Forestry company Safcol breaks the mould of dysfunctional state-owned companies

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RYK VAN NIEKERK: The South African Forestry Company Limited (Safcol), is the third-largest state-owned company in South Africa, following Eskom and Transnet. The company is the oldest certified forestry company in Africa. It manages 190 000 hectares of land all around the country, and it also has 100 000 hectares in southern Mozambique. The group recently reported that in its most recent financial year it managed to grow its revenue by 33% to R1.2 billion. The operating profit rose by R40 million to R390 million.

Safcol also achieved a positive cash flow and generated R250 million in cash from its operations. Irregular and wasteful expenditure amounted to less than R1 million. It also has virtually no long-term liabilities on the balance sheet and, probably most importantly, achieved an unqualified audit opinion for the third consecutive year. This performance must be seen in the context that Safcol racked up significant irregular expenditure of nearly R600 million in its 2018 financial year, and received several qualified audit opinions up until 2019.

Tshepo Monaheng is on the line. He’s the CEO of Safcol, and was appointed in this position in December 2017. Tshepo, thank you so much for joining me. It has been a remarkable turnaround. Did you pay a dividend to government following your recent performance?

TSHEPO MONAHENG: Yes, thank you, Ryk. It was a wonderful journey – challenging, but rewarding at the end. We are still on the journey. We haven’t arrived yet. We are still working on this project and did pay dividend to the shareholder, a modest dividend, just as a gesture. We are planning to pay meaningful dividends going forward.

RYK VAN NIEKERK: At least it is a green number and most South Africans would take it, especially since most other state-owned enterprises are suffering eye-watering losses. It is indeed a breath of fresh air.

Tell us about the turnaround because when you got to Safcol in 2017 you did not find a happy company.

TSHEPO MONAHENG: No, indeed. It was a difficult environment. Ryk, there are two important issues in working on the turnaround of a company. One is that there should be a plan or a strategy that is executable. The other part is the culture and the environment within which you are operating, because you can have a good strategy but you may not be able to execute because of the environment.

So I must say that we had a solid strategy, highly executable, and we had an environment that allowed us to execute – even though we’d have loved to double our top line.

But what we achieved was good as a start, and we wouldn’t have achieved the turnaround if we didn’t have the support of the board, the support of the shareholder and the environment that we worked around, the employees. We changed the culture. We are still working on the culture change to one of accountability, one of excellence, that each employee of Safcol is responsible to deliver what they are contracted on. Every employee of Safcol is contracted, and must deliver on their contracted targets or objectives.

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RYK VAN NIEKERK: Can you give us an overview of Safcol’s operations, especially the areas where Safcol earns the bulk of its revenues?

TSHEPO MONAHENG: We have three parts to the business. We have the forestry business, which is the plantations; we have the processing part, which is the sawmilling part; and we have the third part, which is the ecotourism.

About 80% to 90% – depending on the year – of the revenue comes from the log part . That is the plantations part, where we harvest from the plantations to deliver to our customers, and we prioritise our South African industry, or the sawmilling industry.

The second contribution comes from sawmilling, which is not doing so well in terms of profitability. The technology is quite old so it’s difficult for it to be profitable.

Ecotourism, as well, is not doing so well in terms of profitability. It is small. But we know that there’s huge potential to turn that [around] tenfold or even more.

RYK VAN NIEKERK: There seems to be a significant timber shortage in South Africa at the moment. Several private-sector companies have said they could not source the volumes of timber from Safcol they expected. What is the situation there? What has been the trend with your production levels in recent years?

TSHEPO MONAHENG: We have what we call an auction process at the beginning of the financial year, where we go out to the market and find out the interest from the market. That interest is much more than what Safcol can supply. So [for] some of our customers, especially the big customers, we are not able to meet their required volumes because, as a state-owned company, we can’t just supply the queue and ignore the others. So we try and spread the volume that is available per year.

Because of sustainability we cannot over-harvest. We have to make sure that next generations can find the plantations in a good state.

We have a limited amount per year available for the market. So we [haven’t been able to] provide the volumes that the market has wanted, and we’re correcting that going forward because we realise that if we can focus on companies that process locally, that beneficiate locally – instead of companies that are going to export logs out of the country – we’re going to have a bigger impact, and  most of these companies that are processing will have more timber available for them to process locally. They create job opportunities for the people in the country, unlike if we supply to people who are going to export because it’s a one-man show. They put logs on trucks going to the port instead of processing the logs here locally, converting them into high-end products.

RYK VAN NIEKERK: Tshepo, is it not possible to ramp up production? I would assume it’s not that easy to increase timber production, because there’s a long lead time from when you plant a tree to when you harvest it. But is it possible to increase production levels?

