Resilient performer AVI under the whip
Though grouped with traditional commodity food producers such as Tiger Brands and Pioneer Foods, AVI is more of a niche brands company operating in selected consumer areas.
Its food and beverage division, which contributes about 75% to revenue and profits, specialises in tea, coffee, biscuits, snacks and fishing.
Its fashion brands include deodorant and perfume, personal care products as well as luxury footwear and clothing via Spitz, Kurt Geiger, Green Cross and Gant.
The group has a longstanding loyal investor following due to stable earnings growth, progressive dividend policy and relatively frequent special dividends. One of its most highly regarded investment virtues is its ability to rigorously control costs under all economic conditions.
REVENUE GREW
It’s a solid company that has exhibited compound annual growth rate of 12.8% over the past 15 years. Operating profit margin has more than doubled, from 10% in 2005 to just more than 20% in 2020. There are very few listed companies that demonstrate such sustained stability.
But even quality such as this has taken strain from the struggling economy in the past two years. There appears to be no respite on the horizon. For the six months to December 2019, revenue grew 1%, operating profit margin eased from 20.6% to 20.4%, and operating profit was R1.4556bn, or down 0.1%.
The Entyce beverage division improved operating profit margin slightly, but tea and coffee volumes were down, due mainly to aggressive competitor discounting. Snackworks, holder of brands such as Willards and Bakers, also improved operating profit margins, helped by price increases and lower discounting.
I&J, AVI’s fishing company, had flat revenues but a big improvement in operating profit margin. Higher hake volumes and a favourable rand-exchange rate were the main positive elements, but there was a lower unrealised profit in the valuation of live abalone in line with market prices.
SPITZ PROFIT
The operating profit margin of Indigo Brands — holder of Coty, Lentheric, Rimmel, Yardley and Sally Hansen — plunged from 22% to 13.6%, as cost increases could not be fully recovered in a constrained and highly competitive market.
Operating profit margin at Spitz fell from 30.6% to 27.5%. One problem was poor trading in December, the most critical month of the year, due to Eskom’s load-shedding.
Another detractor was an extended Black Friday in November, causing a shift in consumer spending away from semidurables to nondurable consumption. Green Cross footwear continued to post losses at a rate similar to the previous interim. This company was streamlined extensively recently, and management expects to see the benefits once the economy begins improving.
Prospects for the rest of financial 2020 will be determined by the languishing local economy.
The key food and beverage profit contributors are prepared for another tough year. The fiercely competitive period and the constrained consumer environment will weigh heavily on the highly discretionary brand sector. Management expects I&J’s hake market to exhibit steady growth, but abalone will remain under extreme pressure in its main export region of China and Hong Kong, plagued by civil disturbances and coronavirus.
PROSPECTS FOR THE REST OF FINANCIAL 2020 WILL BE DETERMINED BY THE LANGUISHING LOCAL ECONOMY
Spitz sources many products from Italy, and the high incidence of coronavirus there could affect supply lines adversely.
AVI management is targeting real earnings growth in a constrained consumer environment. If that eventuates, it will be a superb achievement, especially considering that headline earnings per share fell 3.8% in the first half.
Now at about R70, the rolling price-earnings ratio is 13.8 times. Paul Theron of asset manager Vestact emphasises that the slide in value of this high-quality group in the past 18 months is no reflection on the management team. While not cheap, it’s a lot lower than historic levels, and dividend yield is a very attractive 5.9%.
I&J sold its 40% holding in Simplot Australia, and it will be instructive to see how that cash is deployed, either by reinvesting into the fishing operation or paying a special dividend.