Forget the Technical Analysis First,Engage Common Sense – Case Study Of Kakuzi

There is a reason I do 100% of my stocks investment in Kenya, except for the deliberate adventure trip I took to Zambia some years back. It is because I believe in the philosophy of Investment By Walking Around (IBWA, not as cool as MBWA but hey!). Before I get to the technical analysis of a stock, something that appeals to common sense must first draw my attention to it.

Let me illustrate this point using one stock that I started buying recently, Kakuzi Ltd. I have a keen interest in agribusiness. I am a participant, with some years in small-scale tea farming as well as a recent entry into banana and dairy farming. I would not be farming as a business if I didn’t have the conviction that there is good potential in it. This, therefore, means I pretty well understand the way money is made in agribusiness. A key success factor in stocks investment is to as far as possible invest in businesses whose money-making model you understand. With the above background, Kakuzi is a good candidate for me.

I have always known Kakuzi to be a player in the avocado market but I had never been interested enough to find out to what extent. I am also often on the Nairobi-Meru route, along which they advertise the products on offer from their farm. From forestry products like electricity poles and fencing posts to pineapples and Boran heifers. Their well-tended Eucalyptus plantations along the road make every lover of trees slow down to enjoy the views. All this pointed me to a business that is well diversified and that perennially gets its act together.

Then one day recently, I noticed a huge signpost announcing the opening of Kakuzi Butchery at their Makuyu sales office. I popped in once and bought some of the best cuts of meat anywhere at premium prices. The next time I stopped by, three other customers had parked their vehicles outside. I observed as they all bought at least 5kgs of meat each. And every time I drive by since, I notice a number of vehicles parked outside the butchery. I especially understand the various players in the agribusiness value chain and the margins enjoyed by each in order to move from farm to fork. I know how attractive it is to straddle the whole spectrum as one player. By “walking around” I am able to observe Kakuzi’s strategy of playing at this level.

Then came the newspaper reports on the scarcity of avocados in the market that got some regulator stepping in to regulate the export of the product. My own county government is rooting for the mass growing of the crop in response to market information on the demand for the product. Supposing the county officials behind this drive have their information accurate, it will be at least four years before the new crop is ready for the market. That means the currently established players have at least four years of enjoying a market in which demand will outstrip supply.

It is only with these common sense observations that I took the next step of looking at Kakuzi’s financial reports to study its performance. I was in for a pleasant surprise! I observed a number of things:

• Here was a solid business with revenues of more than Kes 2.5 billion for each of the last three years – with avocadoes raking in some 1.8 billion in 2017!
• Of that total revenue, an average of 537 million is pocketed as profit after tax over the three year period. Now if you are a farmer of whatever scale in our environment, those are figures you respect.
• Earnings per share stood at Kes 23.45, 28.70 and 30.19 for 2015, 2016 and 2017 respectively.
• The company boasts a total equity of Kes 4.3 billion, of which 4 billion is retained earnings. The strong balance sheet as at December 2017 includes Kes 1.6 billion in cash! Need I say more? A company with such a hand in cash, comfortable profitability that would not necessitate inflated valuations of biological assets, a dominant player in the avocado market with all its projected potential?

Since I do not intend to join in the county-sponsored growing of avocados and the other sweet spot products the company is in including macadamia, I am taking a bite of the action at the NSE.

The share is rather scarce in the market. Currently at around Kes 360 a piece, one requires at least Kes 36,000 to buy the minimum 100 shares. It has traded at 390 recently, representing a Price to Earnings (P/E) ratio of 13. This is below the overall NSE market level above 14, and in my view represents some relative undervaluation given the fundamentals of other profitable counters. Shareholders will also take home a dividend of Kes 7 per share in June 2018, which is a mean 2% yield, but potential capital gains should make up for this.

Caveat: The above illustrates the thinking that makes me buy Kakuzi. The markets are not rational. Nothing in all this rosy story says the share price cannot fall to 300. But what is sure is that with the fundamentals supported by the industry and business statistics, the share is more likely to make me money over the next 5-10 years than to lose me money. So if it fell to 300, I would not regret my buys at 360, but rather buy much more at the 300.