Ububele loses appetite

Recently released interim results to end-February present a most compelling case for Ububele to focus exclusively on its high-margin farming services businesses (fertilisers, pesticides and herbicides).

In fact, there's a good chance that the handful of new "institutional" shareholders referred to by CEO Bertie Cloete at a recent investment conference will be urging management to take decisive action to sort out the unpalatable returns from the food segment before the close of the full financial year at the end of August.

Things are simply not stacking up in the food business, where revenue of R67m was whittled down to a loss of R1,6m after another disappointing performance from Just Fruit & Veg.

Just Fruit & Veg has been impaired, and Cloete says Ububele has already received offers for the business from larger players in the food sector. During the interim period another food business, So Gourmet, was liquidated, while the remainder of the Linktrade Foods client contract was written off to zero.

Ububele has indicated a willingness to expand its ice cream making facilities by opening plants in Durban and Cape Town (to support the central plant in Gauteng) in a bid to secure retail business.

But surely this expansion will draw a chilly response from Ububele's larger shareholders, which by now should have seen the folly of being a small supplier to the tough trading retail sector with recent developments at Just Fruit & Veg.

The really chunky bit that remains in the food segment is the airport catering contract with Air Namibia in Windhoek, which has promised to be a profitable arrangement now that Ububele has gained 100% ownership of the company (for a nominal cost).

Though profit flows may be fairly attractive from the airport catering contract (considering how the Angolan economic boom is rubbing off on Namibia), this food services slab does look conspicuously out of place in Ububele's fast-growing agri services offering.

If the airline catering arrangement is as lucrative as Ububele's management hints it might be, the company should have no problem in pushing for a management buyout or offering up the business for sale.

With the food businesses out of the equation, Ububele would take on a much more profitable hue. In the latest interim period the agricultural businesses racked up revenue of R320m and profits of R15m, compared with revenue of R283m and profits of R5m in the corresponding period last year.

With structural changes to the ownership of operating subsidiaries and an increased manufacturing (rather than distribution) mix, the trading margin has improved markedly from 2,1% to over 5%.

Cloete believes this margin (as more manufacturing capacity kicks in) could extend to over 10% in the medium term, with a profound effect on Ububele's bottom line.

Progress in fattening the agri business margins may be the only way for Ububele to stave off pressure from shareholders who might be inclined to push for what is euphemistically called "unlocking value".

In this regard Vunani Securities' outspoken small-cap analyst Anthony Clark suggests Ububele is "better dead than alive".

He argues Ububele's R105m value hides some businesses that a savvy corporate financier could carve up and sell to any number of bidders.

In a note to clients, Clark contends: "Ububele has lost credibility (again) and I'm calling for a take-over and break-up of this business which, frankly, should probably never have listed anyway."

There may be a willingness at Ububele to shift away from its food interests in a series of quick deals, but whether a pure agriculture focus would draw PSG-owned agri business investor Zeder - now keen on playing an operational role in its investments - closer to Ububele is probably the bigger consideration for punters right now.

Source: Financial Mail