Our opinion on the current state of KAP

KAP International Holdings (KAP) operates as a diversified industrial entity with a focus on producing and marketing timber, chemicals (PET and related chemicals), bedding, and car parts, alongside managing a logistics division. The company's integration of acquisitions Safripol and Hosaf into a consolidated polymers business under the Safripol brand exemplifies its strategic expansion efforts. Notably, the bedding division has experienced significant growth, supported by new investments in infrastructure and manufacturing capabilities. However, growth in the automotive parts division has been less pronounced. Previously, Steinhoff owned a 43% stake in KAP, but it has since fully divested its holdings. The extension of the government's Automotive Production and Development Programme (APDP) until 2035 is anticipated to benefit KAP's parts manufacturing operations.

The timber division of KAP is witnessing a resurgence following the easing of lockdown restrictions, with sustained high demand for its products. Conversely, the automotive components division faced considerable challenges due to the lockdown, with a slow recovery post-lockdown. The bedding division managed to maintain operations during the lockdown, driven by strong demand for medical and agricultural products, similar to the polymers division, which also remained operational.

Following the flooding in Natal in April 2022, KAP reported temporary operational and supply chain disruptions in the region, which are currently being addressed. For the fiscal year ending on 30th June 2023, KAP announced a 6% increase in revenue but a 43% decrease in headline earnings per share (HEPS). This performance dip was attributed to several factors, including reduced domestic sales volumes due to extensive loadshedding, the necessity of increased export sales at lower margins to normalize inventories, damage to equipment from unplanned infrastructure disruptions, and rising finance costs.

Looking ahead to the six months ending on 31st December 2023, KAP forecasts a decline in HEPS by between 25% and 36%. The share price experienced a low of 127c in March 2020 and showed an upward trend until April 2022. However, the share has been on a downward trajectory since then, with increased loadshedding adversely affecting the company's operations. Despite these challenges, the current valuation of KAP shares may offer good value, considering the broader context of the company's diversified operations and strategic responses to prevailing economic conditions.