Tiger Brands | Wheat and chaff

A challenging consumer environment, declining market share and poor execution have reduced TBS's earnings to 8% y/y in FY '19 and cumulatively by 22% over the past two years (ex-value-added meats and Oceana). TBS's grains business contributes c.45% to group revenue and margins fell from 18% to 11% over two years (c.24% decline of grains EBIT y/y in FY ‘19). Grains businesses are increasingly commoditised, competitive and are at perpetual risk of input price volatility. A c.R550m loss in Value-Added Meat Products (VAMP) in FY '19 comparison to a historical average profit of c.R120m pa, also leaves a large gap regarding the Group's previous profit levels. VAMP will be slow to turnaround, if at all. The share price has fallen 40% over the past two years (ex-Oceana), including a de-rating of 20%. In our view, management needs to regain credibility by:

1. Further consolidating its portfolio by disposing of underperforming assets. The Deli Foods business and VAMP businesses are for sale.

2. Defending market share in core categories such as grains and groceries.

3. Driving innovation to increase mix towards premium, higher margin products.

Our estimates are largely unchanged. We estimate FY '20 diluted HEPS ex-VAMP to grow by 12% y/y to c.1 713cps. An improving product mix should lift margins from c.9.0% in FY '19 to c.13.2% in FY 23, which we believe is appropriate considering TBS's more branded, higher value portfolio relative to Rhodes Foods and Pioneer Foods (both have c.7% margin currently). We forecast 13% y/y earnings growth to c.1 941cps in FY '20 and 13% CAGR to c.2 470cps in FY '23. We demonstrate the re-rating potential of the TBS share, as portfolio mix and margins improve towards global benchmarks. We calculate a 12m target price of R265/share and maintain an OUTPERFORM rating.