BROKERS’ NOTES: Buy TFG, sell Tiger Brands

BUY: TFG

TFG’s share price has dropped 22% this year on fears of the fallout from the VAT hike on consumer spending. This provides a good entry point to buy the share. The business is in good health and the potential for earnings growth is evident given real wage growth in South Africa stemming from low inflation and the lower oil price. The business benefited from pension fund withdrawals resulting from the two-pot system, with customers tending to trade up from value-focused players once disposable income increases. Gross margins are maintaining positive momentum and management’s guidance for South African ebit margins remains at 14%-15% over the medium term. After 12-18 months of strategic consolidation with a large number of investments, TFG is well positioned to capture market share and increase wallet share across all regions.

Sell: Tiger Brands (TBS)

The Tiger Brands management team, led by veteran turnaround expert Tjaart Kruger, has executed its turnaround initiatives well. The group — which owns market-leading brands such as Jungle Oats, Tastic rice, Black Cat peanut butter, Energade and Koo — continues to simplify its product portfolio and dispose of noncore brands. Overall, Tiger has markedly improved efficiencies and streamlined the operating model. The share price responded positively to the improvement and has increased by 76% over the past 18 months. The share touched a multiyear high of R294 in early January, before drifting back to current levels that reflect a trailing earnings multiple of 15. Tiger’s share now trades on a more normalised forward earnings multiple (about 12) and consequently we see better opportunities elsewhere in the market.