Ububele is planning to effectively merge its assets with those of listed ice-cream manufacturer Milkworx.

Shortly after listing the company will conduct a small-scale rights issue which has become a regularly employed strategy by the advisors of Milkworx and Ububele when it comes to small-capitalisation companies often resulting in companies with excessive numbers of shares in issue.

The group says that while it sees food production as a key business sector going forward they have steered away from the actual operation of farms and rather using their contacts at the farm gate to allow them to supply into these industries and to focus on beneficiation over original ("at farm") production.

Below are our takeaways from the presentation.

Management
Company management themselves did not come across as particularly slick and by their own admission would feel more comfortable amongst farmers rather than investors.

While the company makes much of its black economic empowerment status, the executive remains predominantly white male. Management has indicated that it will be reconstituting its board following listing, but a case could have been made for bulking up the credentials before going to market.

The executive itself appears to have a relatively low tolerance for debt on its balance sheet and they have built up a sizeable operation in agriculture - which is traditionally quite "lumpy" in terms of cash-flow - without burdening itself with expensive facilities.

Having said that, management were asked some tough questions about cash-flow and bad debts from the farmers and group financial director Bertie Cloete said that in the history of the company the largest bad debt had come in at around R20000.

A positive comment for us came from Thys Mocke - Director of Legal Service for the group. When asked why the group was proceeding with a listing in a tough economic climate which was not conducive to listings, Mocke said that the group had promised its shareholders that it would list its interests and management was determined to follow through on these promises.

Operations
The group has a couple of operations in Mozambique and Namibia but primarily the focus will be on its two South African operating divisions:

• Ububele Foods (Pty) Ltd - Comprising Milkworx, Just Fruit & Veg and Linktrade

• Ububele Chemical Group (Pty) Ltd - Including RT Chemicals, Envirotrade, Erintrade

A concern we have around the group is that it has limited fixed assets. Apart from the Milkworx factory and a few other bits and pieces, the groups "assets" are its people - the brokers selling product onto the farms. This could crimp its ability to raise finance and grow down the line.

The company has said it has lined up a Cape Based "hot food" manufacturing operation for acquisition shortly after its listing and we believe investors will want to see more assets being brought onto the balance sheet.

Ububele says it also has worked out a strategy for the Milkworx operations and will be looking to move their product into Africa where they believe it will be a success. They are also looking to "sweat" the Milkworx ice-cream technology further and are talking about longer-shelf life ice cream coming out of the plant.

We do note with some concern that JSE listed Famous Brands has recently announced its intention to acquire the Mugg & Bean coffee shop franchise. Mugg & Bean is a key customer for Milkworx and there should be some concerns that if Famous Brands take over the group that ice-cream supply will be moved onto the Famous Brands supply chain and away from Milkworx.

Conclusion
While we have some concerns around management depth and the lack of fixed assets in the group, the existing team have shown an ability to grow a relatively successful business in a short space of time.

A key takeaway for us is that management have emphasised that they want to execute strategy and they have already identified a post-listing transaction.

Having said that we strongly disagree with managements view that primary agriculture is not the business to be in. We believe that high volume farming and agricultural processing operations will consistently be able to be price makers over price takers in the current market and this is unlikely to change in the foreseeable future.

**Disclosure - author holds shares in Milkworx

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