Stealthy Gains: Unveiling Hidden Profits – Moneyweb

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Welcome to the Supernatural Stocks Podcast on Moneyweb, hosted by The Finance Ghost. Your weekly source for local and international insights for investors and traders.

Once upon a time, far from my current home in Fourways, Tiger Tiger was a nightclub where I made many questionable choices during my youth.

In the investment realm, however, “Tiger” signifies a company adept at navigating the repercussions of poor decisions with remarkable proficiency.

After discussing Sasol last week and their need for numerous miracles for future endeavors, my focus now shifts to a turnaround narrative with genuine promise. Unfortunately, market awareness means entering at the current price necessitates some bravery.

Listen/read: Sasol: Five miracles and a dream

Still, there appears to be some upside left with Tiger Brands, which arguably presents less risk compared to ventures like Sasol.

New leadership, new direction

Tjaart Kruger took the reins of Tiger Brands in November 2023, intending to serve briefly. His expertise as a turnaround specialist has been well-received by the market.

When Tjaart is involved, the charts tend to improve.

Having made notable progress in the turnaround and evidently relishing his role, Kruger now plans to stay until the end of 2028, which provides the market with much-needed assurance—something investors greatly appreciate.

Listen/read:
Tiger Brands ‘getting better and better’
Tiger Brands reaches a 7-year high on special dividend boost
Tiger Brands soars 11% following CEO Doyle’s resignation

The saying “if it ain’t broke…” definitely didn’t fit Tiger Brands.

It was quite the opposite—Tiger Brands was struggling, resembling a sluggish house cat rather than an agile predator, dealing with an overwhelming array of products and the aftermath of the listeriosis crisis.

While ongoing legal issues related to listeriosis remain, their strategy regarding Langeberg and Ashton Foods reflects a strong understanding of public image management.

Instead of abandoning Ashton, they actively pursued a sustainable solution to divest from that canning operation.

Since Kruger took charge, decisive actions have been plentiful. The Langeberg and Ashton business proved more of a distraction than a benefit, and strategic measures have been put in place across various initiatives.

The results presentation for the six months ending March showcased a fierce-looking cat on a slide, stating they attained “remarkable topline growth, ending years of declining volumes,” supported by compelling statistics.

Read:
Tiger Brands sells fruit business for R1
Tiger Brands proposes settlement in listeriosis case
Tiger Brands confirms plans to offload loss-making fruit canning plant [May 2023]

They not only divested from non-core operations but also did so with sound reasoning. Volume growth has resumed across remaining sectors, coupled with improving margins.

A striking statistic: the past year saw Tiger’s balance sheet transition from R2.7 billion in net debt to R5.9 billion in net cash.

I admit, I usually approach turnaround situations with caution; investing in them demands careful consideration as success can be elusive.

In this instance, my hesitations resulted in missed opportunities, as I failed to invest in Tiger’s turnaround and missed an 80% increase in share price over the past year.

For what it’s worth, I don’t obsess over missed opportunities—what matters more is avoiding poor investments over lamenting a missed good one.

However, the most captivating aspect of this turnaround, serving as a crucial lesson applicable across sectors, is Tiger’s focus on their Right-To-Win.

Emphasizing strengths

Business strategy fundamentally revolves around discerning what not to pursue with your time and resources.

The market is rife with opportunities. Ranking them from best to worst is crucial, but it’s also essential to evaluate what aligns best with your business’s strengths.

Companies often stray from their core reason for being, exploring too many avenues and underscoring the importance of focusing on their true competencies. Practically, this enables sustainable competitive advantages through strengths like brand reputation, product expertise, or a solid supply chain—optimally combining these elements.

With thousands of SKUs in large grocery stores, Tiger Brands can technically compete broadly. However, what they can do versus what they should do often diverges.

Under Kruger’s supervision, the focus narrows to products where they can effectively convey why their participation is justified. This approach not only drives revenue growth but also substantially enhances margins.

Operating profit is paramount

Chasing revenue for its own sake is counterproductive.

Low-margin, low-quality revenue rarely yields sufficient returns on capital after accounting for necessary working capital and capital expenditure. While Tiger Brands must aim for long-term revenue growth, their immediate priority is unlocking margins.

This was successfully achieved in the interim, with operating income rising by 29.9%, even as revenue only grew by 1.9%.

Delving deeper reveals astonishing figures, such as a 37.3% uptick in operating profit within Milling and Baking, despite a mere 0.4% increase in revenue.

In Grains, the results are even more astonishing, where stagnant revenue corresponded with a staggering 673.5% rise in operating profit. You grasp the idea.

It’s noteworthy that these percentage variations owe partially to the low-margin nature of these fields. Similar to extreme instances in poultry, minor adjustments in gross margins or operational expenditures can heavily influence percentage shifts in operating income.

For example, slight changes in gross profit margins can lead to significant leaps in operating income, underscoring Kruger’s insight and tactical mindset, which the market acknowledges, explaining Tiger Brands’ profit surge despite minimal revenue growth.

What lies ahead?

Management displays confidence, using assertive terminology regarding their strategy, incorporating phrases like “superior channel presence” and “deliberate growth platforms” to galvanize investors.

With a 34% rise in continuing Heps [headline earnings per share] for the interim and a 19% uptick in the interim dividend, the data reinforces their narrative.

If we take a simplified approach of merely doubling interim Heps, we estimate forward earnings of R20.42 per share. This positions Tiger Brands with a forward PE [price-earnings] ratio of 16.9 times, derived by aligning the current share price with those anticipated earnings.

One might argue I’m being conservative by only doubling interim earnings, considering the notable progress unfolding within the business. In brief, it is on a continuous upward trajectory, and H2 is likely to outperform H1.

However, it’s important to acknowledge that the interim period included the festive season, so one must be mindful of the seasonal factors at play. While the business is improving, the retail sector remains susceptible to seasonal variations.

Nonetheless, I find the current valuation somewhat high for my taste, so I won’t be pursuing this opportunity. I’m also skeptical about investing in stocks that have surged rapidly, as corrections are inevitable.

What are your thoughts? Are you considering investing in this long-term strategy, or are you inclined to take profits given the recent surge?

Or perhaps you prefer to stay on the sidelines and avoid this sector altogether? I’d love to hear your thoughts in the comments!

* For previous episodes of Supernatural Stocks Podcast, click here.

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