Can the Tiger beat the bear?
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.)
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.