AVI released mixed FY20 results on 7 September. FY20 revenue growth increased by 0.4% YoY, driven by strong demand for Entyce and Snackworks products, although this was offset by declines in Footwear & Apparel, Ciro, and I&J. The Group’s gross profit declined 2.9% YoY and is reflective of a weaker 2H20 from I&J. The company’s gross margin declined to 39.8% from 41.1% in FY19. AVI managed to protect margins in some segments due to low raw material cost inflation and good cost control. Operating profit declined by 7.5% YoY due to lower gross profit, while basic EPS increased 21.1% YoY, due to I&J selling its interest in a joint venture (JV) with Simplot. AVI realised proceeds amounting to R631.8mn from this sale and the after-tax capital gain stood at R373.7mn. Headline EPS declined by 8.9% YoY to ZAc470.8 from FY19’s ZAc516.6 on the back of lower operating profit and JV earnings. A final dividend of ZAc250/share was announced in 2H20, bringing the total FY20 dividend to ZAc410/share.
Figure 1: Operating profit margins by segment, FY20
Source: Anchor, Company data
We note that these results were mixed because AVI’s business segments were impacted, to varying degrees, by the COVID-19 pandemic and the ensuing lockdowns. Entyce was resilient and Snackworks did extremely well, driven by home consumption patterns during lockdown, while Spitz, Indigo (which sells make-up and fragrances), and Ciro (coffee) were negatively affected by the lockdown restrictions and working-from-home trends. However, I&J’s performance especially was significantly impacted by an earlier build-up of COVID-19 infections. Compliance, isolation, and quarantine protocols reduced the number of people that were available to work, resulting in lower processing capacity and a significant reduction in fishing activity at I&J during AVI’s fourth quarter. These problems were further compounded by export shipment delays at the Cape Town port, which in turn impacted margin recognition in the company’s fourth quarter.
Below we look at the segmental performance of AVI’s various business units in more detail:
Entyce beverages (tea and creamer products were slightly offset by coffee)
Snackworks
I&J
Personal care
AVI’s valuation and sensitivity analysis
Figure 2: AVI PE valuation
Figure 3: AVI valuation sensitivity analysis
In our view AVI’s good cash flow generation and balance sheet capacity indicate a special dividend and/or share buy-back programme is highly possible in FY21. Management also said that there is appetite for acquisitions. However, they will only consider credible brands that can add value.
Figure 4: Cashflow conversion
Source: Anchor, Company data
Figure 5: Net debt/EBITDA ratio
Source: Anchor, Company data
Outlook
Management highlighted that AVI will endeavor to protect Entyce and Snackworks profits and improve Personal Care’s profit in the current tough operating environment. Footwear and Apparel is expected to recover slowly as demand starts to normalise when footfall returns to the major shopping malls. Management also expects to sustain its return on capital employed (ROCE) and maintain its dividend payout ratio of 80%.
We believe that AVI’s earnings growth driver for FY21E will be I&J’s performance, which stands to benefit from the lower oil price and increased export sales into Europe. Nevertheless, despite these positive contributors for I&J, we are concerned about Abalone’s near-term prospects and new shipping fuel regulations that could negate the lower fuel operating costs. As a result, we are cautious on the prospect of I&J reaching record margins. So, while we believe that I&J will be an earnings driver for AVI, we caution against extreme bullish sentiments regarding its margin expansion.
In addition, while we think that Entyce and Snackworks will remain resilient into FY21, in our view AVI’s retail segment will continue to recover slowly. Overall, we believe that AVI is one of the better food producers in the sector, with a credible management team that has a solid track record. The company had good cash generation and continues to have excellent balance sheet capacity. We are also encouraged by management’s comments on returning cash to shareholders in the near term. If playing the SA recovery story, AVI would be our preferred stock within the food producers’ space.