Cairns: a counter worth buying

Taking Stock – Barbican Asset Management

IN the year 2001 the Astra Ltd group demerged into three companies namely Astra Industries Ltd, Cairns Holdings Ltd and Tractive Power Holdings Ltd.



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The companies were then separately listed on the local bourse. Cairns Holdings Ltd (CHL) boasts of a full ownership of Cairns Foods Ltd as well as a 60% stake in ME Charhons (Pvt) Ltd.



Cairns Foods is a manufacturer and distributor of food and beverages with the following divisions; groceries, winery, canning, chips and snacks and paprika.


ME Charhons, which is one of the major suppliers of biscuits in Zimbabwe, had the other 40% shareholder being owned by Dairibord Zimbabwe Ltd as at the financial year-end of 2003.


Shareholder analysis


The top three major shareholders are Finance Trust of Zimbabwe, Cyrus Holdings Corporation, and Cairns Workers Trust, which hold a 66,5%, 11,51%, and 4,76% respectively (see inserted table).


Worth noting is the fact that corporate entities, trusts and pension funds have a combined stake of about 89% in the company. The shareholding structure is acutely negatively skewed mainly due to the controlling interests that the top three major shareholders have in the company.


The level of free float in the counter is estimated around 10% and the annual liquidity for the stock is about 17%, which is a sign of a relatively low level of marketability of the shares. The 365-day trading volume average is 118 446, and there are about 133 million shares in circulation.


Opportunities


Forex retention scheme: The group has managed to establish very good relations with their regional clients. This will contribute significantly in enabling the group to benefit from the recently introduced foreign currency retention scheme announced in the new monetary policy.


Low levels of gearing: The group is currently operating with a very low level of gearing. This implies that they are strategically positioned to cushion themselves against any possible adverse movements in interest rates. Also worth noting is the fact that the window to access concessionary funds of the Productive Sector Facility is also open to the group. Such cheap financing can be used, as and when required, as a tool in the reduction of their cost of funds.


Devaluation: Given that the group exports some of its products, we envisage it to be a beneficiary from the de-facto devaluation emanating from the recently introduced foreign currency auction system. During the year 2003, about 8% of the group’s turnover, were from exports. The contribution of exports is expected to increase in 2004 on the back of anticipated increase in the exports of paprika.


Challenges


As with other companies the group is also facing the effects of the HIV pandemic on its work force. Focus has thus been given in containing the spread of the disease by way of training peer educators, general health education and drug administration.


Valuation


Currently, Cairns is trading at a rolling price-to-earnings (PE) ratio of 4.4 times, which happens to be the lowest of the counters in the food sector (see inserted table). The relative market PE ratio is 0.48, which is an indication that the current share price can be viewed as cheap relative to the market. Based on our projections of earnings growth, the forward PE ratio for the counter is around 0.6x, which further indicates a significant upside potential in the counters’ share price, given an exit PE of 13.82.


From a net asset value point of view, Cairns is also a relatively attractive stock from a food sector point of view. Currently, Cairns is trading at a price-to-net asset value of 3,76, which happens to be the first quartile of the food sector. Also worth noting is the fact that the food sector average of the Price-to-Net Asset Value is 3,96, which happens to be higher than that of Cairns. This implies that there are more assets backing the share price of Cairns than would be expected from a counter in the food sector.


Conclusion


Based on the above fundamental analysis and relative valuation, it can be seen that Cairns is arguably the best stock pick in the food sector.

Consequently, we perceive being overweight in the counter as a sound investment decision.

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