The Investec Equity Fund invests in shares where we believe expectations for future earnings will be revised upwards. These positive revisions must be sustainable and operationally driven.
One such a share, which we started buying towards the end of last year, is Tiger Brands.
The business has been in the news over the past few years mostly for negative reasons connected to its operations in Nigeria, and this has detracted from the true long-term potential of the business.
We believe that the company is in a much healthier position now following the disposal of the Dangote Flour Mills business in Nigeria, which placed a significant drag on earnings in the recent past.
However, the losses from these operations are still reflected in the current financial results, and subsequently the performance is negatively affected.
The other big factor that has negatively affected the company relates to poor pricing and cost decisions. We are encouraged by the change in the management team as at last year.
While the company is still looking for a permanent chief executive, the new management has so far shown an ability to examine costs with a fresh perspective, and a commitment to cut unnecessary expenses.
This is critical in order for the company to focus on building out the strong elements in the business.
Tiger Brands’ greatest assets are its brands, and here the business is inherently still quite solid. It has built a significant presence in the fast-moving consumer goods (FMCG) market with strong, well-known brands such as Koo, Ace, Albany, All Gold and Beacon, to name but a few.
The strength of its brands has given the group an ability to display superior pricing power through the cycle, especially in inflationary conditions.
This makes the share particularly exciting for us given the period we’re entering into in South Africa. We believe the market has underestimated the extent of Tiger’s pricing power and that this has not been fully recorded in expectations for future earnings.
We acknowledge that the rising price of wheat will have an impact on the input pricing of all food-related companies and that the rising inflationary environment creates uncertainty, but we believe the market is somewhat overestimating the effect of higher prices on Tiger Brands.
Over the course of the past 15 years, there have been two or three large spikes in food prices, and in only one case did Tiger’s milling, baking and grains profitability recede.
The share has been given a punitive rating because of some poor decisions in the past.
However, we are of the view that, under the right circumstances – in other words with a more focused management team, a greater commitment to cost-cutting, pricing power through the drought cycle – Tiger Brands has the ability to create shareholder wealth over time.
The food sector is defensive, and as a market leader in the sector, Tiger Brands has shown that it can create success in good and poor markets.
Given its well-known brands, good cash flow, lack of debt and reasonable pricing power, combined with more focused operations, we are excited about the company’s prospects.
*John Thompson is an analyst at Investec Asset Management.
This article originally appeared in the 10 March 2016 edition of finweek. Buy and download the magazine here.