Can Tiger Brands claw its way back?

Can Tiger Brands — the JSE’s biggest and oldest household brands group — regain its roar?

In early December, there might have been a few affirming nods after a resurgent annual financial performance and a strident presentation by CEO Noel Doyle. But that low growl has become an almost pitiful mewing, as its half-year accounts to end-March slunk in well short of expectations.

Still, Doyle believes this is just a setback — not a catastrophe. “We want to return to being the most admired company in our sector,” he tells the FM. “We are not looking to return to the old swagger and the old arrogance when Tiger was really top of the pile. But we want to be known as the group that innovates best, is the most efficient, is quickest to adopt new technology ... the first to latch on to new consumer trends. But a Tiger Brands with a humility that’s come from some of its setbacks.”

Clearly, it’s a bitter struggle in the trenches, even though Tiger is synonymous with some of South Africa’s most iconic brands, from Tastic rice, Jungle Oats, All Gold Tomato Sauce, Ace mealie meal to Jelly Tots and Roses cordials.

These are lucrative — Tiger racked up sales of more than R34bn last year — but its bottom line for the past six months was clawed down by rising food inflation, power cuts, high interest rates and logistical snarl-ups.

It also had to fight tooth and nail for the hard-pressed consumer’s loyalty to brands that had dominated their markets for decades. Cheaper products from rivals, and a surfeit of private-label offerings have gobbled its market share. And the grocery business took a mauling, with consumers shifting to essential foods.

Even the bread market, traditionally a source of stout margins, has become increasingly competitive, with margins crumbling noticeably.

To top it all, Tiger dropped the ball in its rice division.

As Aeon Asset Management CIO Asief Mohamed tells it, Tiger has been at the rough end of a number of events that have hurt profits in recent years. The most notable were the listeriosis outbreak at its Enterprise processed meat factory and, more recently, canning hitches affecting the Koo and Hugo brands.

Mohamed says it’s unlikely that profit margins will return to higher levels, as the competition from local private label brands and imported products has intensified.

‘Not in free fall’

What seems to have really spooked everyone is the impression that the last two trading months of its half year — February and March — were much, much leaner than expected. It was a huge surprise, as Tiger had issued a trading update in February, spanning the four months to end-January, in which it said, all upbeat, that “solid operating income growth for the six months to end-March 2023 is expected”.

Instead, it went the other way. And at its recent results presentation, Doyle warned that the environment is likely to get worse before it gets better. Ominously, he said that in the six months to September, “it’s going to be quite a challenge to match [the previous year’s] performance in terms of our operating income. Certainly not something in free fall — but it’s going to be a challenge.”

The share, which hovered around the R200 mark in early May, plunged to R150 after that presentation. That half-year performance was certainly bleak: while revenue grew 16% to R19.4bn, this was mostly due to rising prices, rather than an increase in volumes, so there was nothing much to celebrate. There was also a 9% drop in operating income to R1.4bn, with the margin eroding to 7% (from 8.9% the previous year).

In the past two weeks, Tiger’s shares have bounced, suggesting some investors are writing off a near-term comeback. But the half-year headline earnings of 731c a share make the initial full-year analysts’ expectations of R18.18 a share look extremely doubtful.

Mohamed, for one, sees hope. “Most of the lower margin expectations are priced into the share price. The interest rate cycle in South Africa may increase one more time and stay flat for a while before declining with lower inflation. This should bring relief to the consumer.”

But opinions on Tiger differ.

Anchor Capital, in a note to clients, expects earnings to decline by about 21% for the full year. It argues that while Tiger looks cheap (trading at a share price that is 8.5 times its 12-month forward earnings expectations), the headwinds give investors pause. “The dilemma here is that one would have to continue holding the share for a long period for it to recover,” it says.

Investec Bank has pencilled in a full-year earnings drop of 20%, down to R14.45 a share, with the forecast for 2024 at R17.45 — slightly above 2022’s number. It has a “sell” tag on Tiger.

In contrast, SBG Securities has kept a “buy” rating with a target share price of R190 — but has downgraded earnings forecasts to R15.30 a share this year, and R16.41 next year.

