Why Are Kenyan Agricultural Stocks So Cheap?

Kenya investors don’t seem to like agriculture stocks, and I’m not sure I understand why.

Over the past five years, the Nairobi Stock Exchange’s benchmark NSE-20 Index lost 30.5% of its value. But each of the market’s eight agricultural stocks performed better than that. Much better. In fact, they actually posted a 41.8% gain during the same time frame.

Yet, today, they remain the NSE’s Rodney Dangerfields — they get no respect. Almost all of them presently trade for a fraction of their book value and less than seven times their trailing earnings.

Granted, agricultural stocks do have their risks. They are, to varying degrees, at the mercy of global commodity prices, the weather, and currency movements. And a proposed tax on tea exports has chilled the outlook for some companies.

But with the globe’s population growing and arable land becoming more scarce, I think the market’s pessimism is overdone.

Photo by CIAT


Let’s take a closer look.

The five Kenyan stocks below put food on the table, and (at these valuations) possibly some big returns in investment portfolios, too.

CompanyP/E RatioP/B RatioROEDebt/Equity RatioDividend Yield
Kakuzi (KKZI:KN)2.90.624.6%42.4%4.6%
Kapchorua Tea (KPTC:KN)6.40.727.9%54.6%6.5%
Mumias Sugar (MSUG:KN)4.60.631.3%67.4%8.1%
REA Vipingo Plantations (RVPL:KN)2.00.642.9%55.8%7.2%
Williamson Tea Kenya (GWKL:KN)2.40.628.8%38.9%5.7%

Kakuzi (KKZI.KN)

(P/E Ratio: 2.9; P/B Ratio: 0.6; Dividend Yield: 4.6%)

You could put together a pretty tasty breakfast consisting of nothing but produce from Kakuzi’s farms. It grows avocados, pineapples, macadamia nuts, and tea. The company also boasts herds of dairy and beef cattle.

The diversification has served the firm well. Over the past five years, it grew earnings at a 33.0% clip, allowing it to award a dividend increase for three out of those five years. It’s balance sheet is very strong. Kakuzi carries very little debt.

Yet the company trades at just 60% of its book value. What gives? Investors may be concerned about tea prices. Or they may be underwhelmed by Kakuzi’s 2011 earnings because they included an extraordinary gain resulting from the conclusion of a legal matter. Even so, after stripping out the one-time gain, the stock still trades at less than 4x earnings.

Kapchorua Tea (KPTC.KN)

(P/E Ratio: 6.4; P/B Ratio: 0.7; Dividend Yield: 6.5%)

The Kapchorua tea plantation sounds an idyllic place. Tucked into hills west of the Great Rift Valley, Kapchorua grows tea plants that receive worldwide acclaim for their full-bodied, floral flavor in forest-fringed fields. The operation is recognized for the fairness with which it treats its workers and carries the Fair Trade and Ethical Tea Production seals of approval.

Kapchorua earned KES282 million (roughly $3.4 million) over the past 12 months, which gives the stock a P/E ratio north of 6x. That’s actually on the high end for Kenyan agriculture firms.

Management has warned shareholders that it may have a tough time replicating recent performance due to higher fuel and labor costs.

Mumias Sugar (MSUG.KN)

(P/E Ratio: 4.6; P/B Ratio: 0.6; Dividend Yield: 8.1%)

Mumias is Kenya’s largest sugar producer, controlling 60% of the market. Management’s in the midst of diversifying its product mix to even out its vacillating, sugar-dependent earnings. It recently began burning sugar cane residue to produce electricity. In doing so, it produces enough energy to supply its own requirements and to deliver 26MW of much needed power to Kenya’s national grid. It also plans to produce ethanol and bottle water later this year. Both projects will provide an immediate boost to company profits.

These efforts cost money, but management has succeeded thus far in keeping its debts to less than 70% of equity. The Global Credit Company just rated Mumias’ long-term debt at “A+”.

We covered Mumia’s generous dividend last month. The share price has risen since then, but it still yields a sweet 8.1%.

REA Vipingo Plantations (RVPL.KN)

(P/E Ratio: 2.0; P/B Ratio: 0.6; Dividend Yield: 7.2%)

REA Vipingo is Africa’s largest producer of sisal, a natural fiber used to make rope and twine. It employs 3000 people at seven estates across Kenya and Tanzania that produce 19,000 tons of the stuff. Nearly all of it is exported through via REA’s own export company in Mombasa. The company is also diversifying into vegetable production.

High sisal prices and good weather helped the company to record profits in 2011. Earnings rose 553% over the previous year.

Fortune may have been smiling on REA Vipingo last year, making a repeat performance unlikely, but you’d think the market would agree that the company is worth more than 2x last year’s earnings and 60% of its book value.

Williamson Tea Kenya (GWKL.KN)

(P/E Ratio: 2.4; P/B Ratio: 0.6; Dividend Yield: 5.7%)

Williamson is one of Kenya’s largest tea companies. It is the parent company of Kapchorua and produces a range of specialty, fair trade teas for sale in the United Kingdom and elsewhere around the globe.

Williamson has strung together an impressive record of profitable years. In the most recent period, earnings spiked 76% thanks to the sale of a Nairobi property. Management keeps a very tidy balance sheet. Total debt comes in at less than 40% of equity.

