AVI remains as solid a bet as they come
AVI is a curious member of the food sector on the JSE. Unlike most of its peers, it’s not a commodity-type food producer, preferring to excel in niche areas of the food market. But it also doesn’t shy away from volatile food areas, such as fishing, with its I&J subsidiary. And of the course the real difference comes into play with the fashion brands, none of which is included in any other food company.
It remains a favourite among local fund managers, even though it has rarely, if ever, shot out the lights in terms of performance. What probably attracts them to the share is the smooth, if unexciting performance for many years, not to mention the regular payment of special dividends for many years. And this is largely thanks to its modest CEO, Simon Crutchley, who has been at the helm since 2005. This well-managed company must surely have been in the sights of a potential offshore acquirer and it wouldn’t be surprising to see a bid materialising in time.
AVI has avoided many of the mistakes that its peers have made, such as venturing into the rest of Africa in search of growth opportunities. And it was never involved in the pricefixing that took place in bread about 15 years ago.
It’s a clean, no-nonsense kind of operation. Operating profit has averaged 11.4% compound average growth over the 16 years since Crutchley took over in 2005.
And while return on capital employed dipped slightly at the height of the Covid-19 pandemic in 2020, it has averaged between 25% and 30% over the past decade. But what is really interesting is the dividend yield pattern since 2005.
Based on the share price at the end of each year and including total dividends paid (normal plus special dividends), the average dividend yield of AVI since 2005 is 6%. The current dividend yield is 10.1%. In a yield-hungry investment environment, this type of performance is exemplary. Total returns to shareholders since 2005, including the impact of the two share buybacks that occurred in 2008 and 2011 have averaged 12.5% since 2005.
The most recent full-year results to end-June 2021 were solid, especially considering the languid condition of the SA economy.
Group revenue was virtually static at R13.3bn, while operating profit rose 3.2% to R2.4bn.
In typical AVI fashion, costs fell 5.4% and net finance charges were 40% lower. Headline earnings per share rose 6.2% to 499.9c and a final dividend of 275c per share was declared, bringing the total dividend for the year, including special dividends, to 715c per share.
Certain categories that had been especially badly affected during the strictest periods of lockdown in 2020, such as Ciro coffee’s out-of-home operations, bounced back in the second half of financial 2021.
Slight market share-price losses were experienced in beverages.
A pattern similar to that of beverages was seen in the biscuit category, where the record volumes of 2020 during the strictest periods of lockdown were not repeated as restrictions were eased.
I&J had a strong year, helped by higher hake volumes, a weaker rand and improved demand and prices for perlemoen (abalone) in the second half.
Indigo Brands, the cosmetics, perfumes and deodorants business, had a better year after a drop in demand during the most stringent lockdown periods in 2020.
In footwear and clothing, which consists of Gant, Spitz, Kurt Geiger and Green Cross, volume decreases were experienced as some underperforming stores were closed.
Gradual recoveries were seen in Spitz, Kurt Geiger and Gant and even in Green Cross, though this particular business continues to have losses.
Provided there are no repeats of strict lockdowns in the current financial year, AVI should turn in an improved performance to June 2022. On a price-to-earnings ratio of 15 times, it is cheap, especially considering the quality of businesses and management involved.
And there remains that omnipresent possibility, no matter how remote, that a foreign buyer will make a bid for AVI if it remains such good value.