Tuesday, 17 March 2015 - 20:00
Seed Weekly - AVI ? Growing Great Brands
AVI Ltd is listed on the JSE under the Food Producers sector, and the company is involved in the manufacturing, processing, marketing and distribution of branded consumer products.
AVI houses many of South Africa’s favourite brands across several market sectors, including beverages (Five Roses, Koffiehuis), biscuits & snacks (Bakers, Willards, Provita), fashion & beauty (Yardley, Lenthéric, Coty) and frozen foods (I&J). The brand portfolio includes 33 owned brands and 20 international brands under license, with brands targeting consumers across all income groups. AVI’s competitors include Tiger Brands, which is double the size by market capitalisation, and Pioneer Foods, which is roughly the same size.
AVI was formed in 1944 when the Anglovaal group split its interests into three segments - engineering services (Aveng), Mining (Avmin) and consumer products (AVI). The industrial assets were unbundled into two new listings, Aveng and AVI, in 1999.
AVI recently released its interim results for the six months ended 31 December 2014, and management believes decent results were achieved given a challenging trading environment.
Revenue increased by 11.1% to R6bn on the back of higher selling prices, while cash from operations was up 16% to R1.31bn. Headline EPS increased by 10%, as did the interim dividend. A special dividend of R2 per share was declared, “in line with AVI’s ongoing commitment to return excess cash to shareholders.”
Operating profit was up 13% to R1.15bn from the previous reporting period. Operating profit has grown at 17% per year over the last 10 years, while the operating profit margin increased from 10% in 2005 to 19.2% currently.
The biggest contributors to operating profit were Entyce (beverages) and Snackworks (biscuits & snacks), which benefitted from both higher selling prices and volume growth.
Spitz – a quality footwear retailer – reported record sales in December and only had limited impact on sales from load shedding.
Green Cross was a significant detractor, with volumes declining and shelf space lost to competitors. In addition, six retail stores had to be refurbished.
AVI’s gross profit margin improved slightly from 44.3% to 44.5%, with international fashion brands negatively impacted by a weaker rand, but food and beverage brands benefitting from price increases.
Outlook and Fundamentals
Overall, management expects the current constrained consumer demand environment to persist. The I&J business segment provides a nice hedge against rand weakness, as higher import costs for the international fashion brands will be partially offset by higher I&J exports.
The beverage and snack segments are well established, and should be able to defend their market share and profit margins. Green Cross should hopefully benefit from the store refurbishments and raise volumes accordingly, given that retail space has also grown.
AVI’s dividend yield of 3.2% compares well with its peers Tiger Brands (2.4%) and Pioneer Foods (1.1%). Currently trading at a PE of 21, AVI is more expensive than Tiger Brands (19) but significantly cheaper than Pioneer Foods (30) on this basis.
AVI is included in the Seed Equity Fund at a 1% weight, with strong recent price and earnings momentum securing it a place in the Momentum portfolio.
Cor van Deventer
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