AFRIAG Food for Thought

Afriag PLC TIC AFRI                                                                                                                      15/04

Afriag isn’t my normal kind of investment. Indeed who wants to invest in lorries and food, when normally its oil and expensive commodities, but it tweaked my interest.

So what do we have, AFRIAG is an investment company with 40% of AFRIAG SA. It also has a few hundred thousand in AIM shares of companies connected with agriculture in Africa. These holdings are a useful source of money if needed due to very liquid holdings.

The main reason for AFRIAG though is as a vehicle for AFRAG SA on the AIM index. Using such an investment vehicle, AFRIAG SA can bypass all the normal oversight connected with an AIM listing.

AFRIAG SA is a joint company owned by Paul De Robillard and David Lenigas (through AFRI) that aims to become a logistic giant spanning the African continent. This is a very profitable space currently occupied by the likes of DHL and Lonhro. David is the Chairman of Afriag SA.

Those familiar with Paul and David will know  about their relationship with Lonhro in the past and Paul’s track record of creating one of South Africa’s largest logistics companies that Lonhro then went on to takeover.

Afriag SA started from scratch around 8 months ago and in this time has already obtained the following contracts.

08/13 Contract to transport Spring Water with Premier Spring Water

10/13 Contract with United exports to transport fruit to European Supermarkets

03/14 Contract with Mozambique’s largest fresh vegetable growing

03/14 Contract to move animal forage to the UAE (approx. 50 containers a week)

The case for investment.

“British researchers Analytiqa projects logistics spending in Africa by manufacturers and retailers will increase by almost $28.8 billion, or 5.19 percent, in a four-year span, from $128.5 billion in 2012 to  $157.3 billion in 2016. The size of the outsourced logistics market alone will increase by 38.4 percent in the period, Analytiqa says in its February report, “Africa Logistics: Keep Cool for Growth; Charting growth trends in logistics markets to 2016.”

It is abundantly clear that logistics is a growth area in Africa and the stated aim of AFRIAG to become the fastest growing logistics company in an estimated market of 157bn by 2016 is certainly a lofty aim.

With Paul and David together they have the track record of creating a multi hundred million logistics business and then selling it.

Afriag has also chosen to concentrate on the sub market specialising in temperature controlled storage and transportation. The below quote is taken from a research paper that supports the view that this is the most important higher end, high margin, high growth sub market.

“Much higher levels of trade in food products will create further opportunities for 3PLs.

Facilitating trade will require vast improvements in cold-chain services, including both

transport and temperature controlled storage facilities.”

Afriag has won the very lucrative contract to perform such a service to the largest producer in Mozambique, which is quite a feat for a company less than 12 months old.

Both Paul and David are very well connected business men in Africa, with large business networks.

Afriag plc has a current SP of .475p with an MCAP of 5m. This values Afriag SA at £10m. Is this fair value ?

It’s very difficult to judge the potential current profitability of Afriag SA. It has no past accounts due to being only 8 months old. No information has been forthcoming about profit margins or potential profit from contracts. Due to this the AIM Market has applied the uncertainty principle and so gives very little value. The potential of Afriag is massive though, given its positioning, its targeting, the size of the market and the strength of its owners. The possibility that in 5 years time this is another company valued in the hundreds of millions is real.

Afriag is suitably funded at current levels after raising £300k with Yorkville Advisers at an average of over 2p a share, well above current levels. The funding contained a second SWAP component that was announced on the 15/04/14, with the monthly swap payments starting on the 30th of June. This was delayed at David’s and YA’s consent due to the low share price that AFRIAG is currently experiencing. That both parties are now happy to start the monthly payments is an indication that they both see an increase in the SP by June. The agreement also means that AFRIAG is fully funded until June 2015, with the obvious caveat that new investments or reverse takeovers might happen with share dilution.

So where does all this leave the share price? Well in the short term until the market sees realisation that Afriag is expanding its profitability rapidly, the share price will struggle to respond much above 1.5p, Over an 18 month period a share price of 5-6p is a real possibility as the market starts to get regular updates of profitability trends.

The short term Share Price could be helped with the following.

1.       A detailed vision being given by AFRIAG as to how the logistics firm will create profits and grow.

2.       A 3 or 5 year plan of where the company is expected to be, what important milestones for profit , margins and revenue they expect to reach and when they expect to reach them.

3.       An overview of the contracts and bids logs with discussion about industry standard margins.

AFRIAG shares a very good place in my Portfolio, it offsets the industry heavy holdings in oil and exploration nicely without the risk of tech stocks. For me this is a BUY with my own 3 month target of 1.5p and 18 month target of 5p.

Some useful research for Logistics in Africa:

http://www.pwc.com/en_M1/m1/publications/africa_gearing_up_-_transport_and_logistics_industry-web.pdf

http://www.africastrictlybusiness.com/news-analysis/logistics-high-growth-industry

http://www.joc.com/sites/default/files/u52092/Arica.pdf