Pioneer sets its sights on the JSE Top40

After being established in 1997, Pioneer Foods listed on the JSE in 2008. From its small- to mid-cap initial public offering, the food producer has grown into a company worth almost R40bn with its sights set on getting into the JSE’s Top40 Index. 

The Pioneer group’s operations include the manufacturing of food, beverages and related products under its three primary divisions, namely: Essential Foods, Groceries and International. 

Divisions, brands & profitability 

Essential Foods

• Manufactures pasta, wheat and maize products. It also packages rice, beans and
  other dried vegetables and has large bakery operations. 
• Key brands within this segment include Sasko, Pasta Grande, White Star Super Maize Meal, Blue Bird Special Maize Meal, Champion (samp and instant maize porridge), Select Rice, Nice Rice and Crossbow. 
• In the 2016 financial year, this division accounted for around 55% of the group’s operating profit, although pressure on operation margins saw a 2% contraction
  in the segment’s operating profit.
  

Groceries

• Produces breakfast cereals, rusks, cake mixes, baking aids, dried fruit products, nuts, sweet and savoury spreads, processed salads, long-life fruit juices, fruit concentrate mixtures and dairy fruit blends. 
• Here the group boasts high-quality, market-leading brands including (and not limited to) Bokomo, Weet-Bix, ProNutro, Right Start, Otees, FutureLife, Nature’s Source, Moir’s, Marmite, Bovril, Peck’s Anchovette, Redro, Maizena, Smash, Safari, Ceres, Liqui-Fruit, Fruitree, Jungle Yum, Lipton Ice Tea and Caribbean. 
• In the 2016 financial year, the groceries division accounted for around 25% of the group’s operating profit, which grew 25% from the 2015 financial year.

International

• This division is primarily structured around an export business model which is managed across two channels, namely Africa and Rest of the World. 
• It also incorporates the group’s fruit operations and the wholly owned Bokomo Foods UK business. 
• In the 2016 financial year, the international division accounted for around 20% of the group’s operating profit, which grew 9% from the 2015 financial year. 

Food producers have had a challenging time in 2016 with inflation costs relating to grains (maize and wheat in particular) weighing on input costs as drought and import duties took their toll. While inflation pressures are expected to have weighed on the first half of 2017 (as they did in 2016), significantly bigger maize crops are expected this year. 

In turn the group could see substantial benefits in terms of input costs starting to manifest into the latter half of 2017 and first half of 2018, forming part of the base case in which Pioneer Foods could be considered to be offering some value at current levels. 

Further to the inflationary pressures beyond the group’s control, the company has shown management’s strategic ability to create operational efficiencies across its divisions. The group appears committed to further control costs through the consolidation of its factories and logistic cost synergies. 

Pioneer Foods trades on a historical price-to-earnings ratio (P/E) of around 18 times and a forward multiple of 16.5 times. While this might be considered slightly expensive in the current marketplace, the company is still in its growth phase, fuelled largely through clever bolt-on acquisitions. The group has managed to achieve substantial growth year-on-year (acquisition driven) to increase its market capitalisation by more than 300% since 2012, while reducing its debt-to-equity by more than a third over the same period. The return on equity north of 20% shows a healthy shareholder return for investors, while a historical dividend yield of 2.2% adds the cherry on top. 

The company has shown its resilience in weathering the storm through difficult phases of the commodity cycle and as conditions improve, we hope to see it return to double-digit earnings growth from its continuing operations, while seeing further growth for the company achieved through strategic acquisitions. Pioneer has emerged as one of the largest food producers in our economy in a relatively short period of time, accumulating some of the top and defensive brands in South Africa. It is perhaps one to consider for those investors with a longer-term time horizon. 

Shaun Murisonis a market analyst at IG. 

This article originally appeared in the 2 February edition of finweek. Buy and download the magazine here.