The impact of the fraud at Steinhoff has been so damaging to the reputation of "SA Incorporated" that it is difficult to sing the praises of the once revered race-horse breeder from Stellenbosch. Yet, despite the poor last few deals (most notably Mattress Firm at double its market value), investors should not forget that Marcus Jooste made quite a number of astute acquisitions during his tenure. Though complicated from the top, Steinhoff has/had a number of quality companies under its wing (either fully controlled or as associates). This includes the likes of Pepkor, PSG Group (recently sold) and French retail chain Conforama.
Another promising business that Steinhoff has a large stake in is KAP Industrial Holdings (KAP) - an association that came about when Steinhoff reversed its industrial assets into KAP in exchange for a 43% shareholding back in 2012.
KAP der Guten Hoffnung
Listed on the JSE in 2014, KAP derives its name from the German translation of Cape of Good Hope - KAP der Guten Hoffnung. Today, the group owns some of the leading industrial businesses in SA, and is structured along three divisions as seen below:
KAP Operational Structure
(Click image to enlarge)
KAP has an impressive track-record, having grown its earnings per share from continuing operations at a compound rate of 15% p.a. during the past 5 years. This is a sound achievement, considering that the local economy provided virtually no tailwind for growth during the period. Leading companies under KAP include Unitrans, which offers reliable services in critical areas of the supply chain, and PG Bison, a leader in the timber market.
Distancing itself from Steinhoff
KAP released its interim results for the 6 months to 31 December in the second week of February. The numbers were solid, with earnings per share increasing 11.1% y/y for the period. However, the issue on the minds of all the attendees at the results presentation was how it was going to address the relationship with its tarnished majority shareholder going forward.
Fortunately, CEO Gary Chaplin took the bull by the horns first up in his presentation when he stated that KAP will end the shared services agreement with Steinhoff on 1 March, and will vacate the premises it shares with Steinhoff by 31 March. Chaplin reiterated that KAP is independently funded with no loans to and from Steinhoff, however, KAP will continue selling products to STAR, based on its independent merits. While Steinhoff’s 43% stake in KAP remains unchanged at this stage, it is understood that a prominent SA investor will be a keen buyer if Steinhoff is necessitated to sell.
Positioned to fire on all cylinders
KAP has built a strong platform to support growth in coming years and is perfectly positioned to fire on all cylinders when local trading conditions improve. This is timely as new president Cyril Ramaphosa is set to invigorate business confidence and investment in the local economy.
Furthermore, KAP’s share price has lagged the rally in SA-focused industrial peers during the past few months, possibly due to the market’s concerns about its connections with Steinhoff. Now that this has been addressed, investors will find an ambitious SA industrial mid-cap, trading at an undemanding forward P/E multiple of 14x, and a likely beneficiary of a Ramaphosa revival.
Comparison of KAP versus other SA industrials
Wim Prinsloo, CFA
Portfolio Manager at True North Capital Management
Wim Prinsloo serves as portfolio manager at True North Capital Management. He holds an honours degree in investment management from the University of Pretoria and is a CFA charter holder.
Wim’s work at True North includes the management of the firm’s equity and property unit trusts, development of its investment processes and ensuring best-in-class service to clients. He benefits from 7 years of experience in the investment industry and is a member of the Investment Analyst Society of South Africa.