Technology Investments And E-Commerce Expansion Will Enhance Future Operations [test]

Key Takeaways

• Operational efficiency and margin improvements are expected from business model evolution, management reduction, and shedding non-core brands.
  
• E-commerce expansion and tech investments boost revenue growth and margins via better online sales and inventory management.
  
• Tiger Brands faces risks from economic pressures in South Africa, supply chain disruptions, and potential impacts on quality from cost-cutting strategies.

Catalysts

Engages in the manufacture and sale of fast-moving consumer goods in South Africa and internationally.

• Tiger Brands is optimizing its operations by evolving its business model, reducing excess management layers, and selling non-core brands, which is expected to enhance operational efficiency and potentially increase net margins.
  
• The company's focus on improving working capital management and cash conversion rates aims to sustain cash flow improvements, impacting both net margins and earnings positively.
  
• By expanding its e-commerce platform and achieving a 54% growth in this channel, Tiger Brands expects to boost revenue growth and improve margins through higher online sales.
  
• Strategic investment in technology, including SAP integrated planning and logistics optimization tools, is set to improve inventory management and reduce operational costs, likely enhancing both net margins and earnings.
  
• Emphasis on product affordability and improved consumer focus, particularly in essential goods, aims to increase volumes and market share, potentially driving revenue growth and improving operating margins.

Tiger Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tiger Brands's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ZAR 3.8 billion (and earnings per share of ZAR 24.41) by about January 2028, up from ZAR 2.9 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 19.7x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the ZA Food industry at 10.2x.
• Analysts expect the number of shares outstanding to decline 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 15.94%, as per the Simply Wall St company report.

Tiger Brands Future Earnings Per Share Growth

Risks

• Tiger Brands may face challenges from the South African economic environment, where consumers are under pressure from food inflation, poverty, and unemployment, which could negatively impact revenue growth as they may prioritize more affordable private-label brands.
  
• The company's heavy reliance on the South African market, constituting 81% of its revenue, poses a concentration risk; any economic downturn or adverse regulatory changes in South Africa could significantly impact overall earnings.
  
• Supply chain and agricultural sourcing issues, such as past shortages of ingredients like eggs and peanuts, could increase costs and disrupt production, thereby affecting net margins and profitability.
  
• The focus on reducing costs might compromise product quality or innovation, potentially risking brand reputation and future revenue sustainability.
  
• Divestiture of non-core brands while streamlining operations may temporarily affect revenue diversification and could lead to short-term financial volatility, impacting earnings predictability.

Valuation

• The analysts have a consensus price target of ZAR310.33 for Tiger Brands based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR44.1 billion, earnings will come to ZAR3.8 billion, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 15.9%.
  
• Given the current share price of ZAR274.89, the analyst's price target of ZAR310.33 is 11.4% 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.