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.
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.
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(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.
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.]