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Analysts warn of sales, cash flow risks for Tiger Brands

Mar 05 2018 18:23
Khulekani Magubane and Lameez Omarjee

Cape Town -  Gryphon Asset Management research analyst and portfolio manager Casparus Treurnicht has raised stark concern at sales and cash flow risks for Tiger Brands, in the light of the revelation that South Africa’s latest and worst listeriosis outbreak came from Enterprise Foods’ Polokwane facilities. 

He said the company’s note to shareholders on Monday read poorly of efforts to prevent the accumulation and distribution of the listeria bacteria in its processed foods business facilities. 

Treurnicht said the company appears to have been found lacking in its facility safeguards, and will have to prepare itself to sacrifice large amounts of money towards litigation and PR damage control. Tiger Brands shares dropped almost 13% in early trade on Monday and by close on the JSE the shares were quoted down 7.44% at R393.38 from their close on Friday.

Tiger Brands confirmed a full national recall of Enterprise Foods meat products, after Minister of Health Aaron Motsoaledi announced on Sunday that the latter’s facilities in Polokwane, Limpopo Province was the source of the country’s latest listeriosis outbreak.

Treurnicht said the company’s financials would bear the brunt of the impact “for another while”. He said Enterprise Food’s position as a Tiger Brands business could mean that, by association, revenue from All Gold and related products might also take a hit.

“Lower sales and margins plus write-offs will impact immediate results. Lawyers will be called in to mitigate lawsuits and advise the business on how to deal with sensitive parts of the issue. Funds will need to be allocated to marketing to ensure the public is kept up to date and prevent destruction to the brand,” said Treurnicht.

Treurnicht said while estimates have to be conservative, class action lawsuits could not be ruled out.

The analyst said he expected the share price to be a lot more volatile.

“Just looking at the price on a technical basis, I would have expected it to settle around R370... although it did touch that level for a split second this morning. For the biggest part of the morning, the R395 level dominated,” he said.

Knee-jerk reaction

Anthony Clark, equity analyst at Vunani Securities, believes that the decline in the Tiger Brands share price was a “knee-jerk reaction” by markets. There is uncertainty how much this could cost - in terms of lost sales and profits - for Tiger Brands, he explained. The markets hate the unknown which is why the share price slumped.

Clark said that the products, also only made a small portion of Tiger Brand’s overall revenue and profits. But trust with consumers has been broken, and this will require a number of steps which could cost Tiger Brands a lot.

Firstly, the factory identified as the source of the outbreak has to be cleaned, brand support in the form of marketing and increased spend on advertising and promotions is also required, by both Tiger Brands and RCL Foods. “This will have a significant cost impact. At this stage we have no idea how much.”

There is also the matter of having compensation paid to families of those who have died or are sick. “Those numbers keep growing on a day-by-day basis,” he explained.

Clark added that Tiger Brands did the right thing by acting quickly on the announcement, ordering products to be withdrawn from shelves.

When asked if consumers may have lost confidence in other products offered by Tiger Brands, Clark said it was unlikely as most consumers are unaware of the different products owned by these retail holding companies.

Meanwhile, Quantum Foods shares held up well on Monday morning in the midst of the latest listeriosis developments, closing at R4.00 a share. The company supplies animal feeds, livestock, eggs and broilers.

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tiger brands  |  enterprise foods  |  listeriosis  |  retail
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