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Senwes share analysis |
2012. I recently bought a few Senwes shares, and it took a lot of patience to get the price I wanted. I put in a buy order in January for R9/share, left it there, and it took over a month before somebody nibbled. In fact what happened was that Senwes phoned me up & asked whether I'd be willing to pay R9.05, I said no, and the seller went down to R9. I was pretty lucky as I've noticed that there are already bids at R9.05. And an added bonus is that I got in the day before the share went ex-dividend. I say lucky, but we really make our own luck - I've found that if you cast enough fishing lines, something will eventually bite.
I estimated the owner earnings of Senwes (excluding financing of loans), discounted that in perpetuity at 10% (8% risk-free + 7% spread - 5% growth), added to that the cash holdings .
Senwes isn't considered for most equity portfolios, as they are restricted to investing in listed companies (although Senwes is unlisted, it's pretty easy to register on their platform & trade). Looking just at historic profit generated Senwes looks good value, but the elephant in the room is their ongoing skirmishes with the Competition Commission. The price of grains is politically sensitive, and I expect litigation to continue for some time. This litigation can have various outcomes, and highlights the fact that investment analysis is not a game where you deal with certainties, but rather the probability of various outcomes. Core to my investment philosophy is the theory that if you bet on enough shares where the odds are in your favour, it's likely that on average you'll come out on top (although on individual shares you might lose everything). Senwes feels a bit like a gamble where you've got a 60% chance of winning - better odds than Grandwest or Montecasino offer - good enough to encourage me to bet a small portion of my wealth on it.
Trading in grain commences with farmers who produce grain & sell it to traders. The traders resell the grain to millers & bakers, who process the grain & sell consumable goods to retailers who supply the public. Storage plays a critical role, as millers & bakers require supply throughout the year, and not just during the 4-month harvest period (May to August).
Senwes is involved in the total grain logistics process, as well as supplying input products & finance services to agricultural producers. Its area of operation is mainly in the Free State, and to a lessor extent in the North West, Northern Cape and Gauteng provinces of South Africa (it recently failed in its bid to purchase/merge with the Grainfarmers Group in the Western Cape). It owns more than 90% of the grain storage capacity in its area of operation, providing significant pricing power. Silos are prohibitively expensive, providing a large barrier to entry.
Operating profit, 6 months to 31 Aug 2011 |
Grainlink |
Village |
Credit |
Other |
58% |
29% |
11% |
2% |
Whilst Senwes seems good value, there are a few risks it's facing:
It's not clear how good a deal the potential merger with the Grainfarmers Group is.
The elephant in the room is the contingent liability as a result of its ongoing court cases with the Competition Commission, regarding margin squeeze.
Possible short-term underperformance as a result of silos being emptied of grain faster than usual
A unique SA risk is that they lost one of their BEE partners in 2011 (Royal Bafokeng), and have a strained relationship with their other partner (Treacle). It's politically important to keep the price of grains down.
An investment in Senwes requires the assumption that the deal with the Grainfarmers Group is on fair terms, that the margin squeeze court cases wont be too damaging, the short term underperformance is just part of the cycle and that any political headwinds wont be too harsh on profitability.
Storage plays a vital role in the grain trade, as the harvesting season is limited to 4 months, but processors require a constant supply throughout the year.
Senwes Grainlink is involved in the grain value chain from the farm gate to the mill door. It focuses on the trading & handling of grain & oilseeds. This involves the storage, handling & transport of grain. In a typical year Senwes handles about 30% of SA's grain and oil-seeds. Senwes Grainlink provides agricultural producers with access to the commodities market through an extensive silo & marketing infrastructure.
Senwes's 69 grain silo complexes (most of which are registered Safex delivery points) have a capacity of 4.5m tons, constituting more than 25% of SA's total commercial storage capacity. Senwes also offers its customers alternative storage through centrally located grain bunkers & temporary transit points, where grain is received on the same basis as at silos.
Value-adding services include the cleaning of grain, moisture management & drying facilities. Unique-specification commodities can be isolated & stored seperately according to processors' preference (e.g. oil content, kernel hardness and GMO status). Grain & oilseed are procured on national level through the medium of agencies & an office network in every region where grain is cultivated.
