Clover milks better economy to grow profit
Clover expects the benefits of a better economy to continue in the short term, providing relief from the economic pressures consumers have faced in the past couple of years.
The consumer goods and products producer reported a normalised revenue growth of 7.7% to R4.2bn in the six months to December. Operating profit shot up 14.8% to R370m, with headline earnings per share jumping 17.8%.
The company is realigning its business through a series of efficiency improvement initiatives. These include the unbundling of the volume-driven raw milk products side of the business through the establishment of Dairy Farmers SA (DFSA) and the rationalising of product lines.
This will allow the company to focus on developing higher-margin products, while limiting its price exposure to supply-and-demand cycles.
"By the end of this financial year [June 2018] we will have a full year to compare," CEO Johann Vorster said on Tuesday.
He said it was important to strip out the effects of DFSA, otherwise the group would have shown larger falls in revenue and volumes.
A 74% share of DFSA has been taken up by milk producers. This means Clover’s turnover would fall by about R1.75bn a year, but the effect on profit should be neutral given fees paid by DFSA to Clover.
The quarter to December 2017 was marked by retail sales growth exceeding market expectations, as consumers took advantage of Black Friday promotions in November. But December 2017 sales were lower than expected.
Meanwhile, cooler and rainy weather in some parts of the country had also hurt volumes.
The roll-out of new product launches and product reformulations — resulting in lower ingredient and sugar costs — had started yielding encouraging results, Clover said.
The company had ploughed back savings into the selling prices of selected products and was rewarded by an overall volume increase of 8% and market share growth across a number of product categories.
"A resilient set of first-half numbers from Clover … with good growth in revenue, profit and market share across key categories," Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said on Tuesday.
"Management needed to show it had addressed the issues that led to a very poor financial result last year and these results highlight to us that it is well on the road to meeting and even exceeding previous profitability levels."
Van Vlaanderen said the numbers were affected by the formation of DFSA.
This had effectively replaced the revenues and profit generated by the sale of commoditised milk products with a contracted fee for the production, distribution and marketing of these products on behalf of DFSA.
"Clover has thus removed the low-margin, low-growth product from its results, which gives a clearer indication of the prospects of its more consistent and attractive value-add portfolio," he said.
"The DFSA transaction was effective July 1 2017 and so the impact will take another six months to fully annualise."