Mid Cap Darlings – AVI


Mid Cap Darlings – AVI

Published Date: 2019-04-17 | Source: INCE|Community | Author: Sifiso Skenjana

Mid Cap Darlings – AVI

For a strong cuppa tea, Five Roses parent company AVI will serve you just at the right temperature, of course with a packet of Baker's Biscuits. Or if your feet have been giving you grief with those stubborn corns, Green Cross is there for you.

Business Model: AVI is a diversified food, beverage, footwear and cosmetics company hosting a range of consumer brands like Green Cross, Spitz, I&J, Five Roses, Koffiehuis, Willards Cheese Curls and Baker's Tennis Biscuits amongst others. Entyce, which is the tea and coffees beverage business contributed 32% to operating profit in 2018, while the Snackworks, the bakery, and biscuits business contributed 29.5%. The rest is divided I&J fish business, personal care business, and footwear and apparel.

Macro Landscape: The consumer household income is generally under pressure with increases in petrol, sin taxes, and higher taxes due to no inflationary adjustments to the tax brackets during the recent budget speech. With incomes under pressure, sales for biscuits and coffees may remain under pressure in the short to medium term. Tea, however, may remain resilient because it may experience positive substitution during tough times. Meaning that people still like their tea served even when their incomes are under pressure.

Results (Six months ended Dec 2018): As mentioned, the constrained consumer environment would be expected to put pressure on revenue. Revenue grew a mere 0.2% and cash from operations up 0.9%. However, over a longer period (2005 - 2019) the compound growth rate of revenue has been 13.8% per annum and operating margin up from 10% in 2005 to 20.6% in 2019. For the beverages business, strong creamer demand and good operating tea margins helped revenue. The Snackworks business had higher sales, but lower profitability over the year and I&J saw a lower revenue and operating profit for them on the back on lower fishing quota and fewer fishing days due to maintenance.
Growth Prospects: AVI continues to enjoy a strong market share in its bigger businesses that contribute the most to operating profit. In the tea business, Freshpack continues to enjoy a 57.1% market share, Five Roses 30% and Ellis Brown creamer 45%. In the biscuits market, Bakers (sweet) biscuits in the first half of 2019 enjoyed a market share of 41.9%. The business has demonstrated good long term performance, but we expect revenue to remain under pressure in a tough operating climate in the short to medium term.

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About The Analyst: The Mid Cap Darlings is brought to you by the Awkward Economist - Sifiso Skenjana. He has a breadth of experience in portfolio management, economic research and investment strategy and management consulting. He is founder and financial economist at AFRA Consultants. He is currently pursuing his PhD.

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