Can de­liver, needs va­ri­ety

Clover’s prospects are both or­ganic and ac­quis­i­tive, writes Andile Makholwa

Financial Mail - Investors Monthly - - Feature -

Hav­ing laid a solid foun­da­tion, dairy pro­ducer Clover In­dus­tries now wants to scale up and im­prove earn­ings through the devel­op­ment of new prod­ucts, ac­qui­si­tions and ex­pan­sion into the rest of Africa.

The group is ex­plor­ing en­try into the baby food mar­ket. Soft drinks is an­other sec­tor it’s re­search­ing. Else­where on the con­ti­nent, it’s plan­ning to get into An­gola and grow its small op­er­a­tion in Nige­ria. How­ever, SA re­mains its fo­cus — the frag­men­ta­tion of the lo­cal mar­ket means op­por­tu­ni­ties for size­able tie-ups could be pur­sued.

The group has un­der­gone sig­nif­i­cant trans­for­ma­tion in re­cent years. Founded as Natal Cream­ery Ltd in 1898, Clover traded as a co-op­er­a­tive for 104 years. Its trans­for­ma­tion into a public com­pany in 2003 and then a listed en­tity in 2010 has been a re­mark­able suc­cess story of en­trepreneur­ship and vi­sion­ary lead­er­ship un­der CEO Jo­hann Vorster.

Be­cause co-op­er­a­tives are gen­er­ally as­set-rich but profit-poor, the temp­ta­tion in re­cent years has been to strip off th­ese as­sets and cre­ate a dif­fer­ent en­tity. Vorster is proud that in Clover’s case, milk pro­duc­ers and the descen­dants of the farm­ers who started the busi­ness were first in line when R1,3bn was un­locked for share­hold­ers when the com­pany listed.

The group had to un­dergo a ma­jor trans­for­ma­tion to un­lock value. In the late 1990s, says Vorster, co-ops were not the flavour of the day when it came to lend­ing as they were con­sid­ered an ar­chaic form of busi­ness own­er­ship, where vot­ing power was not linked to the num­ber of shares one had. To grow, Clover needed to change its busi­ness model.

The group was also sad­dled with a stag­ger­ing R1,3bn in debt.

“As a co-op, we were sup­ply-driven. The farm­ers sup­plied us the milk and we had to get rid of it, some­times at a loss,” says Vorster. “When you’re de­mand-driven, you buy only the milk you need.”

Vorster, who joined Clover as fi­nance direc­tor in 2000, be­gan chang­ing the group’s busi­ness model in 2006 and ex­pand­ing its prod­uct range. It went into fresh juice and other value-added prod­ucts such sliced cheese. In re­cent years, it’s added wa­ter, iced tea, yo­gurt and custard. More than 20% of the group’s prod­uct port­fo­lio is non­milk. Vorster says th­ese prod­ucts gen­er­ally have a higher mar­gin than milk and are easy to put into the truck de­liv­er­ing milk to a su­per­mar­ket. How­ever, milk still con­trib­utes more than 50% to the group’s turnover.

Funds raised from the list­ing helped the group pay off its debt and ad­dress sup­ply in­ef­fi­cien­cies through a project called Cielo Blu, which in­cluded the re­lo­ca­tion of fac­to­ries. Cielo Blu was com­pleted at the end of last year at a cost of R340m. The group’s fac­to­ries and dis­tri­bu­tion net­works are now state of the art.

Dur­ing the trans­for­ma­tion phase, Clover wasn’t look­ing for ac­qui­si­tions, though it made few, but fo­cused on op­ti­mis­ing its op­er­a­tions.

Dirk van Vlaan­deren, in­vest­ment an­a­lyst at Kag­iso As­set Man­age­ment, says de­spite the dis­trac­tion of re-en­gi­neer­ing the busi­ness, the com­pany has made a few size­able bolt-on deals in re­cent years, in­clud­ing the Quali juice brand (ac­quired from AVI in 2012), Nestlé Pure Life (bot­tled wa­ter) and Nestea (iced tea) brands from Nestlé and more re­cently the ac­qui­si­tion of Dairybelle’s Fruits of the For­est yo­ghurt brand. He says the group’s man­age­ment is not shy of big deals but has “shown a dis­ci­plined ap­proach to deal mak­ing, re­sult­ing in value cre­ation for share­hold­ers”.

Vorster says now is the time to con­sider op­por­tu­ni­ties. “We want to di­ver­sify fur­ther but re­main a food com­pany close to the core or yoke of our busi­ness, which is chilled fresh prod­ucts,” he says. “We’ve got a num­ber of prod­ucts in the pipe­line and in­ter­est­ing ac­qui­si­tion op­por­tu­ni­ties, which could ben­e­fit us.”

With­out pro­vid­ing de­tails, Vorster says there are sev­eral ex­ten­sions to prod­ucts such a Trop­ica, wa­ter and milk. He says since Clover is al­ready pro­duc­ing an in­fant for­mula in­gre­di­ent (milk), it makes log­i­cal sense to get into the baby food mar­ket. On soft drinks, he says the group wants to in­tro­duce some­thing that is unique be­cause it will not be able to take on the likes of Coca-Cola and Pep­sico.

“Our Africa strat­egy is low risk,” says Vorster. “It’s not a big-bang strat­egy. It’s more like a cal­cu­lated move.” He says Clover is look­ing for lo­cal part­ners to which it could add value by “bring­ing our IT sys­tems, pro­cesses, mer­chan­dis­ing, train­ing ma­te­ri­als, brand ex­pe­ri­ences and pro­cure­ment con­sol­i­da­tion”.

The group re­cently en­tered

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