Tiger Brands: Where did it all go wrong? 

By Investment Correspondent, Justin Rowe-Roberts

South Africa’s largest food producer Tiger Brands has long been referred to as a high-quality, blue-chip company that is held by a number of top local asset managers. Tiger Brands houses labels such as Jungle Oats, Albany and All Gold and is regarded as best-in-class in the sector, despite the likes of AVI possessing a better track record. The defensive nature of the industry is a definite plus for risk-averse investors; however, dire capital allocation and product quality issues have destroyed shareholder value over the past five years. Even more concerning for investors is that inflationary pressures as a result of unprecedented monetary easing have put significant pressure on input cost. Although its brands are well liked by consumers, it’s not always easy to pass the inflationary pressures on to the consumer. Analysts are becoming increasingly concerned inflation won’t be ‘transitory’ in nature. This means inflation will stay higher for longer and will be negative for margins and earnings. Another concern, on top of many others.

Comparing Tiger Brands 2021 numbers to 2016’s paints a bleak picture. Revenue is slightly lower but, more alarmingly, headline earnings per share – the company’s primary measure of performance – is down by around 50%. Although Tiger Brands spun off its 42% stake in Oceana during the period under review, not being able to grow its topline over a five-year period leaves much to ponder. But where did it all go wrong? 

In 2011 and 2021, management decided to embark on an African growth story. Many of the management teams on the JSE, in various industries, had a similar idea. Nigeria was an attractive jurisdiction with the country’s high growth rates. In 2011, Tiger Brands bought a 49% minority stake in UAC Foods and, in 2012, a 65.7% stake in Dangote Industries; both Nigerian-based businesses. Many JSE-listed counters have lost money in Africa and Tiger Brands is no exception. The stakes of both businesses have since been sold. During this time, management’s focus on growth led to a steady decline in its brands, which have continued to lose market share over the past few years. 

The listeriosis outbreak in 2018 caused great financial and reputational damage to the food producer. What was thought to be an idiosyncratic event, was clearly not. Just weeks ago, the company announced it had been hit by another product quality scandal. Millions of canned vegetable products were recalled and, with the company already mired in litigation following the listeriosis outbreak, it has hit another hurdle. 

When will the tide turn?

Tiger Brands Media Release: 

Tiger Brands’ improved operational performance for the year ended 30 September 2021 was offset by the costs of the product recall and civil unrest

Salient Features*

⋅ Total Revenue increased by 4% to R31.0 billion

⋅ Revenue excluding the product recall and civil unrest increased by 5% to R31.2 billion

⋅ Group operating income** declined by 10% to R2.2 billion

⋅ Group operating income** excluding the product recall and civil unrest increased by 20% to R3.0 billion

⋅ Group operating margin** declined to 7.2% from 8.3%

⋅ Group operating margin** excluding the product recall and civil unrest increased to 9.5% from 8.3%

⋅ EPS increased by 21% to 1 070 cents per share

⋅ HEPS declined 6% to 1 127 cents per share

⋅ Total Dividends increased 23% to 826 cps

*From continuing operations – consistent with the previous year, Value Added Meat Products has been treated as a discontinued operation **Before impairments and non-operational items

Overview

This year, Tiger Brands joins a select group of South African companies that have celebrated their centenary. The company has come a long way since starting out as a small family business in Newtown, Johannesburg, to become Africa’s largest listed manufacturer of fast-moving consumer goods, with trusted brands that form part of every South African’s shopping basket. Although, the past few years have presented particularly high levels of volatility and uncertainty, with rapidly changing production and consumption patterns and increasing social, economic and environmental pressures, all of which have been exacerbated by the Covid-19 pandemic, our longevity reflects the company’s resilience, the inherent strength of our brands and the quality of our people.

Inspired by our strong history, our strategic priorities are aimed at improving the performance of our core portfolio while positioning the company for sustainable long term growth.

Tiger Brands’ results for the year ended 30 September 2021 reflect steady progress against our strategic priorities with an improved underlying performance from the core business, negated by the costs related to the product recall and the civil unrest that took place in July 2021. These costs amounted to R732 million (pre-tax).

The write-off of stock related to the civil unrest (R85 million), as well as the product recall (R308 million), has been accounted for through cost of sales. Customer refunds related to the product recall have been accounted for as a reduction in revenue, whilst other recall related costs have been accounted for through the relevant expense functions in the income statement.

