor earnings from its coffee make the business model unsustain-

able.

Positives

Cheap share on a net asset value basis

429 hectares of land that provide it with the real estate option

Challenges



Competition from Brazil and Vietnam, top coffee producers

Key Ratios FY14 FY15 FY16 FY17F FY18F FY19F Gross margin (%) 8.1 26.5 29.3 30.1 30.8 31.6

EBITDA margin (%) 61.4 9.2 7.7 13.2 13.7 14.4

Profit margin (%) -43.6 20.8 0.4 9.2 9.6 10.1

EPS (KES) -1.30 0.66 0.01 0.45 0.49 0.57

DPS (KES) - - - - - -

BVPS (KES) 14.6 20.4 21.5 21.9 22.3 22.80

P/E (x) -17.1 25.8 1719.1 42.2 38.0 33.1

P/B (x) 1.5 0.8 1.2 0.9 0.8 0.8

EV/EBITDA (x) -12.1 -58.4 84.5 36.4 32.8 29.31

ROE (%) -8.9 3.2 0.1 1.8 1.9 2.1

ROA (%) -7.6 2.9 0.1 1.5 1.5 1.6

Source: Company, ApexAfrica estimates

Bloomberg Ticker : EGDL.KN

Reuters Ticker: EGAD NR

Share Statistics

Recommendation Hold


Price (KES) 18.80

52-week range (KES ) 25.00-14.00

Issued shares (m) 32.1M

Market cap (KES m) 604.6


Land size (Ha) 429

Year end March

Float (% ) 9.8%

Av daily trading value (USD) 1.9

Price Return

Absolute Relative

3m -16.7% -5.4%

6m -26.5% -7.6%

12m -33.0% -11.9%

Price Trend

Source: NSE

60.00

70.00

80.00

90.00

100.00

EGDL NSE-20


26

Investment case

In FY16, Eaagads earned KES 126M from its coffee with the PAT at a paltry KES 0.4M (profit

margin of 0.4%). It has a P/B of 1.2x compared to a peer average of 0.8x implying its is overval-

ued compared to its peers. Compared to a peer average of 0.5x, it also has low fixed asset turno-

ver of 0.2x pointing to a low return on investments in PPE, largely due to low revenues from

coffee, its only revenue stream. At KES 0.01, the company‟s EPS is also low and the directors

have not declared a dividend in the last five financial years. Moreover, compared to the other

companies we have covered, it owns the least amount of land with 429 hectares under coffee.

However, Eaagads‟ NAV/Share of KES 21.52 is much higher than its current market price of

KES 18.80. Moreover, like all other LACs, its 429 hectares of land under coffee, valued at KES

3.9B in 2014, provided it with the alluring option of real estate development.

Financial outlook

We expect a 6.0% y/y increase in revenues to KES 133.6M in FY17F-The world bank fore-

casts international coffee prices to decline 6.5% y/y. Coffee prices at the NCE, however, have

improved by 21.6% YTD and we expect them to maintain the upward trend following reports of

low supply of coffee in the NCE due to low supply from Eastern Kenya predicated on a cold

spell that has persisted for months reducing harvests. Having put the two factors into considera-

tion, we forecast a 6.0% y/y increase in revenues to KES 134.0M in FY17F. Costs of sales are

expected to grow at a much slower pace of 4.9% y/y supporting a 80bps y/y gain on the gross

profit margin to 30.1%. This, coupled with a 15.0% y/y drop in administration expenses is ex-

pected to improve the EBITDA margin by 550bps y/y to 13.2%; leading to an 81.9% y/y growth

in the PBT.

Source: Company, ApexAfrica Research

Eaagads’ balance sheet is not as healthy as its peers. As at 31st March 2016, Eaagads had

KES 1.0M in cash (-68.1% y/y) and this is expected to surge 103.6% y/y to KES 2.1M, attributa-

ble to better working capital management and a 63.1% y/y improvement in cash generated from

operations to KES 21.8M (FY16: 421.3% y/y). The cash, however, remains insufficient for divi-

dend payments.

Its PPE and biological assets make up 96.9% of its total assets with a minimal ROaA of 0.1%,

which we expect to improve to 1.6% in FY17F due to the improvement in earnings. In addition,

as at FY16 it had a ROE of 1.0% expected to improve to 1.8% in FY17. Eaagads is also un-

levered, and we expect this to remain the case in the medium term because it has not indicated

plans of expansion.

