Food prices are rising rapidly. The stock prices of the half-dozen diversified food producers on the JSE, on the other hand, hardly look expensive compared with some heady trading multiples earned in yesteryear.
Sentiment in the food sector was soured even further when Premier Group, which has probably been the best-performing big food company over the past five years, pulled its IPO last week after market conditions were swiped by political uncertainty stemming from the Phala Phala scandal.
Majority shareholder Brait said Premier, which has an enviable position in the bread market, received a “significant amount of investor support” in the IPO process. Retail tycoon and major Brait shareholder Christo Wiese (via Titan) and Rand Merchant Bank will still subscribe for unlisted shares in Premier to the tune of R3.5bn.
The food sector is heading into 2023 with a dire economic outlook … rising interest rates, stubborn inflation, elevated fuel costs and load-shedding
— Anthony Clark
SmallTalkDaily analyst Anthony Clark, a food sector specialist, agrees that financial results have been encouraging — but says the overriding factor dampening investor appetite for food producers is the stretched local consumer.
“The food sector is heading into 2023 with a dire economic outlook … rising interest rates, stubborn inflation, elevated fuel costs and load-shedding. All that plays into the input costs for the food producers, and is why the market just won’t give food producers a rich rating at this point.”
Clark is also nervous about the prospect of a smaller maize harvest next year and in 2024. “If we still have elevated international prices we, as a country, could be in an extremely difficult situation of having to import … and who knows where the rand could be in a year’s time.”
Not too many years ago the top food producers — Tiger Brands, AVI and the now delisted Pioneer Foods — might have reflected earnings multiples anywhere from the mid- to upper teens.
It’s far leaner today. Tiger and AVI sit on trailing multiples of 11 and 13.5 respectively. RCL Foods, which is still lumbered with its large poultry business, holds a multiple of nine, Rhodes Food Group is just under nine, and Libstar sits closer to eight — and this despite both groups producing decent numbers.
Consumers are increasingly price sensitive, and those who previously bought butter might switch to margarine … filter coffee is making way for instant.
Investors with longer-term aspirations might wonder whether there are opportunities among the “big three” diversified food groups to nibble on while stocks are trading at more modest ratings.
TIGER BRANDS
The FM got the distinct impression during Tiger’s annual results presentation last week that the group was getting its mojo back. There was a more reassuring balance between volumes and margin despite a sharp rise in inflationary pressures in the second half. The operating margin mounted a stunning comeback in the second half, shifting from under 8% in the first half to over 11% in the second period.
This is a commendable achievement, with Tiger CEO Noel Doyle reporting lower demand for discretionary and premium products and an increased uptake of value offerings. Most key “R1bn revenue brands” grew both volume and value share. Rice brand Tastic markedly increased volume share from 25.7% to 32.9%, with value share growing from just under 30% to almost 36%. Jungle Oats (39.7% volume and 44% value), All Gold (54.2% and 60.2%), Koo (64.3% and 67.5%) and Oros (41.3% and 43%) all gained market share in the year to end-September.
The bread market looks tough and Tiger’s Albany brand slipped to below 30%, but Doyle reckons market share is closer to 33% after the reporting period, with various new innovations, including a 600g loaf (watch out, Premier?). What will be intriguing in the next few months is Tiger’s seeming strategic shift to “looking ahead”. Acquisitions may be on the cards. Doyle spoke of a culture of “bigger and bolder — but not taking irresponsible bets”.
Said Doyle: “We want to grow market share to provide a solid foundation to become an African giant that just happens to be headquartered in Joburg.” On paper, a deal with Libstar might make sense — adding not only strong-selling dairy brands and specialist foods but also feeding into Tiger’s new willingness to cater for private-label business.
There’s no reason to rush out and load up on AVI. By its own admission, the trading period ahead will be tricky
AVI
This food and fashion brands conglomerate still has the richest rating among its JSE peers. The large Entyce (Five Roses tea and other popular beverages brands) and Snackworks (Bakers Biscuits, Baumann’s, Provita and Willards) divisions have always attracted a superior margin to their competitors fighting in the staple brands trenches.
In the year to end-June, Snackworks still enjoyed a margin of 18.7% and Entyce 22% — underlining AVI’s credo of balancing market share gains without eroding margins. Of course, that will be a considerably more difficult balancing act with the consumer now under immense pressure.
That said, AVI was in talks last year to sell Snackworks to international food brands giant Mondelez. Talks fell through, and no price tag was officially mentioned. Whether such a deal is revisited remains open to debate, and poses the bigger question of whether AVI — which also owns sizeable personal care and footwear operations — is poised for a break-up to unlock value for shareholders.
Now that the prolonged fishing rights allocation process has officially been concluded, there could be an opportunity for AVI to unbundle and separately list the perennially profitable I&J.
Overall, though, there’s no reason to rush out and load up on AVI. By its own admission, the trading period ahead will be tricky. Yet AVI is intent on investing in projects that will bolster the group’s manufacturing capabilities, product quality and customer service levels.
Noteworthy is the further investment to increase the production capacity of the Bakers “Toppers” format — which will extend the Bakers range of biscuits at a time when consumers are buying down. Any unsavoury turns in AVI’s key markets hopefully won’t affect the sweet dividend yield.
RCL FOODS
Management at RCL appears determined to drive vastly better returns. Clearly, much centres on building a more compelling grocery brands business — where operations are focused on key brands such as Sunbake bread, Yum Yum peanut butter, Ouma rusks and Nola mayonnaise (which appears to be spoiling market share for Tiger’s Crosse & Blackwell), as well as a strong niche in pet food offerings. The hitch at RCL is the large commodity exposure via poultry (Rainbow Chicken) and sugar (Selati), which have, at various points, played havoc with its profit performance.
But RCL has separated out the much-improved poultry segment, which could be unbundled and separately listed or bought out (by private equity and management). RCL seems to be in two minds about Selati, perhaps having plans complicated by events at Tongaat Hulett. The group seems more decisive on logistics business Vector, which appears to have been on a beauty parade for prospective buyers.
The consensus is that controlling shareholder Remgro, which owns about 85% of RCL, will ultimately pitch an offer to minority shareholders and delist the group. This would make sense considering Remgro owns spreads business Siqalo, which owns brands such as Stork, Rama and Flora.
For those punters pondering whether RCL is cheap at current prices, the latest Remgro annual report provides an interesting perspective on relative value. Siqalo showed annual operating profits of R476m and headline earnings of R400m, and is valued by Remgro at R6.35bn. RCL has a market value of about R10bn, with operating profits of R1.6bn and headline earnings of R1bn. RCL looks on the cheap side when considering that the plans for poultry and Vector could unlock considerable value in the short term.
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