TSHEPO MONAHENG: Yes, we are working on that. That is part of our strategy. For us most of the required species is pine; about 90% of the required species is pine and it takes about 25 years, plus or minus, from planting to harvesting. It’s a long time.

So what we’re doing now, [knowing] there are a lot of plantations in the country that are not productive, is we are approaching the owners, whether the Department of Forestry, Fisheries and the Environment, or the municipalities, for us to take over the management of their assets so that we can have enough timber available for the industry. That’s our long-term plan.

In the short term we are trying our best, without going beyond sustainability, to provide customers with the timber that they want. We believe that if we supply the processing, the sawmilling industry, with timber, we should be able to get to a nexus…

RYK VAN NIEKERK: Have the production levels of Safcol grown in recent years?

TSHEPO MONAHENG: [There has been] a bit of growth. Like I said, we have to control, to manage, how much we can harvest per year. We can’t increase beyond our sustainable volumes available per year. In past years we didn’t have the budgeted or the planned volumes. In the past year or two we’ve had excess volumes above the sustainable volume that we could tap into.

RYK VAN NIEKERK: What is Safcol’s market share in South Africa?

TSHEPO MONAHENG: We operate in Limpopo, Mpumalanga, a little bit in northern KZN – but mostly in Mpumalanga. We are the main supplier of timber in the Mpumalanga area. And in terms of the market – because we are regionalised, we are not a nationwide company – it’ll be difficult to look at [our] market share in the country. But, looking at our market share in the region we operate in, I would say that we are over 50% in the Mpumalanga area in terms of the supply of logs.

So it means we are [almost] dominant. That’s why it’s important for us to be fair to customers. We don’t want to use our dominance to disadvantage customers. Instead, we have to use that dominance to support the growth of the industry.

RYK VAN NIEKERK: You also have operations in Mozambique. When did you enter that market, and why do you operate there?

TSHEPO MONAHENG: Safcol, through KLF – [Komatiland Forests Limited], a subsidiary of Safcol – bought an asset called Ifloma. KLF bought 80% of that asset and the Mozambican government owns 20%. This transaction happened – I don’t have the exact year – early in the 2000s. The strategy was for expansion. But because that asset was not managed well Safcol didn’t get the benefit of that expansion.

But now we have operationalised that asset, [it] is starting to generate revenue and we are hoping that it will be able to operate optimally, and that will encourage us in our expansion strategy because we don’t believe that we can continue expanding if we can’t make the first leg of expansion work. So we are going to have to make sure that we flow 10:08 in Mozambique works. Based on that we can expand to other areas of the region.

RYK VAN NIEKERK: I want to come back to the three consecutive unqualified audit opinions Safcol received, because that is almost in contradiction with other state-owned enterprises in South Africa where there is a lot of irregular and wasteful expenditure. State capture has caused a lot of operational problems as well. How difficult is it to operate a state-owned enterprise in South Africa?

TSHEPO MONAHENG: I think it’s difficult, because you’ll not just do something because it’s good for the business. There are a lot of considerations that we have to take into account. So for us what was important right at the beginning when we realised [those] audit findings was just huge. It was a big problem.

We decided to strengthen the controls. So we strengthened the controls within the supply chain – how we [should] buy, and the financials in terms of our reporting the accuracy of the information. The other part is the internal audit, strengthening that part of internal audit so that we don’t wait for external auditors to come and tell us the wrong [things] we have done. If there are any problems we should be able to pick them up early.

RYK VAN NIEKERK: Is it possible to curb corruption within a state-owned enterprise only with processes and procedures, or do you need other actions as well?

TSHEPO MONAHENG: Yes, definitely we do. We have to make sure that we don’t allow [any] external influence to determine how we operate, because as a state-company the company belongs to the people. Everybody has a say on how we should [perform]. If they’re not successful in getting a contract, they have a right to question it.

But, as long as we do the right thing in terms of admin and controls, we have to stick to that and not allow ourselves to be influenced by external forces, whether it’s suppliers, whether it’s our customers, or whether it’s service providers. We should make sure that at all times we do what is right.

RYK VAN NIEKERK: I read in the most recent annual report that there is talk of Safcol expanding its footprint, trying to procure additional land to establish new plantations. Is that a complicated process?

TSHEPO MONAHENG: Actually, we are not going to procure, but we want to leave the land. It’s a difficult, long process, because for the people managing the land currently it’s difficult to decide ‘we are going to transfer the land for management to Safcol’, because they’re not businesses. If [they were] pure businesses, it would be a business decision to say, ‘It makes business sense for us to hand over land to Safcol to manage. It’s quick’.

But the land, the plantations that we want to take over [to manage] are controlled by different entities, and it takes time for us to get those, because that is at the heart of our growth. If we can get access to those plantations, we’ll be able to grow the business even further and be able to support our industry. But it takes us a bit longer than we had thought to access those plantations – that is, locally.

