TRADE OF THE MONTH

In the food pro­ducer stakes, AVI is an ap­petis­ing op­tion

Financial Mail - Investors Monthly - - Contents -

Tiger Brands’ share­hold­ers are a long-suf­fer­ing bunch, hav­ing en­dured the bread price-fix­ing scan­dal, which earned the com­pany a R98.7m fine in 2007, and the Dan­gote Flour Mills de­ba­cle in Nige­ria, which rang up losses of more than R5bn be­tween 2012 and 2015.

Share­hold­ers’ for­tunes seemed to have taken a turn for the bet­ter in March 2016, when the ex­pe­ri­enced Lawrence MacDougall was ap­pointed CEO of the group, which gen­er­ates an­nual rev­enue of R31bn.

Things started to look up for Tiger, whose 41 brand line-up in­cludes 12 that are No 1 in their cat­e­gories: Al­bany, Fat­tis & Mo­nis, Tas­tic, Koo, All Gold, Crosse & Black­well, Black Cat, Jun­gle Oats, Doom, Pu­rity, May­nards and Bea­con.

Then, on March 6 this year, news broke that Tiger’s pro­cessed meats busi­ness, En­ter­prise, had been im­pli­cated by the health depart­ment as the source of the world’s worst ever lis­te­rio­sis out­break.

Of­fi­cial fig­ures to July 17 are grim. Since last Jan­uary, 1,060 con­firmed cases of lis­te­rio­sis caused the deaths of 216 peo­ple.

For Tiger, a cri­sis on this scale was never go­ing to be re­solved cheaply or quickly. In its half-year to June, which in­cluded just a few weeks of the cri­sis, Tiger chalked up prod­uct re­call costs of R415m, partly off­set by re­ceipt of R50m of a po­ten­tial R94m pay­out by its in­sur­ers.

Fi­nan­cial dam­age is mount­ing, in­clud­ing a R50m monthly loss at the earn­ings be­fore in­ter­est and tax level, while En­ter­prise’s Polok­wane, Ger­mis­ton, Pre­to­ria and Clayville pro­cess­ing fa­cil­i­ties re­main closed. Tiger’s planned re­launch of the tar­nished En­ter­prise brand is also likely to be a costly af­fair.

To­tal ab­nor­mal and op­er­at­ing losses ap­proach­ing R1bn would not be sur­pris­ing. But the re­ally big dam­age is likely to come from set­tle­ment of class ac­tion law­suits be­ing brought against Tiger by Richard Spoor At­tor­neys and LHL At­tor­neys.

The lis­te­rio­sis cri­sis is not the only bad news Tiger share­hold­ers have had to di­gest of late. They were also dished up in­terim re­sults that Tiger it­self de­scribed as “dis­ap­point­ing”.

Dis­ap­point­ments in­cluded a 1.6% fall in the vol­ume of prod­ucts sold and a 16% fall in head­line EPS (HEPS). Though Tiger’s R24bn an­nual rev­enue grains and gro­ceries busi­ness units put in re­spectable show­ings, the big dam­age was done by a num­ber of smaller units.

Among them, trad­ing profit at the home and per­sonal care op­er­a­tions slumped 46% to R133m, while ex­port-fo­cused de­cid­u­ous fruit op­er­a­tion Lange­berg & Ash­ton plunged from a R30m profit to a R72m loss. En­ter­prise eked out a R13m profit, down 80% on 2017.

The lis­te­rio­sis cri­sis and weak in­terim re­sults have done no favours for Tiger’s share price, which af­ter hit­ting a record high in Jan­uary has re­treated 30%. This leaves the com­pany’s share price up just 10% over five years.

This is in sharp con­trast to the share price of ri­val food group AVI, which has gained 90% over five years. Over 10 years AVI’s 650% share price rise also trounces Tiger’s 140%.

It has made AVI — the R13.4bn an­nual rev­enue com­pany led by the highly com­pe­tent Si­mon Crutch­ley — the food pro­ducer to be long of, and Tiger the one to be short of, for the past decade. This re­mains the strat­egy to stick to.

It is not that AVI has had things all its own way in the ad­verse mar­ket con­di­tions of the past few years. The com­pany’s growth pace has slowed, but it has re­mained con­sis­tently pos­i­tive with HEPS ris­ing 59% in its past five fi­nan­cial years to June 2017.

Un­der­pinned by pow­er­ful cash flow, its or­di­nary div­i­dend pay­ments were in­creased by an even more im­pres­sive 113% over the five years, with two hefty spe­cial div­i­dends added along the way.

The year to June 2018 was par­tic­u­larly tough for AVI, with a trad­ing up­date in­di­cat­ing that rev­enue would rise by only 1.9% to about R13.4bn. But AVI again did what it has proved highly adept at: im­prove fac­tory ef­fi­cien­cies, cut pro­cure­ment costs and keep a tight lid on group-wide costs.

These ac­tions, the com­pany notes, al­lowed it to achieve growth across all three of its broad op­er­at­ing seg­ments: food and bev­er­ages, footwear and ap­parel, and per­sonal care. They ac­count, re­spec­tively, for about 75%, 15% and 10% of group op­er­at­ing profit.

The seg­ments house many mar­ket-lead­ing brands, in­clud­ing bis­cuit brands Bak­ers, ProVita and Bau­mann’s, tea brands Five Roses, Trinco and Fresh­pak, cof­fee brand Frisco, creamer brand El­lis Brown, and fish prod­uct brand I&J.

In sup­port­ing its brands, AVI has in­vested heav­ily in in­creas­ing ef­fi­ciency and ca­pac­ity, with capex in the five years to June 2017 to­talling R3.4bn. In the past fi­nan­cial year, capex was tar­geted to come in at R578m.

AVI is set to re­port an in­crease in HEPS of be­tween 6.5% and 7.5% (the lat­ter be­ing the pace at the half-year stage). The an­nual div­i­dend seems likely to be up by about 8%.

Though much the same per­for­mance is likely in the cur­rent fi­nan­cial year, AVI’s heavy capex and fo­cus on con­trol­ling costs has laid the plat­form for a far faster growth pace given any re­bound in con­sumer spend­ing.

But AVI did what it has proved highly adept at: im­prove fac­tory ef­fi­cien­cies, cut pro­cure­ment costs and keep a tight lid on group-wide costs

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