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Total Produce (TOT:ID)

  • Mkt Price:  EUR 0.39
  • Mkt Cap:  EUR 128.7 mio
  • Net Int/EBITA%:  9.0%
  • P/E:  5.6
  • P/S:  0.05
  • Div Yield:  4.6%      

Time to update my recent Total Produce post. First, a shout out to Philip at pdosullivan who emailed me to highlight Total’s increased stake in Capespan Group Ltd. There are some good follow-up comments here also. A good spot – I looked some years back, and somehow concluded Total’s shareholding was in a Capespan sub. rather than the parent company?! Based on this, I mistakenly decided not to revisit this as a component of my TOT investment analysis. Then again, the lack of transparency and disclosure from Total regarding this shareholding is rather infuriating.

Total’s only reference to the subject (in their latest results) is: ‘…including increasing its shareholding in Capespan Group Limited, the leading South African fresh produce company.’ They don’t disclose their shareholding percentage/size, or disclose it’s a minority stake in an unlisted (shares only trade OTC) company with a dominant shareholder. Even worse, they don’t think it’s worth mentioning that Capespan was recently the subject of a takeover bid, which was subsequently trumped by a competing partial bid! What the hell?! Anyway, with the company asleep on the job, leave it to the blogosphere to provide the facts:

Capespan’s a South African company which is a global leader in fruit marketing, and the provider of supply chain technical, logistical and marketing services. Its fruit portfolio includes the internationally recognized Outspan and Cape brands. Total Produce has now raised its stake in Capespan from 14.1% to 20.03%. Based on the issued share capital of 331.22 mio shares, this puts Total’s holding at 66.343 mio shares which is worth ZAR 159.2 mio (EUR 14.1 mio) at the current ZAR 2.40 OTC price.

This higher price frustrated the ZAR 2.25 takeover bid that was launched by Zeder (ZED:SJ) in June. Zeder’s a South African investment company which builds control stakes in unlisted agricultural, food and beverage businesses. It’s managed by PSG Group (PSG:SJ), its largest shareholder and another well-diversified investment company. Zeder’s actually a long standing shareholder in Capespan, having built up the majority of its current 40.15% stake prior to its bid. Zeder announced an early close to the takeover in September, shortly after Bidvest (BVT:SJ) bid ZAR 2.40 for 50 mio shares. Bidvest’s another South African company, a conglomerate with an acquisitive international foodservice arm. They now have a 7.9% stake, and continue to aim for a 15% shareholding with their remaining 26 mio share OTC bid at ZAR 2.40 still visible on the screens.

Another shareholding to mention is Capespan’s own 9.8% stake. I’ve written about some negative aspects of share buybacks recently: Here’s another example of management usurping shareholder rights. Clearly, these shares should have been cancelled. I’m no expert on SA business law (if anyone can enlighten me?), but these shares are now possibly a crucial voting block in any future corporate developments. And they’re controlled by management, not shareholders! Is it cynical to observe that management interests sometimes diverge from shareholder interests..?!

So what’s Total Produce doing increasing its stake? In fact, why even have a shareholding? I’m sure Capespan would be perfectly happy to maintain a purely business relationship. I like my ‘shareholder neglect’ theory, but perhaps there’s a little more to Total’s silence? Are they planning to launch their own bid? With two ‘financial’ investors now on board for 48%, clearly a deal is achievable. And price shouldn’t be an issue: The Capespan directors already pronounced that Zeder’s bid was fair and reasonable, the majority of Zeder’s stake was built up at much lower prices, and most other shareholders have enjoyed a double in the share price this year.

