Take a bite out of Africa

SA's largest food manufacturer has little choice but to look for new hunting grounds, says Investec Asset Management analyst Diane Laas, "You just have to look at its market share in many key sectors to see that it has limited scope in SA," says Laas.

She points, for example, to Tiger's All Gold brand's 74% share of the tomato sauce sector. Not far behind is a 62% share of the jam sector, 60% of the canned vegetable sector and 45% of the pasta sector.

Pressure to find new growth markets was also evident in Tiger's year to September 2010 financial results, in which it produced a feeble 6% EPS increase excluding the impact of a BEE deal.

Rival AVI, for which Tiger made a bid in 2009, came in with a 13,7% EPS increase in its financial year to June 2010, while Pioneer Foods delivered a 42% EPS increase in its financial year to September 2010, excluding the impact of competition commission penalties.

Matlare, whose performance bonus was cut from R3,44m in 2009 to R855000 in 2010, has a lot at stake in the success of Tiger's Africa strategy. Regrettably, he declined to discuss Tiger's African strategy with the Financial Mail.

Tiger has targeted 16 sub-Saharan African countries as what it terms "priority zones" for expansion. As a start, it gained a foothold in East Africa with its purchase in May 2008 of a 51% stake in Kenyan fast-moving consumer goods (FMCG) manufacturer and distributor Haco Industries

Tiger then shifted its attention westwards, buying a 74,4% stake in Cameroonian cocoa-based products manufacturer Chococam in July 2008.

Though strategic, Haco and Chococam are minor factors in Tiger's results. In 2009/2010, Haco contributed R190m in sales and R20m in earnings before interest and tax (Ebit), while Chococam contributed sales of R315m and Ebit of R37m.

In November 2010 Tiger stepped up the pace, with three moves on both sides of the continent.

In Ethiopia it acquired a 51% stake in FMCG manufacturer and distributor East Africa Holdings.

More significantly, Tiger made its first direct move into Nigeria with the acquisition of Deli Foods, one of the country's 16 biscuit manufacturers, and a 49% stake in the food, dairy and beverage units of UAC of Nigeria.

Views are mixed on Tiger's African prospects. Old Mutual Investment Group SA analyst Jonathan Larcombe says Tiger will apply disciplines and processes that have made it a success in SA.

He also believes the presence of SA retailers such as Shoprite in Nigeria will add support to Tiger. "The market was sceptical when MTN went into Nigeria in 2002. Now it's their biggest profit contributor," he says.

Also backing Tiger's move into Africa, Coronation Fund Managers CIO Karl Leinberger says: "It's the right strategy." But he warns: "They will probably make some mistakes."

First Avenue Investment Management chief investment officer (CIO) Hlelo Giyose is less convinced. "While they [Tiger] are looking in someone else's back yard someone will be looking in theirs." Both hungry for market share, Pioneer and AVI will, no doubt, be doing just that.

Though various challenges lie ahead, Tiger remains a high-quality food producer with a strong balance sheet, a high return on equity and strong historical cash flows.

The group's brand investment and product innovation augur well for the future and should be aided by its expansion into Africa.

However, given the uncertainties related to increased competition, the extent of its expansion, and the effect of a strong rand, analysts recommend the share only to long-term investors.

Source: Financial Mail