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Crookes Brothers might be ripe for the picking

16 Jan 2017

Multinational food processing and retailing company Associated British Foods swallowed SA's biggest sugar industry player, Illovo, in May last year. The move by the British group (which, as it happens, owns cheap 'n chic Primark) was part of a scramble for Sub-Saharan African agricultural assets. Crookes Brothers, another JSElisted player now stands out as another highly attractive potential target.

Freeimages9 via pixabay

The stage for an eventual acquisition of Crookes could already be set thanks to the involvement of African agriculture-focused UK private equity firm SilverStreet Capital as the key shareholder through its Silverlands (SA) Plantations investment vehicle. As with all private equity firms, SilverStreet will exit at some point.

SilverStreet's involvement began in 2013 when it acquired Rand Merchant Bank's 33.1% stake in Crookes. SilverStreet followed this in June 2015 when it upped its stake to 45% through a R215m claw-back issue of new ordinary shares. The issue was pitched at R80/share, a premium of over 30% to Crookes' then share price.

SilverStreet clearly sees solid growth potential. Crookes aims to deliver it, targeting 15%/year headline EPS (HEPS) growth over rolling five-year periods. "We are fairly confident we can achieve this," says Crookes MD Guy Clarke.

Diversification strategy and new projects

Underpinning his confidence is a diversification strategy whereby a steady stream of new projects will kick in over the short to medium term. The strategy calls for R500m investment in new projects between 2014 and 2018.

Diversification has already radically reduced Crookes' dependence on sugar cane, which had been its mainstay since its founding in 1913. Highlighting this, in the group's year to March 2016 sugar cane produced in Mpumalanga, KwaZulu-Natal (KZN), Swaziland and Zambia accounted for 41% of operating profit, just ahead of the 39% contribution from its 700ha Western Cape deciduous fruit operations.

Bananas from Crookes' Mpumalanga plantation were another big contributor, accounting for 18% of operating profit.

It is a contribution that is set to rise. Under development in a R117m joint venture with Silverlands Mozambique is a 300ha banana plantation in southern Mozambique. The project promises higher yields and lower costs compared with SA production, says Clarke. The first 40ha of banana trees will be planted in February with the first crop likely in as little as 18 months.

Crookes has gone it alone on another project in Mozambique: a 300ha macadamia nut tree plantation. Under development since 2012, the first crop will be harvested in March with full plantation maturity and the first positive cash flow expected in 2021. With macadamia nut prices hovering around record highs, prospects are good. But, cautions Clarke, as with all agricultural commodities, prices are prone to high volatility.

Crookes to capitalise on its property holdings

Taking diversification another step forward, Crookes is capitalising on its vast property holdings through a new venture, Renishaw Hills, an upmarket retirement village on KZN's south coast.

"We plan to sell 550 units over the next five to seven years," says Clarke. "They will take up 20ha of 260ha-280ha suitable for development. We envisage full development to take 2030 years."

Riding agricultural commodity price volatility

SilverStreet's confidence in Crookes is paying off. In Crookes' year to March 2016, HEPS jumped 37% followed - despite a 19.5% rise in issued shares - by a 27% rise in the six months to September. The big interim results kicker came from sugar cane, where operating profit jumped 169% to R134m.

The division rode high on a 12.5% rise in the SA sugar reference price in February and another 15% rise in July. Another strong boost came from a 50% rise in world sugar prices, which lifted export prices to almost the same level as SA's normally far higher reference price.

Also turning in robust growth were bananas, where a drought-driven 48% rise in SA prices lifted operating profit 168% to R26.6m.

It was not all good news from Crookes. Hammering home the risks inherent in agricultural commodities and the wisdom of diversification, a fall in deciduous fruit prices sent this division's operating profit crashing to a R24.8m loss.

Trading on a 15.5 p:e, Crookes appears fully priced. However, for small-cap investors prepared to ride agricultural commodity price volatility, it is a share worth consideration on price weakness.

Source: Financial Mail

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