Source: Eaagads Annual Reports,


Source: Eaagads Annual Reports,


95.6

101.5

126.0

160.3 170.4

187.5

-

40.0

80.0

120.0

160.0

200.0


Revenues (KES M)

(41.7)

21.2

0.5

14.3 15.9 18.3

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0


PAT (KES M)

-43.6%

20.8%0.4% 9.2% 9.6% 10.1%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%


Profit margin


27

Valuation Summary

Financial Summary

Income statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr ch 3 yr CAGR%

Revenue 96 101 126 134 142 150 6.0% 6.0%

Gross profit 8 27 37 40 44 47 8.7% 8.6%

Operating profit (24) (6) 6 13 15 17 144.1% 46.6%

Profit before tax (59) (9) 10 18 19 22 81.9% 30.6%

Taxation 17 30 (9) (5) (6) (6)

Profit after tax (42) 21 0.5 12 14 15 2486.7% 216.5%

No of shares 32.2 32.2 32.2 32.2 32.2 32.2

EPS (1.30) 0.66 0.01 0.45 0.49 0.57

DPS - - - - - -

Balance sheet (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr ch 3 yr CAGR%


Biological Assets 93 90 93 97 100 104 3.7% 3.6%

Other non-current assets 0.2 0.2 0.2 0.2 0.2 0.2 0.0% 0.0%

Current assets 126 133 116 121 127 133 4.3% 4.6%

Total assets 547 733 761 822 883 945 8.0% 7.5%

Shareholder equity 468 655 692 704 718 733 1.8% 1.9%

Non current liabilities 41 29 49 49 50 50 0.2% 0.7%


Total equity and liabilities 547 733 761 822 883 945 8.0% 7.5%

Cash flow statement (KES m) FY14 FY15 FY16 FY17F FY18F FY19F 1 yr ch 3 yr CAGR%

Cash generated by operations (15) 3 13 22 24 27 63.1% 26.6%

Working capital (Increase)/Decrease 15.4 0.2 (15.5) (15.5) (15.6) (15.7) -0.4% 0.4%

Operating cash flow (0.1) 2.7 (2.1) 6.4 8.7 11.4 -398.8% -275.0%

Net cash flow for the year (0.1) 2.7 (2.1) 1.1 1.3 2.4 -150.6% -204.5%

Opening cash balance 0.5 0.5 3.2 1.0 2.1 3.4 -68.1% 2.1%

Closing cash balance 0.4 3.2 1.0 2.1 3.4 5.8 103.6% 78.7%


Risks to valuation


Adverse weather

changes

Oversupply in global

markets due to a surge

in Brazil and Vietnam,

top coffee producers


Top Shareholders %

Kofinaf Company Limited 61.7%

Mrs Arbella Illingworth 10.40%

Vivienne Rogerson 10.30%

BID Plantations Ltd 2.50%

Mr. Minesh Shah 1.40%

Bijal Shah 0.80%

Best Investments Ltd 0.70%

Alimohamed Adam 0.60%

Mrs. Savitaben Shah 0.50%

Dr. Minesh Shah 0.40%

Source: Eaagads Annual Reports

P/E METHOD .

EPS 0.45

Weighted P/E 35.99

Fair Value 16.00

ASSET BASED METHOD ___________ __ WEIGHTS

BVPS 21.90



Weighted sum 1.1

Fair Value 25.10_____________


P/E Method 16.00


Fair Value 19.35



28

Appendix

Investment ratings Buy: A total return is anticipated in excess of the market's long-term historic annual rate

(approximately 10%). Total return expectations should be higher for stocks that possess greater risk.

Hold: Hold the shares with neither a materially positive total return nor a materially negative total

return anticipated.

Sell: Stock should be sold as materially negative total return is anticipated.

Disclaimer ApexAfrica and its parent company Axys Group seek to do business with companies covered in their research reports.

Consequently, a conflict of interest may arise that could affect the objectivity of this report. This document should only be

considered a single factor used by investors in making their investment decisions. The reader should independently evalu-

ate the investment risks and is solely responsible for their investment decisions. The opinions and information portrayed in

this report may change without prior notice to investors.

This publication may not be distributed to the public media or quoted or used by the public media without prior and express

written consent of ApexAfrica or Axys Group.

This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any security. Whilst

every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is

given and no responsibility or liability is accepted by Apex Africa or any of its employees as to the accuracy of the infor-

mation contained and opinions expressed in this report.

ApexAfrica Capital Ltd

A The Riverfront, 1st Floor, Prof. David Wasawo Drive, Off Riverside Drive | P.O. Box 43676-

00100 | Nairobi | Kenya |

T: +254-20-2226440 | Fax: +254-20-2319092 | Cell: +254-723-420204| W :

www.apexafrica.com

http://www.apexafrica.com

the agricultural sector report - apex africa · 2018-08-27 · swot analysis (pg. 9) an in-depth...

Documents