In its latest Equity Research Report analysing the financial services sector, Imara Securities has given a HOLD recommendation on Seed Co, a leading certified seed company authorised to market seed varieties developed by itself, governments and other seed breeders in over 15 African countries, including Botswana.
Having appreciated by 45.9 pear year-to-date, Seed Co.’s current price of P2.70 puts the counter on a PER, PBV and EV/EBITDA of 8.97x, 0.97x and 6.16x. When compared with its regional peers (sub-Saharan comparable companies), Seed Co trades above the peer average PER and EV/EBITDA of 6.42x and 4.59x. However, it is priced below the peer average PBV of 1.37x.
In terms of efficiency, Seed Co outperformed regional peers, registering an ROA and ROE of 5.98 percent and 10.78 percent, given the market average of 3.57 percent and 10.65 percent. “Factoring the above, our relative valuation yields a target price of BWP 2.74, representing a 1.48 percent potential upside. We therefore recommend a HOLD on the counter,” the stockbroker says in the report.
Imara notes that the COVID-19 pandemic has further exposed pertinent issues of food security and malnutrition, especially for poor countries, and placed higher importance on seed demand, among others, as a measure to address the matter. “Although Africa has the highest concentration of the world’s arable land, the continent’s share in agricultural output remains low,” the report observes.
“The potential for the continent to augment agricultural output presents an attractive investment case for Seed Co, given its pan-African presence. However, as evidenced in the Organisation for Economic Co-operation and Development – Food and Agriculture Organisation (OECD-FAO) Agricultural Outlook 2021-2030, ease of doing business and access to financing remain key issues.”
The OECD-FAO alluded to the fact that infrastructure and research outcomes require a longer-term strategy, saying this may help explain limited expenditures since political turnover usually occurs on a four-year cycle that leaves little time for long-term planning. Seed Co.’s operations are cyclical by nature, with demand for seed usually peaking in the company’s second half of the financial year.
Demand is however susceptible to unpredictable weather conditions and natural phenomena that is exemplified by the outbreak of desert locusts, with swarms reported across several countries in East Africa, which raised unease over crop and pasture resources in 2020, and improved rainfall which conversely lifted 2020 crop prospects in southern Africa. The current unfavourable weather forecast in East Africa poses a downside risk, though the company believes it should be offset by availability of early maturing seed varieties which are suitable in drought conditions in that market.
According to the stockbroking firm, normal to above-normal rainfall is expected elsewhere, and as such seed demand is expected to grow as food security becomes a priority in most countries and the sub-Saharan population continues to expand. Moreover, with Seed Co investing to grow its presence in the Sahel region, the company stands to benefit from counter seasonality in the Northern Hemisphere.
“In terms of research and development, the company reported that progress is being made with developing fall-army worm tolerant germplasm and the Maize Lethal Necrosis Disease (MLND) breeding programme in Kenya is beginning to yield positive results,” the reports notes. “Furthermore, joint trials are in progress in Ghana with a local institution with a focus towards the release of a rice hybrid for the West African region.”
With inflation heating up across the region and this posing the risk of margin compression due to higher input costs, the company’s large geographic footprint exposes it to significant currency risk. “The Group’s management is therefore cautiously optimistic of achieving earnings growth from prior year underpinned by sustained regional seed demand driven by the need to achieve food security amidst the pandemic and save foreign currency on food imports,” says Imara.
Meanwhile, Seed Co.’s revenues for the half-year ended 30 September 2021 grew by 27.31 percent y-o-y to USD 35.5m (H1 21: USD 27.9m). The increase in sales was attributable to early sales activity in Malawi, Tanzania and Kenya, local currency pricing adjustments as well as translation gains in the kwacha.
The company’s Zambia & DRC region was the largest contributor to sales, accounting for 43.54 percent of total revenues. Sales in the region rose by 21.09 percent to USD 15.5m (H1 21: USD 12.8m). Other regions that reported growth in sales were Malawi (+116.33 percent to USD10.6m) and Tanzania (+78.26 percent to USD4.1m). On the other hand, sales in the CCU + Mozambique region, Kenya and Nigeria were down by 55.56 percent, 17.07 percent and 42.86 percent at USD0.4m (H1 21: USD 0.9m), USD3.4m (H1 21: USD 4.1m) and USD1.6m (H1 21: USD2.8m) respectively.
Maize remained the major contributor to revenue by way of revenue per crops, accounting for 84.51 percent and 80.66 percent of total revenues and sales volumes.