Financial Mail - Investors Monthly
Under a microscope
Scrutinising Tiger Brands’ response to the listeriosis crisis
The way a company responds to bad news can be decisive for investment in it. Yet — despite listeriosis allegedly linked to Tiger Brands’ products was associated with the deaths of 193 people and the illness of countless others — the company seems to be riding through relatively unscathed, as the share price continues to pick up after an initial collapse.
This might sound strange, considering that Tiger Brands is likely to come out of this with its reputation hammered and its balance sheet under pressure. By the company’s own calculation, the crisis will cost it at least R380m and up to about R800m.
According to analysts’ calculations, it could even run to billions, depending on the outcome of class action claims.
Whether a direct link between its products and listeriosis deaths can be legally established or not, the truth is that people have died. And some observers believe the company responded with offish, legally fuelled comments and not enough empathy.
The crisis also exposed the fact that it was caught sleeping when the National Consumer Commission and the department of health informed it of the presence of listeria monocytogenes ST6 type bacteria at its Enterprise meat division — something it should have been aware of itself and then have acted upon.
None of this can be good news for the share, which has lost ground — from 425c prior to the March 5 revelation of the contamination to 395c at present — though the price has been increasing since midMarch.
In the year to date, it has lost only 1.5%, and the consensus is a buy.
This does not look too bad, although the company’s response has to be compared unfavourably with competitor RCL, which immediately acted, pulled products and provided as much information as it could to its customers. Its share price has risen from 17c before March 5 to 19c, with a year-to- date increase of 35%.
Tiger Brands’ share price may be holding up, but the company could face headwinds for a long time to come, depending on how much this crisis costs.
So what will the expense be? As much as R10bn, by some people’s reckoning, depending on the result of class action suits and the amount of damage to its brand.
Tiger Brands has recalled products and suspended operations at four meat processing facilities at an estimated pretax cost of R337m-R377m before accounting for insurance recoveries, which could be up to R94m, the group says. Its value-added meat products business will show a loss before interest and tax of R28m-R33m in March. Ceasing production will cost R50m monthly before tax.
Class action claims have been launched on behalf of
“Enterprise could still survive if the brand were repositioned, but there will have to be significant marketing costs and price cuts to persuade customers
people who fell ill and dependants of people who died, with the group estimating the amount to be claimed at R425m.
Asked about other costs, including marketing to repair the company’s reputation or the employment of advisers, corporate communications director Nevashnee Naicker gives no further details, referring IM to the group’s published cost estimates.
Gryphon Asset Management research analyst and portfolio manager Casparus Treurnicht estimates a worst-case scenario of R10bn for class actions. “Looking at a market cap of R75bn, that is a lot of cash.”
Treurnicht says that in the first half of 2018, the group’s cash and cash equivalents stood at R1.2bn, with borrowings of about R800m. “The problem this poses for Tiger Brands, [in the case of a] R10bn worst-case scenario, is that it is going to have to raise borrowings, which will be expensive and put a lot of stress on the balance sheet.”
“The company should start de-gearing the balance sheet and building up a cash surplus in anticipation of the worst. This will cause derating of the share price — and we can even see it at 270c,” he says.
Vunani Securities equity analyst Anthony Clark says: “Tiger Brands [will be] simmering under a cloud of doubt, certainly until the claims are settled. It has put aside R425m for legal claims, and it will rally or tank depending on whether these come in higher or lower.
“It is in a holding pattern now, because the market doesn’t know the ultimate quantum, and until it does, the group will have to act as a responsible, good corporate citizen. It will have to make sure nothing else happens if it wants to keep its position in the market place.”
Even given the worst-case scenario, Treurnicht expects Tiger Brands to see the crisis through. He says it could even lead the group to refocus, something it has been doing to a degree since its costly mistakes in Nigeria, which it left at the end of 2015.
Treurnicht has expressed some doubt about the tenure of CEO Lawrence MacDougall, however, saying his position is vulnerable.
