TWK Investments Limited (TWK or the TWK Group) is a diversified agriculture and forestry company. TWK operates through the following divisions: timber, retail and mechanisation, financial services, grain, and vehicles and tyres. The group reported results for the year ended 31 August 2020 that reflects the tough trading conditions experienced during the year, exacerbated by the COVID-19 pandemic.
André Myburgh, CEO of TWK, commented: “The results of the TWK Group for the year under review are disappointing when compared with the record results of the previous year. However, the results should be put into perspective. The past financial year was probably one of the most challenging years for most businesses. No business has escaped the widespread disruption caused by the COVID-19 pandemic.”
During the lockdown, agriculture was classified as an essential service provider. The sector therefore alleviated the impact on the industry in which the TWK Group operates. Although TWK is a diversified business operating in the agri sector, the timber division is the main contributor.
Therefore, the biggest impact on the TWK Group was the disruption in the export of fibre and the decline in demand for local lumber and fibre. Substantial losses were also incurred in the dealerships and fuel operations, directly related to the severe impact of the COVID-19 hard lockdown periods.
Overview of revenue
Revenue was down by 1% from R7,8 billion in 2019 to R7,7 billion due to tough market conditions. However, there was an improvement in the retail and mechanisation division of 15,7% due to higher volumes of fertiliser sold, the additions of new branches, and better trading conditions in certain areas. Revenue in the timber division decreased by 16,8% due to a drastic decline in demand in the international pulp paper industry.
Operating expenditure as a percentage of turnover was 12,9% (2019: 13,3%) and is in line with the group’s commitment to maintaining disciplined cost control. Operating profit, excluding discontinued operations, declined by 31,7% from R431,1 million (2019) to R294,3 million, resulting in the operating profit margin weakening to 3,8% from 5,6% in 2019.
Eddie Fivaz, TWK’s chief financial officer, said: “The company declared a total dividend to shareholders of 65c per share, a decrease of 27,8% on the previous year’s 90c per share. Our financial position remains strong with good cash flow. Nett asset value per share increased by 5,1% from R40,74 as at 31 August 2019 to R42,83 as at 31 August 2020. Return on equity decreased from 13,7% to 7,8%.”
Overview of divisions
The timber division reported revenue of R1 838,6 million, a decrease of 16,8% from R2 210,8 million for the previous financial year primarily due to a sharp decline in the export of woodchips on the back of the drastic decline in demand in the international pulp paper industry.
Sales volumes to the South African eucalyptus, pine and wattle markets decreased by 54%, 21% and 22%, respectively. Operating profit from continuing operations decreased by 55% from R244,5 million in 2019 to R110 million in 2020, resulting in the operating profit margin declining to 6% compared to 11,1% in 2019.
During the year, TWK increased its interest in the mine timber sawmill, BedRock, by 25% to 90% as at 31 August 2020. The acquisition of the forestry assets (23 422ha of land, 17 900ha of standing timber, buildings and a sawmill operation) of Peak Timbers is still subject to Competition Commission approval.
Following year-end, TWK acquired 51% of Sunshine Seedlings Services (Pty) Ltd (Sunshine) and has been granted an irrevocable right to acquire a further 49% of the shares in Sunshine over the next five years at agreed terms and financial ratios. Sunshine is a large nursery business yielding some of the highest quality timber and vegetable seedlings in South Africa. The nursery produces over 50 million vegetable seedlings annually, as well as ten million forestry clones, seven million forestry seedlings and four million essential oil seedlings and clones.
Revenue for the retail and mechanisation divisionincreased by 15,7% from R2 912,2 million in 2019 to R3 369,7 million mainly because of higher fertiliser prices and 5 015 tons more fertiliser sold. TWK increased its retail outlets to 29 compared to 27 in 2019 by adding the New Holland Mechanisation Agency in Pietermaritzburg with effect from February 2020 and the Harding retail store. Operating profit increased by 7,3% from R32 million in 2019 to R34,4 million, with an operating profit margin of 1% compared to 1,1% in 2019.
The financial services division reported a decrease in revenue of 3% from R178,9 million (2019) to R173,5 million, largely attributed to the 34% decline in bridging facilities provided by the credit division. The insurance division reported a 20% growth in crop insurance and an 86% growth in its medical insurance portfolio. This contributed to operating profit increasing by 2,5% from R36 million (2019) to this year’s R36,9 million. The overall operating profit margin increased from 20,1% in 2019 to 21,2%.
The grain division reported a strong set of results and was the only division unaffected by COVID-19. Contributing to the strong results was the silo capacity increase at the Rietspruit Silo to accommodate the storage of non-genetically modified organism (NGMO) crops.
Revenue decreased marginally by 2,5% to R1 311,5 million compared to R1 346,1 million in 2019. Operating profit increased by an impressive 131,4% to R44,1 million from R19,1 million in 2019. The operating profit margin recovered to 3,4% compared to 1,4%, as the results exclude the loss-making (since 2019) Mkhondo Animal Feeds operation that was closed during the year.
The motors and tyres division experienced one of its most challenging trading periods in history. Revenue decreased by 10,8% to R979,6 million (2019: R1 097,6 million) due to declines in sales volumes across all the underlying businesses. The Toyota, Hino and Isuzu dealerships showed a 21% decline in the number of vehicles sold, a 17% decline in new tyre sales, as well as a drop of 21% in petrol and diesel sales for the year ended 31 August 2020. Operating profit declined significantly by 45,5% to R19,2 million from R35,2 million in 2019, resulting in the operating profit margin decreasing from 3,2% in the prior year to 2%.
Prospects for 2021
“Although a slight improvement, we project that the international markets and prices of timber fibre will continue to be under pressure into the new year. We are expecting the ‘loss’ in volumes due to the lower demand by the pulp paper industry to be absorbed by the increase in packaging volumes as online or e-commerce shopping, as well as the demand for sanitary products increased as a direct result of COVID-19.
“In addition, with the volume decline in recycled waste paper, we are expecting an increase in the demand for virgin pulp used in the manufacturing of paper, corrugated carton board, and other paper-related products,” said Myburgh.
“We are also very optimistic that the rest of our business units will perform much better than the past year. We will continue to bear down on costs and improve the efficiency of our operations, including through range optimisation and lower stockholdings to deliver sustainable improvements in our cash generation and profit before tax. Our strategy is robust, and the diversified nature of our business makes us resilient in the face of tough macroeconomic pressures.” – Press release, TWK