Intellidex analyst Tinashe Kambadza similarly argues that there is value for investors at current levels. “The stock is at a 20% discount to its long-term earnings multiple with a dividend yield of 5.2%,” he writes. “Furthermore, the stock is undervalued relative to the MSCI emerging markets food producers index.”

Turnaround on track

John Biccard, a deep-value doyen and Ninety One portfolio manager, is one investor who has been accumulating Tiger. He argues that much of the group’s woes are not company specific, but stem from South Africa’s wider macroeconomic and structural challenges.

“The numbers were disappointing,” he tell the FM. “But I’ve seen worse results. Some of the food retailers were far more disappointing ... some shares have been killed. The setback at the rice division aside, there is nothing that has gone wrong internally at Tiger. Yes, the rice was an own goal, and a large part of the missed earnings.”

Biccard believes the turnaround is still on track. “The group is better run today. It has a good balance sheet and a strong brands portfolio. Investors are picking this up on a less than 10 earnings multiple on a 6% yield. You won’t need a rights issue, and I really don’t think Tiger will stop paying dividends.”

Punters might have also taken heart from the fact that Doyle recently bought Tiger stock worth about R1.57m. Skin in the game is never a bad thing — especially from a veteran executive.

Another event is the emergence of Value Capital Partners (VCP) as a meaningful minority shareholder. VCP holds only 3.5%, but the group has shown an inclination to build more meaningful stakes in listed companies where it believes value can be restored.

VCP’s prime movers know this industry well, since they were former top executives at investment company Brait, which invested in a then low-key Premier Group. That bet paid off: Premier has since become a formidable player in the fast-moving consumer goods space, with a market value of R7.5bn. Its success in the bread market has sliced away market share (and a few top managers) from Tiger’s Albany brand.

It’s too early to speculate on the role VCP might play — and its executives are coy when asked. VCP founder Sam Sithole will only say his group is “excited about the opportunity”. But its track record at other listed companies suggests it’s not an investor that “waits and sees” for too long.

Still, Sithole’s appointment to the Tiger board as a nonexecutive director in early April suggests the relationship with the activist shareholder is cordial and constructive.

But it’s not only the bread market where Tiger is feeling the pinch. RFG is fighting hard to take a share of the canned food market with its Rhodes brand, Pioneer is strong in cereals and condiments, and Remgro-controlled RCL competes hard in peanut butter and mayonnaise.

Doyle is at least frank about Tiger’s challenges — famously noting earlier this month that, “from a consumer perspective, the elastic has snapped”.

That’s a scary assessment. Tiger’s brands — including Jungle Oats, Tastic rice, Purity baby food, Fatti’s & Moni’s pasta, Koo tinned foods, Mrs Ball’s  chutney and Crosse & Blackwell mayonnaise — are right in the centre of the consumer space. A number of them still hold market share of more than 65%, with revenues exceeding R1bn a year.

Doyle says sustained food inflation beyond 10%, and the series of interest rate hikes, have taken their toll on consumers who would have been lucky to get low single-digit salary increases. “Other than our very basic commodity staple categories, we are seeing categories in decline and accelerated decline,” he says.

He admits the angle of that trajectory did surprise Tiger. “We were expecting a slowdown, but not to the extent at which we saw that slowdown in February and March. This [trend] has continued in terms of trading being quite tough.”

But, he vows, Tiger won’t retreat into its lair to wait for better days. “Our big challenge is calibrating what we respond to that is short-term, and that we don’t cut out muscle for the future. In this last reporting period, were we quick enough and agile enough? Clearly not. But we must also be very careful not to overcorrect and overreact.”

‘A fleet of destroyers’

In terms of consistency and operating efficiency, Doyle believes Tiger’s business is better than ever. But he admits the group hasn’t expanded into other categories quickly enough, which means it hasn’t been able to de-risk some of its portfolios. Still, he adds, “it can’t be all about consolidation, there has to be some growth”.

If Tiger is to speed up innovation, however, the group needs to take some risks — and small, niche innovations aren’t going to be enough to move the needle. Instead, Tiger’s innovations will focus on a smaller number of bigger-volume bets.

