A lot was expected from KAP when Steinhoff used it to reverse-list its SA industrial assets in 2012.
And KAP is delivering growth.
Headline EPS have grown at a cracking pace, coming in 18% up in the year to June. Over four years the annual average is 19%, despite a modest 6% average annual rise in revenue.
Operating margins have been rising.
"KAP is one of a few SA industrial companies with a plan to do something about improving operational profitability," says Anthony Sedgwick, asset manager at Abax Investments.
He has KAP as the number two holding in the R2.1bn-asset Nedbank Entrepreneur Fund he manages.
KAP has been through a lot of change since 2012, ridding itself of noncore assets to create a group divided into two distinct segments — each accounting for roughly half the group’s R16bn annual revenue.
Segment components have a common feature. They are number one or two players in sectors with high barriers to entry and are strong cash generators.
One segment houses logistics heavyweight Unitrans, the other industrial interests including timber products business PG Bison, PET plastics producer Hosaf, Feltex (leading supplier of moulded seats and carpets to SA vehicle manufacturers), and a bedding products unit.
KAP is very much in an investment phase, a strategy underpinned by robust cash flow. In the latest financial year cash flow after tax and dividend payments of R2.33bn was 57% up on the previous year. It left net debt at a modest 27% of shareholders’ funds.
KAP is investing heavily in lifting capacity and efficiency of its operations through projects such as an ongoing R600m upgrade of PG Bison’s Piet Retief particle board facility. A similar upgrade at the Boksburg facility yielded a 45% fall in overhead costs per m² of board produced.
Also under way is a R700m project at Hosaf, SA’s only producer of PET plastic (used extensively in the beverage sector). The project is due for completion in August 2017. It will increase annual capacity from a fully utilised 128,000t to 240,000t. At the current 7% annual rate of PET consumption growth, new capacity should be fully utilised within three years.
As is to be expected of a Steinhoff group company, KAP is also bulking up operations through acquisitions. First on board was mattress manufacturer Restonic, acquired in January 2015 for an estimated R140m.
Vehicle accessories franchise business Autovest followed in April 2016, in a R560m deal.
Thinking far bigger, KAP is to acquire Safripol in a R4.1bn cash deal. Set to close in January 2017, the deal values Safripol on an 8.4 p:e based on its R488m taxed profit in 2015.
"We have had our eye on Safripol for some time," says KAP CE Gary Chaplin. "It is very complementary to Hosaf."
Safripol is based in Sasolburg, where it draws its raw materials from Sasol’s plant. It produces high-density polyethylene (HDPE) and polypropylene (PP), both used to produce a wide range of consumer and industrial products.
The market applauded the Safripol deal, lifting KAP’s share price 13% in the week following its announcement.
The reason for market approval is clear.
"Demand is strong and exceeds capacity for HDPE and PP globally," says Chaplin. "Safripol is running close to full capacity. We will look at increasing it in the next 12-18 months."
How KAP will finance the deal has yet to be clarified. "There is no rush to decide," says Chaplin.
Sedgwick believes an element of equity will be used to fund the deal. "KAP will want to retain its firepower," he says. "Additional shares will improve KAP’s liquidity. It would be a welcome move."
KAP, on a 15.4 p:e, is not at bargain-basement levels. But it earns a superior rating because it is a highly cash-generative company, delivering above-average growth.
Sedgwick agrees. "I am a happy holder," he says.