Clark says the Enterprise meat division makes up about 8% of the group’s profit, and it has indicated it has 15% of the polony market and just under 20% of the vienna market in SA. “Quite a key division is in a suboptimal position and needs to rebuild its brand image. This will have an impact for the next two to three years.”
Enterprise could still survive if the brand were repositioned, says Clark, but there will have to be significant marketing costs and price cuts to persuade customers.
Enterprise’s loss is the Eskort co-operative and RCL Foods’ gain, and they will be fighting to maintain market shares gained at Enterprise’s expense. RCL, which owns Rainbow chicken, immediately recalled products when the presence of listeria was suspected, and temporarily closed its Wolwehoek polony plant. It says the costs to date are R75m for the recall and suspension of production and R20m/month for the lost contribution of polony products as well as the knock-on effect on the rest of its processed meats and other chicken products.
Treurnicht says he will award RCL “five out of five” for the way it handled the crisis.
“It shut down immediately and has worked hard in trying to create awareness and to do the right thing — an attitude Tiger Brands should have shown,” he says.
Tiger Brands may experience further damage to its reputation if consumer distrust spills over onto its other products, which are extensive and include everyday household products such as Albany, Koo, Ace and Purity.
“The question is whether other products will be affected, so it has a tough and lengthy [adjustment] period ahead — I
don’t expect this to disappear in the next few years. Five years from now [the group] may be back on its feet,” Treurnicht says.
Tiger Brands will survive the debacle, but its handling of the situation and loss of good reputation will prey on it for years to come.
Those with long memories might recall how former Pick n Pay CEO Sean Summers took decisive control in 2003 to handle an extortion plot and possible poisoning of food items. It was described at the time as a textbook case of how to manage a crisis.
Tiger Brands management should have read such a textbook. It certainly should have read about US medical brand Tylenol’s handling of a cyanide poisoning crisis and its US$100m (in 1982 prices) global recall, about which there are many case studies.
Tiger Brands should also have learnt lessons from its own unsuccessful foray into Nigeria, a minor event relative to the listeriosis crisis, but nevertheless an important learning opportunity about how to deal with bad news.
Asked if the crisis was handled correctly and what the extent of the reputational damage was, Naicker says the priority “has been to ensure the safety and health of consumers, and we worked consistently to ensure that the recall was managed thoroughly and at pace”. The company is “leaving no stone unturned”, leading to it “virtually deconstructing [its] factories and equipment”.
Naicker gives a very carefully worded response to a question about the human cost of the outbreak. “We acknowledge that any loss of life is tragic. We are deeply sorry and offer our sincere condolences to those people who have been affected by the listeriosis outbreak in SA. We commit to manage any valid claims brought against us with honesty and integrity, and in a structured way.”
However, Naicker believes the company “communicated openly, frankly and with urgency with all [its] stakeholders from the outset, in addition to furnishing Sens announcements to the market”. She says the group’s board “is considering a number of initiatives aimed at rebuilding trust”.
Rebuilding customers’ trust will probably depend on the extent to which they know of its many other products and whether they will choose to stay away from these.
The items’ ubiquity on SA’s shelves is likely to shield the company in part, as many people would struggle to identify which products come from the group.
But Tiger Brands should not underestimate the effect of bad news on investors, who are increasingly expecting only best practice.
The Steinhoff debacle sounded a strong warning to investors that companies need to be held to the highest standards or the results can be crippling for their investments. Similar lessons have been learnt this year from Facebook.
Since the housing bubble and global selloff, investors are increasingly seeking investments in companies that are principled and transparent, and have their eyes on the ball.
This is not to say Tiger Brands isn’t. That it did not pick up listeria may not mean it isn’t an otherwise well-run and principled business.
But that doesn’t change the fact that missing the contamination was just unacceptable and the results devastating.
Time will tell if it will learn from its mistakes.
Steinhoff does not provide a good example. Its directors have been evasive, they have dragged out investigations and the refiling of financial information, and seem to feel they are entitled to big bonuses despite their failures of management and oversight.