Since becoming Tiger Brands’ CEO just six months ago Lawrence MacDougall has wasted no time getting to grips with putting the food sector also-ran back on a growth track.
"I am fully up to speed," says MacDougall, whose first decisive move was to set up a team to undertake a group-wide strategic review.
One of the aims of the review, which is due for completion in April or May, is to "fundamentally restructure and re-engineer the business".
MacDougall gives little away on potential outcomes of the review. But it is clear that great emphasis will be laid on extracting maximum value from what he terms Tiger’s "power brands". These include Albany, All Gold, Koo, Jungle, Tastic, Crosse & Blackwell and Fatti’s & Moni’s. "We will identify the categories on which to focus and ensure we have the structure and capacity to [carry out what is necessary]," says MacDougall. "I also have a team that can execute [what must be done]."
Cost cutting will be high on the list of priorities, says Tiger CFO Noel Doyle, who has already overseen cumulative savings of R692m in the past three financial years. Total savings of R380m were achieved in the year to September alone. There is far more to do, he believes. "Cost cuts have so far been applied on a status quo organisation," he says. "With the strategic review we will relook at our model. It will provide opportunities to lift the level of cost savings."
Buying in on Tiger’s promises, the market has its share price hovering around a record high. Renewed confidence seemingly also reflects relief at Tiger’s exit from the disastrous Dangote Flour Mill venture in Nigeria and a reversal of the rot at its Kenya-based, R960m annual revenue Haco unit. Haco was last year rocked by a profit-inflating scam perpetrated by its then senior management.
What has yet to be seen from Tiger is delivery. Though MacDougall correctly argues a 2% rise in Tiger’s domestic volumes was laudable given tough conditions, annual results to September were far from inspiring, with headline EPS (HEPS) lifting a mere 2%. It left growth of average annual HEPS over five years at 3.3%.
Though it was a year in which food producers’ profit margins were hit by soaring input costs, especially of maize and wheat, rival Pioneer Food Group’s 6% HEPS rise suggests more could have been expected of Tiger.
Tiger’s results were also boosted by income from associates, which lifted 43% to R861m and accounted for 60% of the rise in group pretax profit. Stars were fishing group Oceana, in which a 43.8% stake is held, and 24%-owned Chilean food group Empresas Carozzi.
A key factor in a strong revival in Tiger’s fortunes will be the performance of its milling and baking division, which accounts for 38% of operating profit. What is working in the division’s favour is that grain prices have fallen, with maize now 25% off its March peak and wheat 25% off its August peak.
But benefits won’t be instantaneous. "We expect to see them come through in the latter part of our new financial year," says MacDougall.
He is not prepared to say why there will be a long delay. But the answer appears to lie in a problem revealed by Pioneer: futures contracts bought at higher prices that still have to unwind.
When benefits start to flow they are likely to provide a big profit kicker, believes Investec Asset Management analyst John Thompson. Prices, he argues, have been pushed up sharply by high input costs but are unlikely to fall much when input costs fall.
"Price structures will stick and profit margins will widen," says Thompson. "Food producers could find themselves in a sweet spot."
But there is a potential pitfall in a market where rivalry has never been more intense. "Pioneer and Rhodes are especially aggressive," says Thompson. "Price-based skirmishes for market share are highly possible."
The market has high expectations for Tiger.
Analysts rate Tiger Brands as a "buy" overall, with a target price of R414. Tiger’s 14% share price rise in the past six months to R401 mean it’s already close to that.
Renaissance Capital is the most optimistic, putting its target price for the stock at R450.
But investors who expect too much, before there is meaningful profit growth, could end up being disappointed.