AVI is something of an enigma among SA food companies. Untainted by scandal or controversy unlike most of its commodity-type food producer peers that were involved in the bread price-fixing scandal of a few years ago, AVI just keeps bumbling along, churning out predictable low to mid-single digit earnings growth and regularly paying out special dividends. In fact, this is where its main attraction lies: as a no-surprises, high-yielding relatively defensive stock.
Last year, its Snackworks businesses were the subject of an attempted buyout by multinational food producer Mondelez. After protracted negotiations, Mondelez left but not before taking AVI’s long-time CFO Owen Cressey with them.
The investment community breathed a huge sigh of relief when it learnt of Mondelez’s departure, as it would have been difficult to replace Snackworks in the AVI portfolio had the negotiations been successful. The alternative would have been to pay out a huge special dividend to shareholders if Mondelez’s offer had been accepted. But in such a situation, AVI would have been considerably downsized.
SA’s listed food companies, especially the commodity-type food producers, are relatively dull, with the only real interest occurring when something really unpleasant such as listeriosis, avian flu or product recalls become an issue. Others, such as RFG and Libstar, tend to be the products of private-equity exits and these have had bouts of excitement interspersed with long periods of inactivity. And then of course there was Tongaat, which was such an unpleasant surprise to the market.
This sector should by its very nature be defensive and devoid of controversy and yet it has managed to be extremely volatile and full of controversy. Apart from AVI that is.
Earnings rose
The latest results for the six months to end-December 2021 were very much in line with results for the past few years. On revenue growth of 2.3%, gross profit margin was virtually unchanged at 39.6%, while selling and administrative expenses reduced by 2.5%, leaving the operating profit margin up from 19.9% at the previous interim to 20.8%. As usual, there was strong cash generation.
Headline earnings per share (Heps) rose 6.6% to 316.9c and the interim dividend was increased 6.3% to R1.70 a share.
Segmentally, tea and coffee (Entyce) profitability was down by 4.5% to R452m, while Snackworks’ operating profit rose 8% to R547m. I&J had a great interim period, helped to a large extent by a profound recovery in abalone. Operating profit rose 27% to R160m.
Indigo Brands, the cosmetics and related products category, experienced a 9% drop in operating profit to R99.5m. Female body spray market share took a noticeable knock. In line with a general improvement in clothing, footwear, textiles and leather (CFTL) sales in SA generally, the footwear and apparel business had an excellent year, bouncing back with a 27% rise in operating profit to R265m.
Though footwear volumes were lower, it was more than offset by higher selling prices. Interestingly, the December sales period was better than the pre-Covid-19 sales. Spitz, Gant and Kurt Geiger all turned in superb performances and even Green Cross, a perennial laggard in the portfolio, came close to turning a profit for the first time in years.
Real competitor
The management is confident of achieving real earnings growth for the full year in an environment that is likely to remain constrained.
At the current share price of R70.51, AVI’s market capitalisation is R23.7bn. This compares with Tiger Brands on R28.5bn, RCL Foods on R11.4bn, Oceana on R7.5bn, Libstar on R4.2bn and RFG on R2.9bn. Thus AVI’s only real competitor of any size is Tiger Brands. And the two are similarly rated, with AVI on a price-to-earnings ratio of 13.7 times and Tiger on 13.9.
But AVI has by far the better track record of the two in terms of virtually every financial metric. And it’s not nearly as volatile either.
• Gilmour is an independent investment analyst with Salmour Research.
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