Senwes Grainlink's footprint in Africa was enlarged by the establishment of the Senwes Malawi project. Malawi was identified as a first country of entry into Africa due to its focus on agriculture. Similar ventures are being set up in Zambia, Mozambique & Kenya. On 17 September 2012, Bunge exercised its option to puchase 50% of the existing established African structures of Senwes (the option was part of the jv which has operated since 1 October 2011).
Senwes Grainlink acts as broker in transactions with Safex for any role palyer in the market. An option underwriting desk is also in operation. Committees within Safex recommend annual tariffs for daily storage rates. Though these rates are not binding, they are in practice followed by silo owners, including Senwes. An alternative to storing grain in silos is to use huge silo bags, however as these silo bags are not eligible for silo certificates (and are therefore excluded from the Safex trade), they are not so appealing.
Senwes Grainlink & Imperial Logistics established a new logistics company called Grainovation.
Senwes Village is a series of stores offering production input supplies, mechanisation equipment & general farming supplies. A trained team of input marketers visits customers on their farms. Marketers also offer production financing packages, insurance, agricultural services and precision farming.
Senwes Mechanisation strives to assist producers in lowering input costs & increasing profit margins; supplying tractors, harvesters, balers & planters. They offer long-term support & after-sales service (e.g. through workshops, offering general repairs & maintenance with regard to agency products). Used goods are offered, such as used tractors and combine harvestors.
New spares are available from Senwes Village. The enterprise acts as agent for John Deere products as well as other makes. Batteries, bearings, V-belts, filters, tyres, tubes, nuts, bolts, sprayers, power-takeoff parts, hydraulic pipes, couplings and chains are among the products available.
Senwes Village has a team of trained staff to assist with the planning & execution of precision farming. The unit works closely together with Senwes Agricultural Services.
At the end of July 2012 Senwes and Afgri Operations merged their agricultural retail businesses into a new business trading under the names "Town & Country" & "Farm City". Senwes Village, Village Grocer and Quick Serve were sold to the new entity; as well as Afgri's Partrite (a wholesale business that sources, imports & distributes agricultural & industrial parts). The rationale is:
the increased ability to negotiate volume discounters with suppliers
allow Senwes to diversify activities
cost savings from shared overhead structures, including updating & integrating a system-wide IT system
Assists producers in developing their farming businesses by:
Evaluating current & alternative farming plans
Interpretation of financial results
Budgeting
Market comparisons
Grain price management model
Agricultural advice on fertilisation, recovery of soil fertility, crop & cultivar selection, optimal planting time & plant densities, cultivation systems & mechanisation costs.
Advice on stock management programmes (feeding, marketing, health & record keeping), fodder flow planning (balancing of rations & supplementary feeding programmes), established pastures (crop selection, cultivation practices, production potential & utilisation), budgeting.
Focuses on adding value with regard to wine production & insurance services. Univision Financial Services offers purpose-built insurance products to producers, clients & the general public.
Senwes Credit focuses on creating finance products to enable the agricultural producer and grain off-taker to manage their enterprises optimally. Financing is supplied for:
Agricultural oriented inputs
Fixed & movable assets for farming purposes
Marketed grain
Senwes credit products are:
Monthly Account 89/90, which allows a variety of items to be bought on account from Senwes Village shops. Account balances have to be settled on the last working day of the month following the month of purchase. Offers payment discounts on some products & interest-free credit up until payment date.
Crop production account, offers credit facilities for all inputs & services required for cultivating summer and/or winter crops. Outstanding debt is settled as the crop is harvested & marketed, but no later than 31 August (summer harvest) & 31 January (winter harvest).
Animal production account which offers credit facilities for production inputs relating to the production of red meat & wool. Outstanding debt must be paid by 31 May.
Contract insurance plan, under which all inputs as well as services which are required for the cultivation of summer and/or winter crops are subject to crop insurance according to each client's long-term average yield. Account balances are payable as the crop is harvested & marketed, but no later than 31 August (summer crops) & 31 January (winter crops).
Insurance account. Financing is available for the premiums of all types of insurance taken out by Univision, a subsidiary of Senwes.
