Crouching Tiger, 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 where I currently reside—specifically Fourways—Tiger Tiger was a nightclub where many regrettable choices were made during my youth.

However, in the investment world, Tiger refers to a company managing the consequences of poor decisions with remarkable skill.

Fresh off discussing Sasol last week and the numerous miracles they require for future success, my attention now shifts to a turnaround story with genuine potential. Unfortunately, the market is already aware of this, so entering at the current price requires some courage.

Listen/read: Sasol: Five miracles and a dream

Nevertheless, there’s likely still some upside left in Tiger Brands, arguably carrying less risk than other ventures like Sasol.

New leadership, new direction

Tjaart Kruger is at the forefront of the changes at Tiger Brands. He assumed the role in November 2023, intending to serve only a couple of years. As a turnaround specialist, his appointment was welcomed by the market.

When Tjaart is involved, the charts tend to improve.

Having made significant strides in the turnaround and clearly enjoying his role, Kruger plans to stay until the end of 2028, providing the market with added certainty—something investors greatly value.

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 adage “if it ain’t broken…” certainly didn’t apply to Tiger Brands.

It was, in fact, quite broken. Tiger Brands resembled an oversized house cat rather than an agile hunter, grappling with an excessive array of products and the fallout from the listeriosis crisis.

While they still contend with ongoing legal matters related to listeriosis, their approach to the Langeberg and Ashton Foods situation demonstrates a keen awareness of managing public perception.

Rather than abandoning Ashton, they actively sought a sustainable solution to offload that canning operation.

Under Kruger’s stewardship, action has been plentiful. The Langeberg and Ashton business was more of a distraction than anything else, and decisive strategies have been implemented across various deals.

The recent results presentation for the six months ending March includes a slide featuring a fierce-looking cat, proclaiming they’ve achieved “remarkable topline growth, ending years of declining volumes” backed by impactful 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]

Not only have they divested non-core operations, they’ve done so with sound rationale. They’ve seen growth in volumes across remaining businesses, with improving margins.

Here’s a telling statistic: in the past year, Tiger’s balance sheet shifted from R2.7 billion in net debt to R5.9 billion in net cash.

I admit, I’m usually wary of turnaround situations; investing in them requires a great deal of caution as success is hard to achieve.

In this case, my hesitations cost me money because I didn’t 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 worry excessively about missed opportunities—it’s more concerning to squander resources on mistaken investments than to look back at a good one.

Yet, the most fascinating aspect of this turnaround, a lesson applicable across businesses, is Tiger’s emphasis on their Right-To-Win.

Emphasizing strengths

Business strategy is fundamentally about determining what not to pursue with your time and resources.

The landscape is teeming with opportunities. Even if you can rank them from best to worst, it’s crucial to assess what aligns best with your business’s strengths.

Companies often lose their way, venturing into too many areas while neglecting the importance of focusing on where they can truly excel. In practical terms, this leads to sustainable competitive advantages through strengths like brand reputation, product expertise, or a robust supply chain—ideally combining these factors.

With thousands of SKUs in large grocery stores, Tiger Brands can technically compete across many. However, what they can do and what they should do are often different.

Under Kruger’s guidance, the focus is solely on products where they can convincingly articulate why their presence is justified. This strategy not only fosters revenue growth but also significantly enhances margins.

Operating profit is paramount

Pursuing revenue for its own sake is futile.

Low-margin, low-quality revenue seldom yields acceptable returns on capital after accounting for working capital and capital expenditure required to achieve that revenue. While Tiger Brands must pursue revenue growth in the long run, the immediate focus rests on unlocking margins.

This was successfully achieved in the interim period, with operating income rising by 29.9%, despite revenue only increasing by 1.9%.

Diving deeper, you’ll find impressive figures, such as a 37.3% increase in operating profit within Milling and Baking despite only a 0.4% bump in revenue.

In Grains, the situation is even more remarkable, where flat revenue coincided with a stunning 673.5% surge in operating profit. You get the idea.

It’s important to note that these percentage shifts stem partly from the low-margin nature of these industries. Similar to extreme examples in poultry, small fluctuations in gross margin or operating expenses can drastically affect percentage changes in operating income.

For instance, modest changes in gross profit margins can yield significant increases in operating income, highlighting Kruger’s awareness and strategic approach, which the market recognizes, explains Tiger Brands’ profit growth despite minimal revenue increases.

What lies ahead?

The management exudes confidence, employing decisive language about their strategy, invoking terms like “superior channel presence” and “deliberate growth platforms” to excite investors.

With a 34% increase in continuing Heps [headline earnings per share] for the interim period and a 19% rise in the interim dividend, the data backs up the narrative.

If we adopt a straightforward approach of merely doubling interim Heps, we arrive at forward earnings of R20.42 per share. This translates Tiger Brands to a forward PE [price-earnings] ratio of 16.9 times, calculated by comparing the current share price against those future earnings.

One could argue that I’m being conservative by only doubling interim earnings, given the substantial improvements occurring in the business. In short, it continuously improves, and H2 should surpass H1.

That said, the interim period included the festive season, so one must consider the seasonal dynamics at play. While the business is improving, the retail industry is subject to seasonal fluctuations.

Regardless, the current valuation appears a bit steep for my liking, so I won’t pursue this one. I’m also hesitant to invest in stocks that have experienced rapid ascents, as corrections are bound to occur at some point.

What are your thoughts? Are you inclined to invest in this multi-year strategy, or are you considering taking profits given the recent performance?

Or perhaps you prefer to sit on the sidelines and steer clear of this sector? I’d love to hear your opinions in the comments!

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

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