Intellidex’s Kambadza reckons Tiger’s strategy for innovations seems to be paying off when it comes to Koo and All Gold. He says Koo’s pilchards brand is the third most popular brand at a national level, having outperformed private labels and gained market share since launching.

Then there’s All Gold tomato sauce, now also sold in a “squeezy” PET bottle. Kambadza says the product has experienced double-digit growth and gained market share. Similar results have been seen in other Tiger brands, such as Kasi Magic Sauces and Mrs Ball’s chutney value packs.

Similar plans are afoot for Black Cat, Maynard’s and All Gold jams and sauces, he says.

Doyle, aware of the squeeze on consumers, has been cutting costs where he can — he expects to save R500m in costs across the group.

But even that may not be enough in the current trading environment, he adds, especially with inflation levels north of 6%. In response, Tiger has been producing secondary products, and altering the size of its packs to allow it to reach the right price point — but these things take time to pay off.

“You don’t just formulate a product and put it on the shelf,” he says. “You need to have it on your shelf in your lab for some time before it goes to market. But you will see more of this from us.”

This raises the question of whether Tiger has been agile enough. On this point, Doyle admits “our flexibility needs to improve — we have to work hard to have more variability in our costs ... to cut our cloth to suit our measure.”

But part of this agility will be changing the corporate culture, which Doyle says has become too risk-averse. “People have used the analogy of a supertanker. We’d rather be a fleet of destroyers than just one big hunk of metal that is difficult to move.”

Tiger has already made moves to declutter its profile: its majority stake in fishing group Oceana has been unbundled; the processed meat division was sold to a consortium led by Country Bird Holdings; and its 49% stake in Nigeria-based UAC Foods was sold. It’s also in advanced talks to sell its fruit canning operations, which could release as much as R700m in working capital.

Structurally, Doyle also wants to devolve decision-making to the individual product categories, which will give MDs of Tiger’s divisions a much greater level of autonomy.

To shave another R500m in costs, beyond the current cuts, would be possible — but in two or three years Tiger would pay for that, “as we would have fallen behind in certain spaces”, he says.

Perhaps Tiger’s plans to regain market share in the tightly contested bread space is one area for investors to focus on in the short term. If new innovations in the bread sector — including new loaf sizes — are successful, he says, it would be hugely helpful in fattening margins.

Doyle also believes the bread market should become more rational in terms of competitive price cutting.

It’s been a “dogfight” out there, he says, referring to competition between the three big bread players. “We scrap for every loaf. But I believe bread has gone as low as it is going to go ... though those might be famous last words.”

The biggest challenge, says Doyle, is that the group is trying to balance between playing catch-up in some areas, while investing in others.

“We have to get the balance right, and that’s what I’m paid to do. If we don’t respond sharply to the current environment we won’t be around for the long term — and if we don’t invest, then in two or three years’ time we’ll be playing catch-up again.”

For its long-suffering investors, that’s not something it can afford to do any longer.

Not so (fan)Tastic

There were some raised eyebrows when Tiger Brands’ operating profit for its “other grains” division halved in the six months to March. It turns out that a pricing snag had boiled away its margin in its rice segment, best known for its Tastic brand.

It seems Tiger realised only late in that period that its price-volume dynamics were badly out of shape. As its executives explained at its investor presentation, the level of discounting provided to retailers was much higher than initially expected — a detail that became apparent when bills came through from retailers only in the last two weeks of its half-year.

“We have quite a strong, robust internal control policy that’s followed by every other category, which we’ve double-checked since,” said Tiger chief growth officer Yokesh Maharaj. “We did investigate in the quarter when we looked at prices, [but] the anomalies didn’t jump out at us until we got the billings back from customers, which raised a flag.”

According to CEO Noel Doyle, the problem can be attributed to noncompliance with policy at a very senior level. “One of the things we have tried to do in terms of agility is give more control back to the MDs and the management teams of the individual categories, within guardrails,” he told shareholders. “In this case, those guardrails were breached.”

Doyle tells the FM it will take at least six months to get pricing back to the right levels. “We’ll have a much better year in rice next year.”

This story has been updated to reflect that Tiger Brands owns Roses Cordial, not Five Roses Tea, as originally stated. Five Roses is owned by AVI