Grain financing account entails cash being created for grain in storage in order to settle production & other debts, as well as strenghening the client's cash flow situation. Maximum repayment term of 6 months.
Grain hedging account
Medium term loan, offers the client the opportunity to consolidate his debt and/or purchase productive agricultural land. Payment is made over a maximum term of 10 years.
Livestock account, offering financing solutions for the purchase of livestock for breeding purposes; repayable over a maximum of 3 years
Grazing account, offering credit for activities regarding the planting or fertilising of pastures. Repayable over a maximum of 3 years.
Medium-term loan financing the purchase of capital equipment for precision farming, repayable over 3 years.
Lime account, credit offered for the purchase of lime for liming of lands, repayable on 31 August for summer harvests & 31 January for winter harvests.
Senwes Asset Financing - financing of motor vehicles, bakkies, trucks, tractors, combine harvestors, aircraft, helicopters, milking equipment, irrigation systems & centre pivots.
At the start of April 2012 Senwes & NWK announced that they have merged their insurance divisions, creating a new "Univision Financial Services Company", which will offer short-term, long-term & crop insurance. They are equal partners.
A 50% interest in the JDI group in Swellendam was acquired on 1 October 2011.
GFG shareholders had the option to (a) sell their shares to Senwes at a cash price of R25.50, up to a maximum of 75% of the total issued shares of GFG and/or (b) swap their shares for Senwes shares, up to a maximum of 25% of GFG's share capital on a basis of 1.6 Senwes shares to 1 GFG share. This was subject to Senwes acquiring at least 50.1% of GFG's shares. However, only 60% support was gained (instead of the requried 75%).
Moorreesburg Koringboere (Pty) Ltd (MKB) is the trading company of the Grain Farmers Group Limited, & is situated in the the Swartland. MKB has silos at Bergrivier, Koperfontein, Koringberg, Leliedam, Moorreesburg and Moravia for the storage of canola, lupin, oats & wheat. MKB also has seed processing installations at Bergrivier, Koperfontein and Moorreesburg. MKB has a minority stake in Pioneer Foods, a dog food plant (Petfood Caterers in Moorreesburg) and retail outlets in Langebaan, Moorreesburg & Velddrif.
The grain operations of GFG are a good fit for Senwes. Senwes's total 2009 Grain Silo Revenue was R188m, compared to MKB's R4m.
Senwes's BEE partner, Royal Bafokeng Agri Investments, sold their stake in July 2011 (after receiving an "unsolicited offer" which they "could not refuse"). The relationship between Senwes and Treacle, its other BEE partner, has been under strain since Treacle alleged that in 2003 & 2005 Senwesbel illegally purchased some 8.3m of Senwes stock from minority shareholders, and that Senwes had funded the transactions (the Companies Act says that a company may not finance third party purchases of its shares). On 1 Feb 2012 the North Gauteng High Court found that the shares acquisition between Senwes & Senwesbel was valid & Treacle was ordered to pay all the legal costs of Senwes & Senwesbel, but Treacle has the right to appeal.
After a long and extensive legal process, Senwes was found guilty by the Competition Tribunal regarding a margin-squeeze complaint. Senwes successfully appealed against the ruling of the Competition Appeal Court at the Appellate of the High Court (winning on a technicality, that it hadn't been part of the original referral). However, the Competition Commission has subsequently lodged an appeal at the Constitutional Court. The appeal was heard on 22 November 2011 and on the 12th April 2012 the Constitutional Court ruled against Senwes, saying that the Competition Tribunal can interrogate possible contraventions of the Competition Act even if the complaint referred to it by the Competition Commission did not cover that specific contravention.
The essence of the case is that since 2003 Senwes has charged a different fee for silo storage for grain traders compared to farmers (for farmers the fee is capped at 100 days until the next harvest season). In addition, Senwes itself trades in grain, thus competing with the grain traders, and Senwes does not charge its trading arm storage fees.
"The error made by the Tribunal was to call it a margin squeeze...the Supreme Court of Appeal erred when it held that the Tribunal considered a complaint which was not covered by the referral". The Constitutional Court set aside the order issued by the Supreme Court of Appeal, and amended the ruling of the Tribunal by deleting the reference to margin squeeze.
