AVI’s appetite for well-priced acquisition opportunities
There is something reassuring in AVI’s ability to balance volume growth and pricing in its array of consumer brands
The JSE’s food sector — now further tainted by the bitter disclosures at sector stalwart Tongaat Hulett — is churning the stomach of many an investor.
Queasy sentiment, however, has not dulled the appetite of consumer brands conglomerate AVI for well-priced acquisition opportunities.
AVI’s interim results presentation highlighted, in its investor proposition section, the acquisition of high-quality brand opportunities … "if available".
While the presentation slide’s wording might betray an air of caution, AVI CEO Simon Crutchley remarked that there were some consumer-brand assets that might get into trouble. "This is a ‘winners’ and ‘losers’ environment, which might present some opportunities."
While Crutchley did not delve into detail, market watchers will be aware that the JSE hosts a number of food businesses that are struggling for sustained traction. One suspects that parts of listed food businesses like Libstar and Rhodes Food Group — even Pioneer Foods — might interest AVI.
AVI, which pegged its interim dividend at 165c a share after paying a generous special dividend in the previous financial year, certainly has the balance sheet to accommodate any deal-making endeavours.
Net debt stands at R2.5bn, which is hardly an impediment to making acquisitions. Cash generated by operations increased at almost R1.6bn in the interim period.
That said, some shareholders might well prefer AVI to keep plugging away at its existing brand portfolio — remembering also that the group’s last tilt was the rather limp Green Cross footwear business.
In the wake of a shock trading update from Tongaat and lean fare from RCL Foods, there is something tastefully reassuring in AVI’s ability to balance volume growth and pricing in its array of consumer brands that span food, fragrance and fashion.
The key takeout of the interim results (to end-December) investor presentation was that AVI was prepared to play the longer-term game, soaking up pricing and market-share pressure.
Crutchley noted: "This is no time to be esoteric … the focus is on margin management, procurement, costs savings and efficiency."
Of course, such a statement might be lost on a jaundiced market. But the interim numbers support Crutchley’s contention that AVI could actually squeeze out some real profit growth in the second half of the financial year.
Overall headline earnings were down around 6% at R1bn or 305c a share.
The more important indicator was the ability to restrict the drop in gross margins to 44.3% (last year 45%) and the slightly more pronounced dip in operating margin to 19.6% (21%).
This was achieved despite another clumsy performance from the Green Cross business, a flat performance from the I&J fishing segment and increased pressure at the higher-end fragrance and fashion brands.
AVI’s food core performed commendably in the leaner trading conditions with Entyce Beverages (the tea, coffee and creamer brands like Five Roses, Freshpak, Ciro, Frisco and Ellis Brown) increasing sales 3.8% to R2.1bn. Operating profits lifted 10% to R467m.
Margins fattened to 22.1% (previously 20.8%).
Pricing was strong. Volumes in the key tea segment were lower on the premium-brand side, but it seems AVI scored from a shift to more affordable brands.
Coffee profit decreased due to increased competitor activity, though Crutchley stressed that profitability remained healthy.
The weaker coffee segment was fortunately offset by huge volume gains (22.5%) in the creamer segment. In truth, the performance was buoyed by competitor supply issues — which means this trend may not extend too far into the second half.
Snackworks, which includes Bakers biscuits and Willards chips, hiked revenues 3.8% to R2.26bn but operating profits declined 5% to R429m with the margin squeezed to 19% (previously 20.8%).
The Bakers biscuits business had 4.4% revenue growth — driven 3.9% by volumes and 0.5% by price. Market share grew slightly in the "sweet" category to 41.4%, but fell to 13.8% (from 15%) in the savoury category.
The snacks segment had a 1.8% gain in top line — driven by 1.9% growth in volumes and a 0.5% crimp in pricing.
The fashion segment — the Indigo fragrance business and Spitz footwear — took the biggest knock, with revenue down 6.5% to R1.76bn and a 17% stumble in operating profits to R399m.
Crutchley said the fragrance body spray volumes were constrained by aggressive discounting across the category in the first quarter. He said Indigo’s share of the local body spray market declined from 32.7% to 32.1%.
But Crutchley noted good volume growth from body care and roll-ons.
The footwear segment suffered lower demand in a constrained environment, and that meant the record performance in the previous interim period was not repeated.
On the positive side, the gross profit margin was stable and profitability remained strong in spite of no price increases on core ranges.
AVI’s investment presentation showed that revenue from the key Spitz and Kurt Geiger brands decreased 8%, with the selling prices averaging down 0.2%.
AVI’s Achilles heel is its Green Cross footwear business. It notched up an R18m loss from turnover that was 20% lower at R154m. Crutchley admitted Green Cross had not turned out to be the opportunity AVI envisaged when it was acquired for R382m in 2012.
In November AVI took the decision to stop all local manufacturing operations at its facility in Epping, Cape Town.
If AVI can complete the restructuring process at Green Cross without delay — there are plans to relaunch its product range and revamp its store design by the first half of the 2020 financial year — there could be a meaningful kicker to bottom line in the medium term. For the short term Green Cross is likely to prove a drag.
But the outlook for the second half seems cautiously upbeat. Crutchley (who believes AVI capable of real earnings growth) notes encouraging trading for the first two months of the second half.
On a forward earnings multiple of around 15 times AVI is not dirt cheap. But there is a resilience to the business and its brands that should provide an underpin even if the economy is still crawling along after the general elections in May.
Crutchley reiterated that AVI will not be sitting on cash it could not mobilise.
So while there is probably no chance of another special dividend this year, there may be another payout in the medium term if no suitable acquisition opportunities are uncovered.