The return of Seed Co Limited

Batanai Matsika

Following an announcement that Seed Co Limited’s (SCL) planned merger with SeedCo International (SCIL) was halted by the Reserve Bank of Zimbabwe (RBZ), SCL resumed trading on the local bourse on Monday June 21, 2021. 

According to the company, SCIL and SCL will continue to operate as two separately listed companies and will utilise a Group Shared Services Unit to harness synergies to the extent possible. As outlined in our research reports, the re-listing of SCL presented a massive share-price upliftment opportunity given that the last traded price on the ZSE was ZWL$21.61 (23 February 2021).  At the end of the Tuesday trading session, SCL closed at ZWL$67 per share, which represents a gain of 210%. As part of our analysis of the stock, we re-visited the investment thesis in SeedCo;

•  Strong Food Demand in SSA

The food demand outlook in the Sub Saharan Africa (SSA) region remains very strong. Rapid population growth and increased economic prosperity are expected to create substantial demand and opportunities for the agricultural sector of Africa. The SSA region accounts for more than 950m people, approximately 13% of the global population. By 2050, this share is projected to increase to almost 22%, or 2.1bn. Governments in the region are also increasing policy focus on the agricultural sector to support to food affordability and availability. This represents a massive opportunity for a regional seed companies like SCIL and SCL given their strong brand visibility.

• Exposure to high-growth-rate region

Through an aggressive regional expansion strategy, SCIL and SCL have been diversifying away from political and economic risk in Zimbabwe. The group has made successful forays into new markets in both East and West Africa. New markets such as East and West Africa present an attractive growth outlook given the low penetration/adoption levels of certified seed in these markets. For example, the adoption rate in Tanzania is 25% vs. 95% in Zimbabwe.

•  High industry barriers to entry

Seed Co’s business model is difficult to replicate. The key competitive edge is that Seed Co has a strong focus on communal farming activities in SSA, having developed several seed varieties in the region over time. 

As a result, the business has managed to maintain very strong market share positions on the continent. In our view, the focus on Africa is a key competitive edge. 

We therefore contend that Seed Co will continue to grow and maintain dominant market positions in various SSA countries. On the other end, smaller local players in various markets could find it difficult to enter the market segment given that biotechnology requires investments in research and development (R&D). For example, Seed Co has been investing c5.0% of its revenues in R&D and plans to increase this to 10% in the long term.

• Low capex demands

A key advantage is that Seed Co’s business model is not demanding on capex (ex R&D). Generally, most companies in the agricultural sector consume significant amounts of cash on the back of high capex requirements associated with farm acquisitions and maintenance. Seed Co is a biotechnology company and most investments are in R&D. We also like the out-grower model that does not compel the company to invest in farms. This also points to prospects of generous dividend pay-outs for shareholders in the medium to long term.

•  Currency Hedge for Zim Investors

We view SCL as a strategic holding for investors looking to hedge against ZWL volatility. 

The stock offers an ongoing hedge against inflation given that c15% of SCL earnings are from SCIL (a regional player in SSA ex Zim).

•  Limagrain partnership is set to unlock value

We remain bullish that the partnership with Limagrain will unlock value in the long term. In our view, the partnership will enhance SeedCo’s research capabilities. 

Limagrain has more than 100 research centres and over 1,400 researchers over the world that creates approximately 600 new varieties each year. The group’s annual research budget is in the region of €200m. 

Seed Co is therefore set to leverage from the strong R&D capabilities.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or               batanai@morganzim.com/batanai@piggybankadvisor.com

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