Automation And Hedging Will Strengthen Future Position In FMCG Sector

Key Takeaways

• Automation and operational leverage boost gross profit margins, promising improved future earnings and robust financial health for AVI.
  
• Strategic capital expenditure and effective hedging aim to enhance revenue and protect net margins in volatile environments.
  
• Challenging economic conditions, supply chain issues, high competition, and debt pressures could hinder AVI's revenue growth and profitability.

Catalysts

Manufactures, processes, markets, and distributes branded consumer products in the food, beverage, footwear, apparel, and cosmetics sectors in South Africa, other African countries, Europe, and internationally.

• AVI's investment in automation and operational leverage across its operations has resulted in a higher gross profit margin, improving from 41.5% to 42.9%, which could enhance future earnings.
  
• Continued strong cash generation, with cash generated by operations increasing by 16.4%, suggests robust underlying financial health that could lead to enhanced future shareholder returns.
  
• Strategic capital expenditure, such as the acquisition of a secondhand freezer vessel for I&J, positions the company to better meet fishing quotas, potentially boosting future revenue from the fishing segment.
  
• The company's focus on hedging both currency and commodities to manage input costs could help protect and potentially improve net margins even in volatile environments.
  
• Initiatives to manage volume and value dynamics, including innovation in product offerings and investments in marketing, are aimed at sustaining and potentially growing revenue across AVI's diverse product portfolio.

AVI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AVI's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.9% today to 13.9% in 3 years time.
• Analysts expect earnings to reach ZAR 2.6 billion (and earnings per share of ZAR 8.15) by about May 2028, up from ZAR 2.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 12.6x today. This future PE is greater than the current PE for the ZA Food industry at 9.3x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.42%, as per the Simply Wall St company report.

AVI Future Earnings Per Share Growth

Risks

• Declining real incomes and a challenging economic environment could continue to constrain consumer spending on AVI's products, impacting revenue growth.
  
• Supply chain issues, such as supplier falterings in Italy affecting the Carvela brand, could lead to lost sales and increased operational costs, affecting net margins.
  
• Increased competition in the FMCG space, including a crowded market with multinationals and aggressive pricing in categories like personal care, could limit pricing power and market share, impacting revenues and net earnings.
  
• High debt levels, exacerbated by special dividends, could increase financial risk and raise net finance costs, potentially squeezing net earnings.
  
• Continued pressures in businesses like abalone due to oversupply and pricing challenges in core Asian markets could weigh down segment profitability, affecting overall earnings.

Valuation

• The analysts have a consensus price target of ZAR107.6 for AVI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR120.0, and the most bearish reporting a price target of just ZAR98.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR18.8 billion, earnings will come to ZAR2.6 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 16.4%.
• Given the current share price of ZAR90.4, the analyst price target of ZAR107.6 is 16.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.