Ironically, the most recent earnings report from the fair trade tea purveyor bemoans rising labor costs. Management won’t get much sympathy from me in this regard. Profits have increased nearly 18x since 2003. Even so, the company trades for a pittance at just 2.4x trailing earnings.

Conclusion

I believe all five of these stocks are priced at levels to outperform the market over the medium term. They’re profitable, carry manageable levels of debt, and produce basic commodities that are in more demand with each passing year.

What do you think? Am I lost in the weeds on this one? Let me know in the comments!

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

Comments

  1. Kenya’s low bargaining power in the global market,unpredictable weather patterns,the current european financial crisis are among the issues keeping investors at bay from investing in agri. stocks.They consider it a big risk compared to other stocks in the market.

    • Many thanks, Ombuna. It’s true that agriculturals are subject to a number of risks that are beyond their control. Currency fluctuations are another big one. Still, I would argue that these risks seem more than adequately accounted for at these prices.

  2. Stocksmaster says:

    I have been steadily accumulating agriculturals for some time now. The agricultural stocks on the NSE present good value for money on all valuation metrics. I believe the main issue with some of the counters above is availability (amount of free float is very limited for most of the above except Mumias).

    To unlock value, most of this companies need to issue more shares either as share splits or bonus shares.

    Happy hunting….

    • Anonymous says:

      stockmaster is spot on! Availability is very limited on these counters. Long term, they offer good returns. Here’s a twist; aside from being agri plays, some of these counters could turn into real estate plays given that some of the companies mentioned hold vasts tracts of land in locations that are increasingly viewed as being close to Nairobi and will soon be considered part of the greater Metropolitan area!

      • Yes. Absolutely right, Stocksmaster. I failed to mention liquidity in my post. Apart from Mumias, all the stocks above are very thinly traded. It’s rare for their trade volume to exceed $10,000 in any given day.

        This keeps them from being discovered by institutional investors, but patient retail investors could do very well with them.

        Good point, too, Anon. Some of these companies have valuable property assets hidden on their balance sheets. We saw this when Williamson sold some Nairobi real estate last year.

  3. Are these pre tax earnings?

  4. Anonymous says:

    Great article, as mentioned it perplexes me as well why some of these companies trade at such ridiculous multiples. I own Mumias Sugar, Sasini Tea and about almost 0.50% of Limuru Tea, my favorite tea company.

    So my response will be more Limuru Tea which you didn’t cover: The reason i like this stock is because before I started buying the shares, I toured the plant and spoke with some employees and directos and viewed the plantations as well. This company owns over 650 acres of land 4km from limuru town, which is about 30KM from nairobi and even disregarding the Tea plantations there is a real ‘real estate’ play here. Read about the developments along limuru road from Gigiri to Runda to Tigoni etc.. hence its just a matter of time.

    But disregarding that speculative perspective which would require a catalyst, this company is still generating profits be it in a volatile manner, but it also pays a steady dividend currently yields about 2% after the 40% spike YTD. The issue with LTC is becuase supply is extremely limited and actually has taken me about 3 years to accumulate the shares I have now. Which I will hold dearly.

    LTC also has no debt on its books, but has some cash and also has some cash due from parent (Unilever plc) of about USD$1MM. Which Unilever pays at prevailing TBill rates.

    LTC does not have any employees, as its a Unilever outgrower and is managed by Unilever staff at a minimal management fee of about USD$35K per annum or there about.

    LTC is an outgrower hence sells its Tea at market prices, but exclusively to Unilever, therefore carrying no exposure on the newly introduced “tea taxation”.

    Yeah, and there you have it, why I like LTC and will continue accumulating, though I am watching at the sidelines since prices have shot to Kes 430 which is still cheap on all metrics, but am sure will stabilise lower. Last year in Q4 I was buying it at Kes 300.

    Btw, LTC carries its Land on balance sheet at cost, of about USD$35K for the over 650 acres in Limuru!!!.. of-course that wll probably get you 2 acres at current prices, if you are lucky.

    • Thanks for this excellent background on a stock that I was unfamiliar with, Anon. Very thin trade volumes, but could be a nice opportunity for an individual investor who can afford to buy and hold.

  5. Thank you for the article, I think investing in agricultural stocks will really pay off in the next few years. I mention them in an article about the U.S. debt issues at http://www.eatmystocks.com. The article is pretty basic, but I’d love in you checked it out and left a comment.

  6. In Mumias\’ case, it faces the lifting of barriers to free trade of sugar with other COMESA countries, due to take effect by 2014, but even the headwinds of competition do not seem to explain a PE as low as this. The Kenyan sugar cane industry is much less productive than in other sugar-producing countries in COMESA, and sugar prices paid by Kenyan consumers are much higher, according to data from the World Bank. Free trade is likely to force rationalisation. Mumias seems to be one of the more effective sugar businesses in an industry marred by a mixed bag of management talent and so, you might argue, may be a beneficiary from greater economies of scale/creative destruction elsewhere in the sector when these eventually arrive. The Kenyan market for sugar has increased over the past few years, opening up a deficit in meeting the country\’s sugar needs that a more productive industry would have a role in filling. With plausible new catalysts from electricity, ethanol and bottled water, as mentioned in Ryan\’s article, I would be inclined, too, to look beyond its tepid recent growth rates. I wasn\’t clear on the figure of 31.3 stated above for Mumias\’ ROE. Reuters gives an ROE figure of 13.3 or 14.74 averaged over the past 5 years.

    Robert

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