Tiger Brands’ road to recovery | Fin24
 
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Tiger Brands’ road to recovery

Jun 05 2018 10:26
Lloyd Gedye

Tiger Brands’ share price “still has a long way down”, says Rob Pietropaolo, private client trader at Unum Capital.

 

In May, the group released its results for the six months to 31 March – its first results following the news that the listeriosis outbreak in South Africa could be linked to a strain found in facilities owned by Enterprise Foods, one if its subsidiaries.  

 

With its share price at a peak of R474.50 in January, it is currently trading at around R335 per share. Its market cap is down R27bn since January to around R64bn at the time of writing, Wayne McCurrie, senior portfolio manager at Ashburton Investments, points out.

 

To date, Tiger Brands has recalled and destroyed 4 000 tonnes of value-added meat products (VAMP), costing the company R415m, according to its chief financial officer, Noel Doyle.

 

“On a daily basis, we are incinerating products,” said CEO Lawrence MacDougall.

 

It has also closed three plants, and Tiger Brands has since spent R50m in remediating its facilities. According to Doyle, the food giant is planning to have all its facilities reopened by September this year. Floors have been replaced and changes to process flows have been implemented.

 

“We have changed how we move products from one place to another,” he says.

 

Despite the closures, Tiger Brands has maintained its 1 600 permanent employees. Carrying these costs while facilities are not in production is a challenge, making it critical to get facilities back up and running as soon as possible, says Doyle.

 

The listeriosis news broke at the beginning of March, and therefore only four weeks of closures have been included in the recent set of results. Volumes in VAMP have dropped by 12% over the period and revenue by 16%, delivering an operating income of R133m.

 

“These closures have already seen [operating] income plunge almost 80%, so the longer they stay closed, the worse it gets for Tiger Brands,” says Pietropaolo.

 

“Their forward guidance was also somewhat bleak, expecting trading conditions to remain tough for the rest of the year.” 

The cost of a class action

McCurrie says Tiger Brands is likely looking at a direct cost of R800m to R1bn to its income statement, before it even gets to the class action lawsuits relating to the listeriosis outbreak, which to date have resulted in over 200 deaths.

 

There are currently two class actions in motion, and the two cases are expected to be combined into one, says Doyle, adding that Tiger Brands’ insurance lawyers are close to the process. He believes the company has appropriate cover to respond to the crisis.

 

“Just how big the settlement [relating to the two class action lawsuits] will be, is anybody’s guess,” says Pietropaolo.

 

McCurrie points to a potential settlement figure of between R1bn and R2bn, and suggests that Tiger Brands should choose to settle the class actions rather than have them drag on for years.

 

“That would be the quickest way to repair your brand and truly put this thing behind you,” says McCurrie.

Other bad apples

Doyle argues that Tiger Brands sees the current performance as a “fairly satisfactory environment”, given the level of deflation in the market.

 

The company’s revenue for the period was down 4% year-on-year to R15.7bn. According to Tiger Brands, had the impact of the recall been removed, revenue would have been down by 2%.

 

Tiger Brands also identified “specific challenges” in its grains, consumer brands, home and personal care (HPC) and Langeberg & Ashton Foods (LAF) divisions, which it said significantly impacted on the group’s overall performance.

 

Volumes at LAF, its deciduous fruit business, dropped 22.9%, and revenue by 23%.

 

It reported an operating loss of R72m, a decrease of 337% on last year’s operating profit of R30m. The poor performance in this division was largely down to the drought in the Western Cape and the subsequent lack of volume to sell, according to Doyle. “Yields were poorer,” he says. “That was the biggest driver.”

 

Volumes at its HPC division were down 12%, and revenue down 16%. Operating income, at R133m, was down 46% year-on-year.

 

While Doyle also cited an intense price war between Clicks and Dis-Chem, he says the major reason for the poor performance in this division was grain.

 

According to Doyle, Tiger Brands’ Deli Foods in Nigeria has faced 24 months of significant downturn, linked to the devaluation of the naira and the deep recession that followed the oil price collapse.

 

“We haven’t found the right way to recover that business,” says Doyle, adding that Tiger Brands had made some management changes at Deli Foods and would like to still make some more.

 

“We are looking at it carefully,” he adds.

This article originally appeared in the 7 June edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

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