TRADE OF THE MONTH

In the food producer stakes, AVI is an appetising option

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