Barbican Asset Management

Taking Stock – Interfresh’s future prospects exciting

Introduction DESPITE a difficult operating environment especially within the agricultural sector, Interfresh Ltd continues to put up a performance above inflatio

n and market expectations.


Classified in our Barbican Equity Model (BEM) as being in the agro-industrial sector, Intrefresh Ltd has consistently lived up to its promise of enhancing shareholder value.


Background


The group was incorporated in February 1953 before it was later listed on the local bourse in April 1997.


Its original purpose was to ripen and distribute bananas grown on its Mozambican farms. Currently, the company’s major operations include producing, processing and marketing horticultural, floricultural and allied food products for both the local and export markets.


Divisions


The group is comprised of several small business units, which work together towards fulfilling the company’s business objectives. After having disposed of its air and general freight-handling arm called Interfreight during the year under review, the company introduced three more SBUs namely Citifresh, Smithfield Flowers and Transfruit Exports.


One of the group’s division, Wholesale Fruiterers handles the distribution of fresh produces and allied products in the country.


It is involved in cross-border trading to neighbouring countries.


Mazoe Citrus Estate a large-scale citrus producer also produces citrus byproducts like juice and oils for export. The estate also diversified into wheat, maize, soyabeans and barley while Mazoe Flowers the group’s 50:50 joint venture with Netherlands Floricultural Investments grows roses for export.


The group also imports a wide range of food, beve-rages and liquor products for the local mart through Marlon Trading. Its other divisions include Transfruit, Inter-foods Manufacturing and Interspan which mainly export the company’s horticulture and floricultural products while Intercrop is a “one stop shop” for supplying packaging, chemicals and fertilizers thereby allowing other SBUs to concentrate on their core businesses.


About 76,69% of thecompany’s shares are tightly held in the hands of institutional investors. The fact that renowned institutional investors have the highest stake in the company serves to show the level of confidence the market has on the counter.


Stock market performance


Interfresh Ltd’s share has performed fairly well on the stock market. Its average price from November 2002 todate is $30 while its minimum this year was $8,50.


Currently the counter is trading at an all-time high of $130 and this is a good development as the counter is now on a re-rating path.


Financial performance


Interfresh put up a sterling performance during the first half to post a 507% increase in turnover to $23,6 billion. The group’s before and after tax profits went up by 492,9% and 684,8% respectively. It is interesting to note that growth in turnover, before and after tax profit figures was above the inflation figure for the period, which was around 228%.


Additionally the group’s six months performance to June 30 has already surpassed last year’s 12 months performance and this in other words gives one a foresight of what its year-end are likely to be.


Operational efficien-cies and dedicated management must have been instrumental in the achievement of these astounding interim results.


Traditionally the second half of the financial year always performs better than the first half. As a result we expect the growth in the company’s earnings per share in the final half to be significantly higher than the reported 602% upsurge.


Although the operating margin dropped from that of the previous year it is worth noting how the company achieved a 3,6% rise in net margin to 15,6%.


This further explains improved efficiency inthe company’s operations. The group’s net asset value per share swelled 10-fold to 2 234 cents from only 210 cents last year while its total assets swelled by 689 percentage points to $26,3 billion.


This splendid performance against the background of stringent operating conditions serves to show what Intefresh is capable of doing if the playing field gets slightly levelled.


Challenges


Close to 80% of Mazoe Citrus Estates was listed for compulsory acquisition and this hampered the estate’s efforts of increasing production. With prices of most agricultural products being controlled it appeared difficult for the companies to break even.


However the reversal of price controls has brought a new lease of life in the sector, as companies are now able to competitively price their produces.


Strengths


The company has a very sound export base since most of its SBUs have export processing zone (EPZ) status. Thus the company has a very strong forex earning potential.


Additionally the company is benefiting from firming global flower and horticultural prices and this will go a long way towards the growth of its earnings. The group is well-positioned in the market as it is involved in the production and marketing of its produces and this reduces its vulnerability to change in policies of suppliers if it were to buy merchandise or farm produce for sale


Forecast


Given that the company performed well above market expectations in spite of the numerous challenges the agricultural sector was facing, the future is full of promises for Interfresh.


The counter boasts of a sound forex hedge and this is good news given the current hyperinflationary environment.


Valuations


With a rolling EPS of 928,81 cents the company is currently trading at a historic P/E ratio of 10,2.


Based on the rate, at which the group’s earnings have grown, we forecast a forward P/E of 1,8x. From these valuations it is apparent that this counter will experience a marked increase in share price.


Conclusion


Intrefresh Ltd can be classified as a growth stock with a potential of having its share price re-rated to higher levels and we therefore recommend a buy at current price.