Avoid Tiger Brands, advises Hlelo Giyose, First Avenue Investment Management CIO. "It looks cheap but you have to ask why it does," he says.
Tiger is trading on a 16,6 p:e, a far cry from an almost 23 p:e of 10 months ago. There are worrying fundamental reasons for its downrating.
Dragging hard on Tiger's p:e rating is its 65,7% stake in Dangote Flour Mills (DFM) in Nigeria, acquired for R1,5bn in October 2012 under CE Peter Matlare. It was a costly blunder. Tiger wrote down its DFM stake by R849m in 2014 and has just injected a further R350m in equity capital.
DFM has so far rewarded Tiger with losses totalling R928m. And they are mounting. Hit by tough market conditions, a slump in Nigeria's naira currency, and fuel shortages, DFM reported an operating loss of N9,1bn in the nine months to June, up from a N4,9bn loss in the same period in 2014.
Reflecting market reaction to Tiger's acquisition of DFM, Warren Jervis, manager of Old Mutual Small Companies Fund, says: "It leaves doubt about Tiger's capital allocation ability."
In SA, where Tiger is the biggest player, it has also been under pressure. "Tiger is looking over its shoulder at a lot of competitors coming after it," says Giyose.
Not least of these is Pioneer Foods, headed since April 2013 by CE Phil Roux, Tiger's former consumer brands head. He says Pioneer has undergone a "complete re-engineering" that included a new business model.
"Pioneer has a sound game plan and allocates capital well," says Jervis. "There is solid momentum in the business."
The results are showing in strong volume growth in key sectors where Pioneer is clashing with Tiger. They include groceries, bread, pasta, rice, cereals and beverages.
Assisted by improving margins, Pioneer's profit growth is also powering ahead. A consensus view by eight analysts polled by I-Net BFA looks to Pioneer lifting headline EPS by 40% in its year to September. Tiger has delivered total HEPS growth of 23% in the past five years.
For Giyose, AVI is the standout sector player. "Strategically, AVI is far better run than Tiger," he says. "Simon Crutchley [AVI's CE] has done a phenomenal job."
Jervis shares his view. "It has strong brands, allocates capital wisely and has a strong cash flow," he says.
AVI investors have been rewarded with a 133% rise in HEPS over the past five years. Dividend growth was even more impressive at 212%.
AVI topped its performance with special dividends in 2011, 2013 and 2015, totalling 455c/share. They amounted toalmost 40% of total ordinary dividends over the past five years.
While reflecting AVI's ability to generate cash, its generous dividend policy did not restrict capex: a hefty R3,25bn over the past five years.
Also making a strong showing in the food manufacturing sector is the small-cap Rhodes Food Group (RFG). It holds number one or strong number two market share in niche sectors through brands such as Rhodes and Hazeldene (jams and vegetables), Magpie (pies), Bull Brand (corned beef) and Portobello (cheese). It is also Woolworths' exclusive supplier of ready-made meals and pies.
Since listing in 2014 RFG has set a cracking pace, lifting HEPS 40,5% in its year to September 2014 and by 117% in the six months to March 2015.
More robust growth appears to be in store. Under CE Bruce Henderson, RFG is on an aggressive expansion path, adding four bolt-on acquisitions since listing.
For investors in the food manufacturing sector, a choice between Pioneer, AVI and RFGis a tough call. A strong case could be made for a spread across all three.
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