Killer Trade:

Can the Tiger beat the bear?

Finweek English Edition - - CONTENTS - ed­i­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­search Team in the

tiger Brands has had a dif­fi­cult year, with an ex­pen­sive mis­ad­ven­ture in Nige­ria con­tribut­ing to the de­par­ture of for­mer CEO Peter Mat­lare. The group, which com­petes with multi­na­tion­als like Nestlé and Unilever in the South African mar­ket, has seen its share price move side­ways over the past 12 months as con­cerns mount over the health of the lo­cal con­sumer.

Ris­ing in­ter­est rates and a slow­ing econ­omy are putting pres­sure on house­holds, rais­ing ques­tions over Tiger Brands’ abil­ity to sus­tain its mar­ket share and profit mar­gins in the cur­rent eco­nomic cli­mate.

On the plus side, the group owns a huge port­fo­lio of strong brands that gives it pric­ing power, as well as the abil­ity to gen­er­ate re­turns in the up­per end of its peer group.

How­ever, with the worst drought in a cen­tury af­fect­ing South Africa and a weak rand against the US dol­lar, Tiger Brands will be fac­ing ris­ing in­put costs in the com­ing months. It warned in a trad­ing up­date in Fe­bru­ary that in­fla­tion­ary pres­sures on the group’s raw ma­te­rial cost base are likely to in­ten­sify over the bal­ance of the year, given the sus­tained weak­ness of the rand.

“In a con­strained con­sumer en­vi­ron­ment where com­pe­ti­tion is in­tense, it is ex­pected that trad­ing con­di­tions will re­main chal­leng­ing as the com­pany seeks to pass through price in­creases,” it said. Tiger Brands man­aged to in­crease its turnover from con­tin­u­ing op­er­a­tions by 7% yearon-year in the four months to end Jan­uary, driven in part by a bet­ter per­for­mance in its in­ter­na­tional busi­nesses and ex­ports.

Its for­ays into Nige­ria and Kenya in par­tic­u­lar have weighed on the share price over the past year, and raised red flags over the group’s gover­nance and ex­pan­sion strat­egy.

The group fired the manag­ing di­rec­tor of its Kenyan sub­sidiary – Tiger Brands owns 51% of Haco In­dus­tries – last year af­ter it came to light that sales were over­stated in or­der to achieve op­er­a­tional targets. In Nige­ria, Tiger Brands made write-downs of nearly R1.9bn on its 65.7% in­vest­ment in Dan­gote Flour Mills (which was re­branded as Tiger Branded Con­sumer Goods).

It orig­i­nally paid R1.6bn for the stake in 2012, and reached an agree­ment late last year to sell it back to Dan­gote In­dus­tries for $1.

Un­der­stand­ably, in­vestors are con­cerned over cer­tain de­ci­sions that Tiger Brands has been mak­ing over the years, es­pe­cially in Nige­ria. This hes­i­ta­tion is seem­ingly ev­i­dent in its share price, which is con­sol­i­dat­ing on the down­side.

Ap­point­ing a new CEO, Lawrence MacDougall, could in­stil some sta­bil­ity. If not, fur­ther down­side will most likely con­firm a medium-term bear­ish pat­tern. (At the time of writ­ing, the start date for MacDougall, who has ex­ten­sive ex­pe­ri­ence in the FMCG busi­ness and was a for­mer manag­ing di­rec­tor of Cad­bury in SA, was yet to be an­nounced.)

What next?

Pos­si­ble sce­nario: Tiger Brands could be con­struct­ing the fi­nal shoul­der of a head-and-shoul­ders pat­tern. Fail­ure to trade above 33 935c/share, thus form­ing a third fall­ing-top, could see Tiger Brands fall to the 28 000c/share level in the near term. Be­low 25 500c/share, the bear­ish pat­tern would be con­firmed, with the share price po­ten­tially de­clin­ing fur­ther to 19 950c/share in the medium term. Al­ter­na­tive sce­nario: Tiger Brands would have to trade above 36 970c/share to negate the bear­ish­ness. A new bull trend would com­mence above 40 090c/share.

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