Crookes targets high-return projects to offset sugar slump

Image Source: Crookes Brothers Limited

The company's recently released annual report shows that plans to invest R500m in new projects over a five-year period to end March 2018 were linked to a targeted nominal internal rate of return (after tax) of more than 20% a year.

Last year, Crookes raised R215m via a share issue. The proposed five-year capital expenditure is significant for a relatively small agribusiness player such as Crookes, representing more than half the company's R900m market capitalisation on the JSE.

Thinking long-term

Writing in the annual report, Crookes MD Guy Clarke said several high-return projects and acquisitions were being evaluated as part of the company's expansion strategy. He disclosed that the company's primary financial goal was to achieve long-term growth in headline earnings of 15% a year. "This compares favourably with an average long-term growth of JSE-listed companies," he said.

Pencilling in returns for agribusinesses is a hazardous business, with prospects hinging on factors beyond management's control - in particular, the weather and market prices.

Clarke believed that in evaluating the appropriateness of the earnings growth target, investors should remember that farming was an asset and labour-intensive business that limited opportunities for rapid growth. "Farming is also a long-term endeavour, subject to climatic and market fluctuations. Hence a rolling five-year average is used as a measure of headline earnings growth."

High-return projects

Clarke said that a secondary financial goal was to achieve a return on equity (RoE) of more than 15% a year. This is measured by headline earnings as a percentage of capital and reserves. He stressed the RoE target was considered aggressive for a farming operation - where single digit returns were the norm.

To achieve these goals, Clarke conceded that Crookes needed to identify and implement high-return projects on a continuous basis.

Establishing new high-return projects is also critical if Crookes is to lessen the reliance on its core sugar operations. In recent years, the company has found traction in banana plantations, macadamia nuts in Zambia and deciduous fruit farming in the Western Cape. However, sugar production still accounts for the bulk of revenue - although the year to end March saw income from sugar cane constituting less than 50% of group operating profits for the first time. Clarke reckoned the 2016-17 year would be "exceptionally tough" for the sugar cane operations.

Deciduous fruit to become increasingly important to Crookes

"There is little relief expected from the difficult climatic conditions. We go into winter with very low dam levels, and restricted irrigation in Mpumalanga and Swaziland."

He predicted that sugar cane production would drop 10% in the season ahead due to the drought - although this would be partially offset by higher sugar cane prices in SA, Zambia, and Swaziland.

Crookes' push into deciduous fruit production will intensify as new orchards come into production. But Clarke cautioned that the rate of growth might slow in 2017 after the bumper deciduous crop harvested in the current season. But Clarke noted that deciduous fruit would become increasingly important for Crookes in the future. According to the annual report, deciduous fruit accounted for 39% of operating profits in the past financial year.

He said the effect of the drought on banana crop tonnage and quality was not yet clear. "But early indications are good and we expect good yields and grades in 2017." Clark added that banana prices were also expected to be good, as the supply to the market was reduced by the drought. Bananas accounted for 18% of operating income in the year to end March 2016.

Source: Business Day