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Rep office reports

Acorn Agri & Foods bullish about SA's agricultural prospects (Economic Division in South Africa)
Kind: Rep office reports  Organization: Department of International Cooperation  Publish Date: 2021-08-13 14:18
The acquisitive group says the state’s response to recent violence, and progress in issues such as water rights, are reasons for optimism

Acquisitive agriculture group Acorn Agri & Food (AAF), which recently inked a R770m deal for Ascendis Health’s animal business, says it has turned optimistic about the prospects for SA's agricultural sector, which could be in store for another few good years.

After battling with regulatory and policy uncertainty, including around land reform, AAF CIO Carl Neethling told Business Day that he had seen a palpable shift in sentiment from farmers due the government and society’s response to violence and looting that gripped the country last week.

Recent progress around issues such as the availability of water rights were another reason for optimism, said Neethling, and the agricultural sector could be in store for a decade of growth, something he wouldn't have said a few years ago.

“People have been able to invest in more capital-intensive projects, especially for the export market,” he said.

AAF, which is managed by Acorn Private Equity, is a long-term investor with interests across the agricultural value chain, ranging from providing fuel and lubricants, as well as lime and snacks.

It is publicly traded, but unlisted, and was founded in 2018 through the merger of Somerset West-based agribusiness investor Acorn Agri and Caledon-based agricultural services group Overberg Agri.

With a sum-of-the-parts value of about R3bn, it was launched with the backing of African Rainbow Capital (ARC), which currently holds about 8%, and Sanlam Private Wealth, which holds roughly 15%, and is its biggest shareholder.

AAF's interests include dried fruit and snacks businesses Montagu and Grassroots, fuel distribution specialist Moov, as well as ACG Fruit, which produces and packages primarily citrus and table grapes.

The group remains acquisitive, said Neethling, but is unlikely to make any major acquisitions soon, given the group had recently agreed to pick up Ascendis Health's animal division.

The animal health division comprises of three businesses, including Ascendis Animal, focusing on farm animals with a wide range of antibiotics and feed additives. It also includes Ascendis Vet, for pets, and Kyron Laboratories, which makes over-the-counter health products and veterinary instruments.

It contributed about 7% of Ascendis’s revenue, but has also fared well recently, with core profit up 21% to R75m in the group’s six months to end-December.

AAF expects compound annual growth of this profit measure in excess of 6% for the business, with Neethling saying the group wasn't planning any major strategy shifts, given it is extremely well run.

“There will be no major changes, but we will empower management to deploy capital, so there will be a cultural shift to have more of a growth focus,” he said.

Ascendis Health has been battling to survive an unsustainable debt load, starving the group and its subsidiaries of cash for growth projects.

Neethling said Acorn had always been interested in the business, which was only one of its type in SA, with competitors the local outfits of international players. “We approached [Ascendis] the minute the cracks started to show,” he said.

AAF had fared reasonably well in its year to end-February, even though SA’s hard lockdown prompted a 2% revenue fall to R7.45bn, but net profit about tripled to R184m with the group benefiting from SA's bumper grain and fruit harvests.

Neethling described the performance as “okay” and said the year before had been tough for a number of reasons, including a need to turn around debt-laden businesses, as well as constrained local demand.

Although Covid-19 prompted a 7% decline in economic activity in 2020, its worst performance since 1946, favourable climatic conditions and robust exports helped SA's economy buck the trend with 13.1% growth in 2020.

The outlook is bright for 2022, said Neethling, who said the group would be looking at future acquisitions that would bulk up its health food business, primarily for the export market.

AAF is still interested in a JSE listing, said Neethling, but would need to “double in size to even consider it”.

Group earnings also needed to improve, he said, which was a focus of analysts, while agriculturalists were focused on the longer-term. The group's shares, which are traded over the counter, were also very thinly traded, he said.

AAF also looks set to get about smaller, with the group currently pursuing a black empowerment transaction that would see it carve out all of its ACG Fruit business and a quarter of its health foods and snacks business.

ARC will be the majority shareholders in the new vehicle, Sefate-Umthi Investments, which will be managed by Acorn Private Equity. ARC will divest from AAF.

ARC had seen its shareholding halve during the amalgamation in 2018, which was not ideal for it as it had originally bought in seeking a preferred and empowered vehicle for further investment in the agriculture and food industries.

AAF meanwhile will get an empowerment partner of choice through the new vehicle and reduce exposure to some of its riskier assets, with shareholders set to vote on the scheme in August. If implemented, AAF's net assets would fall by R720m, but net asset value per share would remain unchanged and earnings per share would rise 90%.
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Update: 2020-04-08
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