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.
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.