Of course, it would be pretty ridiculous to see Total finally motivated to launch a bid, just because other companies have expressed a keen interest…and after the share price has doubled! But this would be nothing new in the corporate world – ‘sell low, buy high’ it seems… Btw I thought Promethean plc (PTH:LN) was a smart investor, but its just announced IFG Group (IFP:ID) stake sale at EUR 1.00 (vs. a EUR 1.70+ price three months ago) really takes the cake! However, if I take a look at the numbers, a Capespan bid still seems viable for Total Produce:

Let’s assume they paid an additional 15% premium on the current share price. This would cost a total of  EUR 56.7 mio (ZAR 641.6 mio – ignore their current stake and Capespan’s uncancelled shares). In return, Total would add EUR 246 mio of Revenues and EUR 11.2 mio of Adjusted EBITA to its P&L. This would represent an approx. 32% increase on its current Adjusted EBITA (adjusted for Minorities). There would also be no impairment in financial strength, as Total already has the required Cash on hand. The loss of Interest Income on this Cash is relatively minor, so current Net Int/EBITA of 9.0% could be expected to remain stable or even decline. With a higher relative SA tax rate, Total’s EPS would increase by, say, a lower 27% – still a game-changer of a deal!

But, woah, let’s take a closer look…and we’ll discover something odd. Fruit comprises the majority (79%) of Capespan’s Revenues and all of its growth – Fruit’s growing at 17.5% pa vs. a 10.6% pa decline for Logistics, over the past 3 years. Despite this, virtually all of Capespan’s value is derived from its Logistics business. As evidenced by an average Logistics Operating Profit Margin of 12.2% in the past 3 years (despite declining revenues), vs. an average Margin of 0.5% in the Fruit business. Yes, the core of the Logistics business is fruit related, but we’re still talking about a very different animal here! Whatever your thoughts about an Irish/European company taking on a SA business, I certainly didn’t sign up for the risk and dilution of focus involved in a potential takeover of a Logistics business. So let’s hope sanity prevails at TP HQ, and presume that this scenario is not on the agenda. But what’s the logic of the increased shareholding then?

Perhaps Total wants to act as king-maker in any future deal? I could probably live with that. Johan Dique was appointed as CEO in January, and based on his record at Senwes there should be significant operational improvements to come. It’s likely we can also expect further corporate developments with two competing acquisitive shareholders on the share register. On this basis, any future realization of Total’s stake should be financially attractive and also, hopefully, a very positive news catalyst.

There may be a better way for Total to play this. I’m not tremendously excited with the idea of them buying a remote SA fruit business – I can just imagine the codswallop about synergies and cost savings…  But I’ll take it, versus waiting any longer for a decent European transaction to occur. The reality is that purchasing any stream of earnings is better than sitting on idle Cash. Yes, I know…famous last words before many a value destroying acquisition! In this case one can but hope they know Capespan’s fruit business well enough to take it on successfully…and avoid overpaying for it. With the stake they own, and the relationship they have, they’re clearly the leading contender to purchase the fruit business. This could be a white knight deal with Capespan. Or a deal that helps seal a final takeover deal from Zeder, Bidvest or another bidder interested in the Logistics business. Or perhaps, to play hardball, it’s a deal where Total uses its blocking stake to extract a price and a commitment to sell the fruit business in return for supporting a takeover deal.

As I think about it, perhaps the best solution is for Total Produce to simply offer its current stake in return for the fruit business. This could, in effect, be another share buyback for Capespan or an attractive proposition for a potential bidder. This equates to a purchase price of ZAR 159 mio for ZAR 2,215 mio of Revenues with an average 0.5% Operating Margin. It also corresponds to a 0.07 P/S multiple, which is a little steep in light of current margins. However, this is a pretty elegant solution and it retains 100% of Total’s Cash for other deals (hopefully), so the higher price would seem to be justified.

All in all, this is simply speculation… But even if the end result’s simply a more valuable ‘financial’ stake, this should prove to be another positive financial/news catalyst for Total Produce. I’ve now increased TOT from 2.2% to 3.9% of my portfolio. I’d be interested to hear your views, dear reader.

  • Tgt P/E:  12.7
  • Tgt P/S:  0.11
  • Fair Value:  EUR 0.882
  • Upside Potential:  126%
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