The following from Adams & Adams analysis of the Consitutional Court order on Senwes is relevant:
"No costs order was made against Senwes as the Commission is an organ of state, and no fine has been or may be imposed on Senwes as a first-time section 8(c) contravention is not one of the contraventions listed in section 58 for which administrative fines may be imposed for a first time offender. The fact that the Court has confirmed the Tribunal decision may, however, lead to possible civil claims by grain storers to whom Senwes charged differential storage rates, however the likelihood of such a civil claim succeeding is slim, as such an action has to date not been successful in South Africa."
(1) "An order against Senwes to sell either its grain trading division or its storage division to a separate registered company"
(2) An order "that all parties who store grain with Senwes be charged for such storage on the same terms and conditions"
Ironically, if the Competition Commission forces Senwes to adopt this structure, the consumer may be the one who suffers as it will probably cause grain prices to rise for the consumer. Senwes is a significant but not dominant player in the grain trade, and its efficient structure is what is causing the margin squeeze for other traders. If margins are allowed to increase then grain prices may increase. Trading grain seems a relatively easy market to enter, so even if Senwes succeeded in forcing players out through low prices, they could reenter if prices rose.
So, what are the repurcussions against Senwes if it is forced to break up its business, splitting the grain trading division out? Well, the positive is that it will now make more money out of storage fees, as it charges its own trading division higher storage fees. The negative is that its trading division will make less profits equal to the higher storage fees it pays. These would seem to cancel each other out (except for VAT leakage). Although, it's likely that there will be less trading carried out by the trading division, but Senwes could simulate something similar to the current situation, by deciding to operate the trading division on a much thinner margin than other traders.
Senwes has a "4-pillar-10-year-plan", which was presented to the board in October 2010. The plan starts with transactions with MGK & Bunge. Senwes Grainlink is following a dual growth strategy - coupling with a large international grain trading partner (Bunge) & expansion of the Africa footprint. Earlier in 2011 a joint venture was established with the European operational arm of Bunge. Expansions in Zambia & Mozambique are in the negotiation phase. Expansion of the Group's mechanisation business (John Deere agency) is also foreseen. The long term financing book is being sold to the same financiers who have already successfully taken over the hire purchase book from Senwes. Hartswater Wine Cellar was sold to Oranjerivier Wine Cellar during the year as a last step in the Group's disinvestment from non-core business. Senwes has increased its investment in a lime business to 50% this year.
Faster rate of outloading has probably been negatively impacting grain stock levels during the 2nd half of the financial year, and as a result silo storage income will be under pressure.
Senwesbel has indicated that it wants to increase its equity stake in Senwes over time (increased from 39.2% to 41.2% over the 2011 financial year).
The Senwes platform's trading fees are a bit unusual - you can trade for free for amounts of under R200, and I was tempted to do so! Eventually sanity prevailed, when I realised that my time is worth more than that. Paying 0.7% to buy an amount of R30,000 seems a fair deal.
SELLERS
Rand value of transaction Trading fees
Below R200 No fees
R200 to R5 000 Fixed fee of R50
R5 001 to R10 000 Fixed fee of R150
R10 001 to R30 000 Fixed fee of R200
R30 001 to R50 000 R200 plus 1% on value between R30 001 to R50 000
R50 001 to R500 000
R200 plus 1% on value between R30 001 to R50 000
plus 0.75% on value between 50 001 to R500 000
R500 001 to R1 000 000 Fixed % on capital - 0.5%
Above R1 000 000 Fixed % on capital - 0.35%
BUYERS
Rand value of transaction Trading fees
Below R200 No trading fees
R200 to R30 000 Fixed fee of R200
R30 001 to R50 000 R200 plus 1% on value between R30 001 to R50 000
R50 001 to R500 000
R200 plus 1% on value between R30 001 to R50 000
plus 0.75% on value between 50 001 to R500 000
R500 001 to R1 000 000 Fixed % on capital - 0.5%
Above R1 000 000 Fixed % on capital - 0.35%
Plus Value Added Tax.
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