Pro Pick: AVI

AVI, home to many of South Africa’s best-loved brands, is ex­cep­tion­ally de­fen­sive and of­fers in­vestors a con­sis­tent bench­mark-beat­ing re­turn.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za Jade Mis­plon is an an­a­lyst in the Qual­ity team at In­vestec As­set Man­age­ment.

aVI is the cus­to­dian of prom­i­nent house­hold brands. The port­fo­lio in­cludes more than 50 brand names, which span a range of cat­e­gories in­clud­ing bev­er­ages, bis­cuits, snacks, frozen foods, per­sonal care and ap­parel. Many of th­ese brands have grown into great South African favourites.

Per­haps the most prom­i­nent parts of the busi­ness are the bev­er­ages and snack­ing di­vi­sions, in­clud­ing ex­cep­tional brands such as Five Roses, Fresh­pak, El­lis Brown, Bak­ers and Wil­lards, amongst oth­ers. Th­ese di­vi­sions con­trib­ute 60% to the com­pany’s prof­its.

In In­vestec As­set Man­age­ment’s Qual­ity team (in which our Op­por­tu­nity and Cau­tious Man­aged funds are man­aged) we seek out busi­nesses with a sus­tain­able com­pet­i­tive ad­van­tage and ro­bust busi­ness model. In light of this, AVI is par­tic­u­larly at­trac­tive since the eq­uity con­tained within its sta­ples brands causes the busi­ness to be ex­cep­tion­ally de­fen­sive as con­sumers – drawn to the con­sis­tent qual­ity of prod­ucts – con­tinue to pur­chase through­out cy­cles. In ad­di­tion, man­age­ment care­fully con­trols price in­fla­tion to en­sure vol­ume de­mand is sup­ported to the ex­tent that rev­enue con­tin­ues to grow in ex­cess of cost in­fla­tion. This has re­sulted in con­tin­ued profit growth and best-in-class gro­cery op­er­at­ing mar­gins among South African food pro­duc­ers.

Within our in­vest­ment phi­los­o­phy we also seek growth beyond short-term cycli­cal­ity. In this re­gard, AVI con­sis­tently spends more on mar­ket­ing than its peers in order to in­grain brands in the minds of con­sumers for years to come. This en­trenches the deep moat and com­pet­i­tive ad­van­tage of this busi­ness for the long term.

Aside from the con­sumer sta­ples di­vi­sions, AVI also houses three other di­vi­sions – I&J, per­sonal care and ap­parel, which pro­vide favourable di­ver­si­fi­ca­tion.

I&J sells fish into the do­mes­tic and in­ter­na­tional mar­kets. The com­pany has the abil­ity to re­di­rect fish off­shore dur­ing pe­ri­ods of rand weak­ness to boost prof­itabil­ity, dis­play­ing good rand hedge char­ac­ter­is­tics.

The group’s per­sonal care and ap­parel di­vi­sions in­clude in­ter­na­tional brands sold un­der li­cense in South Africa such as Yard­ley, Coty, Len­théric, La­coste and Gant, im­ported Ital­ian shoes Spitz and Carvela, and lo­cal brand Green Cross. Th­ese di­vi­sions, par­tic­u­larly ap­parel, have ex­pe­ri­enced sub­dued prof­itabil­ity in re­cent years due to rand weak­ness sub­stan­tially in­creas­ing the price of im­ported ap­parel amid in­ten­si­fy­ing con­sumer pres­sure. Re­cent rand strength and a facelift and repo­si­tion­ing for the Green Cross brand should see a re­cov­ery in the short to medium term.

While th­ese di­vi­sions do not fit strictly into our in­vest­ment frame­work, they of­fer in­ter­est­ing di­ver­si­fi­ca­tion and op­tion­al­ity to the sta­ples busi­ness.

Over­all the sta­ble growth of the sta­ples busi­ness, com­bined with profit up­lift op­tion­al­ity in the dis­cre­tionary busi­nesses, should see AVI grow earn­ings in ex­cess of 10% on av­er­age per an­num over the medium term.

In ad­di­tion to a ro­bust busi­ness model, cap­i­tal al­lo­ca­tion is high on the list of pri­or­i­ties when mak­ing an in­vest­ment in order to en­sure in­creas­ing re­turns to share­hold­ers. AVI is man­aged by a highly re­garded and con­ser­va­tive team whose cap­i­tal al­lo­ca­tion has been ex­em­plary. The team is fix­ated on cost growth and run­ning an ef­fi­cient busi­ness, re­sult­ing in above-av­er­age free cash flow gen­er­a­tion. The util­i­sa­tion of cash be­tween in­vest­ment, re­turn to share­hold­ers and lever­age is bal­anced with pre­ci­sion, al­low­ing for a con­sis­tent div­i­dend pay­out pol­icy of 80% of earn­ings and ul­ti­mately above-av­er­age re­turns to share­hold­ers. The stock trades on a 12-month for­ward div­i­dend yield of 5%.

There are very few SA-cen­tric busi­nesses listed on the JSE that are able to de­liver the con­sis­tent com­pound earn­ings growth of AVI, while gen­er­at­ing ex­cel­lent free cash flow, al­low­ing am­ple in­vest­ment and re­turn to share­hold­ers. The start­ing 5% div­i­dend yield, com­bined with earn­ings ex­pected to grow at 10% per an­num, of­fers in­vestors a con­sis­tent bench­mark-beat­ing re­turn and is there­fore an ap­peal­ing in­vest­ment within the frame­work of our in­vest­ment phi­los­o­phy.

The util­i­sa­tion of cash be­tween in­vest­ment, re­turn to share­hold­ers and lever­age is bal­anced with pre­ci­sion, al­low­ing for a con­sis­tent div­i­dend pay­out pol­icy of 80% of earn­ings and ul­ti­mately above-av­er­age re­turns to share­hold­ers.

AVI’s brands in­clude Wil­lards and I&J.

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