A year ago in this column I predicted that AVI was due to pay a special dividend in 2024, if past history was anything to go by. I qualified that prediction with the observation that strong consumer spending would be necessary for a sustained improvement to the share price.
In the event, the company did indeed pay a special dividend and though consumer spending remained subdued, AVI managed to produce knockout earnings for the year to end-June. This performance was unexpected, though the good interim figures to end-December 2023 suggested that earnings growth for the year might be stronger than usual.
And all of this was achieved with many of the divisions performing well below their best, suggesting that under better economic conditions the group can do even better. This is a far cry from the dismal earnings performance of more commodity-type food producers such as Tiger Brands and highlights AVI’s highly disciplined approach to cost management, coupled with a lean, complementary brands portfolio.
For the year, group revenue rose 6.3% to R15.9bn, while cost of sales was only 1.7% higher at R9.2bn. Gross profit advanced 13.5% to R6.6bn and the gross profit margin rose from 39% to 41.7%. Operating profit was 21.7% higher at R3.3bn.
As has been the case in the past, the great bulk (almost 78%) of operating profits last year came from two sources: Entyce and Snackworks. The remaining 22% came from I&J (6%), personal care (almost 6%) and footwear & apparel (10%). Operating profit margin rose from 18.2% to 20.8%.
Net financing costs fell 3.4% to R184.5m and headline earnings per share (HEPS) was 24.1% ahead at 687.1c. A final dividend of 388c per share was declared, making 590c for the year. In addition, a special dividend of 280c per share was declared.
Segmentally, Entyce (the tea and coffee business) grew its revenue 18.2% to R5.025bn, while its operating profit soared 43.1% to R1.3bn. Snackworks, which makes biscuits and snacks, managed revenue growth of only 6.4% to R5.6bn, though operating profit jumped 22.4% to R1.3bn.
And then there was I&J, the fishing business. This has been problematic for a few years now and financial 2024 was no exception. Revenue declined 1.1% to R2.5bn and operating profit was virtually static at R199.7m. Problems included lower catch rates and lower profits from the abalone (perlemoen) business.
Any improvement from this source should be regarded as a welcome bonus.
Indigo Brands, the personal care business, had a poor year, with revenue dropping 16.4% to just more than R1bn and operating profit declining 5.5% to R220m. However, there was a margin improvement due to the loss of the lower-margin Coty business last year.
Footwear & apparel had a mixed performance. Revenue rose 3.6% to R1.8bn while operating profit fell 3.9% to R341m. This is an unashamedly luxury brand business and as such has done well in recent years just to keep its head above water. It really needs a much more consumer-friendly environment in which to thrive.
Management expects financial 2025 to remain challenging from a macro perspective, though it seems reasonable to expect a lower interest rate environment for most of the year. Entyce and Snackworks are highly resilient businesses and should continue to provide a solid, dependable base for the future. Indigo Brands should see an improvement from a low base, and the footwear & apparel businesses should get relief from lower interest rates, especially during the vitally important December trading period. Which just leaves I&J, whose performance is notoriously difficult to forecast. Any improvement from this source should be regarded as a welcome bonus.
At a share price of R108.66, AVI’s price-to-earnings ratio is 15.8 times and its dividend yield (excluding the special dividend) is 5.4%. Including the special dividend it is 8%. This is not an onerous rating for such a high-quality company.
• Gilmour is an investment analyst.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.