In terms of the group’s underlying performance, the year under review can be characterised as a year of two halves, with a solid first half result, driven primarily by a strong first quarter, offset in part by slower top line growth in the second half. Despite revenue challenges, cost savings and efficiency initiatives were sustained, resulting in positive operating leverage for the full year.

Total revenue from continuing operations (before the impact of the product recall and civil unrest) increased by 5%, underpinned by price inflation of 7%, which was partially offset by an overall volume decrease of 2%. As a result of the costs related to the product recall and civil unrest, operating income from continuing operations** declined to R2.2 billion from R2.5 billion the previous year. Gross margin and operating margin declined to 28.5% (2020: 30.1%) and 7.2% (2020: 8.3%), respectively. In addition, naked margins came under pressure due to the high level of agricultural commodity cost push not being fully recovered through selling price increases. However, this was offset by a steady improvement in manufacturing efficiencies, resulting in a marginal improvement of overall gross margins (excluding the product recall and civil unrest) to 30.3% from 30.1% in the prior year. Operating income0F ** (excluding the product recall and civil unrest) increased by 20% to R3.0 billion.

Earnings per share (EPS) from continuing operations increased by 21% to 1 070 cents (2020: 886 cents), whilst headline earnings per share (HEPS) from continuing operations declined by 6% to 1 127 cents (2020: 1 196 cents).

EPS from total operations increased by 87% to 1 142 cents (2020: 612 cents), and HEPS from total operations increased by 20% to 1 127 cents (2020: 940 cents).

The group’s statements of financial position for the years ended 30 September 2020 and 30 September 2019 were restated to better reflect the requirements of IFRS 15 by offsetting a portion of the group’s rebate liability against trade and other receivables. In addition, there was a restatement in the income statement for the year ended 30 September 2020 relating to the disclosure of non-operational items to better reflect the presentation requirements of IAS 1. This change had no impact on EPS and HEPS reported for the year ended 30 September 2020.

Report of the independent auditors

Ernst & Young Inc., Tiger Brands Limited’s independent auditors, have audited the consolidated financial statements of Tiger Brands Limited from which the summarised consolidated results have been derived. The auditors expressed an unmodified opinion on the consolidated financial statements. The consolidated financial statements and auditor’s report, including the key audit matters, are available on the Company’s website www.tigerbrands.com.

Board Committee Assignments

Shareholders are referred to the Company’s audited group results and dividend declaration for the year ended 30 September 2021.

In addition, shareholders are advised of the following committee appointments:

• Following the resignation of Mr Ian Burton from the board in June 2021, Ms Geraldine Fraser-Moleketi is appointed chairman of the investment committee with effect from 19 November 2021.

• Following the retirement of Ms Maya Makanjee with effect from 31 December 2021, Ms Emma Mashilwane will be appointed chairman of the social, ethics and transformation committee, with effect from 2 January 2022.

• Following the retirement of Mr Mark Bowman at the company’s annual general meeting on 16 February 2022, Mr Donald Wilson will be appointed chairman of the remuneration committee with effect from 17 February 2022.

Declaration of final dividend

The Board has declared a final ordinary dividend of 506 cents per share for the year ended 30 September 2021. This, together with the interim ordinary dividend of 320 cents per share, brings the total dividend for the year to 826 cents. In view of the company’s ungeared balance sheet and strong cash generating ability, it has been decided to determine this year’s total dividend on the company’s adjusted headline earnings. Consequently, HEPS was adjusted to exclude the impact of the product recall and the civil unrest, which took place in July this year. The Company’s dividend policy of 1.75x cover has therefore been applied to HEPS after the aforementioned adjustments.

In accordance with paragraphs 11.17 (a) (i) to (x) and 11.17 (c) of the JSE Listings Requirements, the following additional information is disclosed:

• The ordinary final dividend has been declared out of income reserves

• The local Dividends Tax rate is 20% (twenty percent) effective 22 February 2017

• The gross final dividend amount of 506.00000 cents per ordinary share will be paid to shareholders who are exempt from the Dividends Tax

• The net final dividend amount of 404.80000 cents per ordinary share will be paid to  shareholders who are liable for the Dividends Tax

• Tiger Brands has 189 818 926 ordinary shares in issue (which includes 10 326 758 treasury shares)

• Tiger Brands Limited’s income tax reference number is 9325/110/71/7.

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