In the SADC region we have suspended growth because we want to make sure that we have excelled in South Africa, that we have been able to manage the plantations that were not managed well. We’ll manage them well and then, when we are done, only then can we move to the region.

RYK VAN NIEKERK: Would that be typically communal land, or private-sector land?

TSHEPO MONAHENG: Most of the land is government-owned land that belongs to the Department of Forestry. And the other land is municipal-owned land. Municipalities do own plantations.

The third leg is where communities have successfully claimed the land. So we get into an agreement, a contract, with them, for us to lease the land from them and continue operating. We pay them rental fees, and we also give them opportunities when we operate on their land. So they have the first right to opportunities that are created in the business, whether it’s service provision, supply chain, or training opportunities. So all opportunities around the plantations will first be offered to the communities who own that land.

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RYK VAN NIEKERK: It seems to me as if the timber industry is a very closed industry. There are only a few players in this market, and obviously Safcol is a major player. But how effectively do you think is Safcol competing with its private-sector competitors?

TSHEPO MONAHENG: The barriers to entry in the forestry space are huge, mainly because for you to be able to harvest you’ll have to plant at zero… And maintain the asset over 25 years. And there is timber theft, there are fires, there are all these problems. So if you’re going to invest in forestry, you must know that you’re going have to wait for over 25 years to start harvesting and making money.

Most people will not be able to achieve that. So if you want to be in that business you should have started 25 years ago. That is the challenge.

In terms of competitiveness we do compete, even though we didn’t invest many years ago in the technology, because the success of a forestry business is not in the sale of logs. It’s in what you do with the logs to convert the logs or the timber into high-value products. That’s where you make the money. So Safcol didn’t invest in any the beneficiation processes. It’s only now that we are doing that to invest in beneficiation, and that’s where we are going to start making money.

The margins coming from the logs are very, very thin because the customers cannot afford expensive logs. So we have to make sure that between our cost and the price that we put on the logs we can make margins, but the margins are very thin.

RYK VAN NIEKERK: What are the key markets that Safcol targets? Would it be the paper industry or other industries?

TSHEPO MONAHENG: We are in construction timber in the lumber space at the moment. So we have a sawmill that manufactures construction lumber, the [type] we use in construction, building. We are not in the space of paper, packaging or biochemicals. We are not there yet.

Going forward, we’re looking at products that we are going to produce from the trees, the biochemical products that we’re going to produce, but we’re not going to be in competition with existing companies. We have identified products that we are going to focus on, and that’s where the high value creation is going to come from.

RYK VAN NIEKERK: What products are those?

TSHEPO MONAHENG: [Chuckling] Okay, we are looking into the CNC, crystal nanocellulose, that we are going to extract from the trees. That has a number of products that would be produced out of the CNC to go into the retail market. That’s one product.

We are looking into CLT, which is cross-laminated timber. We are looking into that product because we believe that [future] housing or buildings should be built of engineered wood.  We believe there’s huge potential for growth in that space.

In the energy space as well – the pellets are compressed wood for energy. We are looking to that space as well. There’s a high demand for pellet production.

RYK VAN NIEKERK: Then, lastly, you have an ecotourism business as well. I’m an avid mountain biker, and I’ve ridden some of the Safcol trails all around the country. It’s very interesting that a state-owned company would focus on such activities. What is the business model of your ecotourism business?

TSHEPO MONAHENG: Ecotourism, if it’s managed well and there is investment going into it, is a huge revenue generator. But unfortunately we didn’t invest in the ecotourism some years ago. So if you are cycling or riding the ecotrail side, you’ll realise that some investment is required. With that investment you will be able to make money.

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We haven’t been able to do that. It doesn’t contribute hugely in terms of revenue for the company, but we have a strategy now. Instead of taking it out to be run by someone else outside, we are going to partner with people who are specialists in the space of hospitality and ecotourism to manage the asset on behalf of Safcol from what could be a profit-sharing approach. We are looking at expanding that part of the business hugely, because there’s huge potential there and we believe we have to keep it within Safcol.

RYK VAN NIEKERK: It’s an interesting business. Do you often get on a bike and enjoy those trails?

TSHEPO MONAHENG: [Laughing] I would love to. I spend too much time on the golf course. I don’t find time to bike, but I’m going to try it soon.

RYK VAN NIEKERK: Oh, you must. Tshepo, thank you so much for your time today and congratulations on an excellent performance. I think it could become a blueprint for many other state-owned enterprises – not just to receive bailouts from taxpayers, but to actually contribute through dividends to the fiscus.

TSHEPO MONAHENG: Thank you, thank you on behalf of the colleagues of Safcol, the board, the shareholder. I would like to thank you as well, because if we don’t keep honest we forget what we have to deliver.

RYK VAN NIEKERK: That was Tshepo Monaheng, the CEO of Safcol.