Pioneer Food Group: Lost Its Flavour?

7 June 2017 | Cheyne Anderson
 


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Pioneer Food Group has had a horrid first half to their 2017 financial year. It has been a market darling for some time, and produces brands that most of us consume. Many of us will have either Weet-Bix, Pronutro, or Cornflakes for breakfast. Or perhaps spread our toast with Marmite or Bovril. Sip on Lipton ice tea, Liqui-Fruit or a Ceres juice when we are thirsty. Or perhaps snack on Safari dried fruits or Bokomo rusks. These are just some of the brands that comprise Pioneer Food Group.

Despite the well established brands, PFG reported very weak 1H17 results in May. South African sales growth was only 4% while the international division was down 11%, mostly due to the strength of the rand. Operating profits were down 43% and headline earnings per share (HEPS) were down 47%. Profits were negatively impacted by maize hedging costs and PFG barely benefitted from the falling maize price. The maize and raisin business (due to smaller crop sizes) were the main drag on profits.

The year so far

The share price has been very volatile this year. In March, the share price spiked over 11% on news that a foreign buyer was interested in acquiring the company. However, in April, the potential deal was pulled due to the credit downgrade and the share price fell sharply. The company issued a trading statement in early May (as required by JSE regulations) announcing that HEPS was expected to be down between 44% to 49%. Since then, the share price has fallen a further 14%.

Investment case

While the maize and raisins business has performed poorly, the bread/bakeries, breakfast cereals and snack businesses reported very strong performances. Given that management expect maize and raisins to return to profit in 2H17, it seems the worst is behind us. Profits should be further buoyed by lower concentration costs in the beverage sector and by improved outlook in the UK and EU businesses.

As mentioned, the share price has fallen significantly and is now more than 2 standard deviations away from the average when compared against the Industrial 25 Index (J211). The below graph confirms how ’cheap’ the share is relative to the index:

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At current levels, PFG looks like a good buying opportunity for a longer-term investor who can withstand short term volatility. 2H17 numbers are likely to be much more positive, but the full recovery is only likely to occur in 2018.

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cheyne

Cheyne Anderson
Portfolio Manager and Securities Trader

Cheyne has spent the last 10 years working in London, holding numerous positions within Equity and Equity Derivatives at various Investment Banks. His main focus has been on South African and Emerging Markets and also gained good exposure to global equity markets and products. He completed both his BCom degree in Economics and his BCom. Honours in Financial Analysis and Portfolio Management at the University of Cape Town. After completing each of the rigorous exams, Cheyne became a CFA Charterholder in 2014.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

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