Investing In Super Bakeries And AI Will Lower Costs And Improve Future Net Margins

Key Takeaways

• Streamlining management and rationalizing SKUs are expected to enhance revenue growth and improve net margins.
  
• Investments in technology and manufacturing aim to optimize costs and capture market share in Southern Africa.
  
• Heavy reliance on South Africa and cost-cutting strategies may hinder revenue growth, with risks in operational challenges, cash flow management, and competition affecting profitability.

Catalysts

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

• Tiger Brands is focusing on evolving its operating model by streamlining management, which is expected to increase efficiencies and potentially improve net margins.
  
• Strategic sales of non-core brands and SKU rationalization efforts may lead to a more streamlined and profitable portfolio, enhancing revenue growth and optimizing earnings.
  
• The company is increasing investments in technology, such as SAP for better supply chain management and AI capabilities for improved demand forecasting, aiming to optimize stock levels and reduce costs, supporting net margin improvements.
  
• Tiger Brands is intensifying its focus in Southern Africa, particularly in high-growth segments like e-commerce and general trade markets, to drive revenue growth and capture market share.
  
• Investments in competitive manufacturing and the development of super bakeries are expected to substantially lower conversion costs, potentially improving net margins and earnings over time.

Tiger Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tiger Brands's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.4% today to 7.2% in 3 years time.
• Analysts expect earnings to reach ZAR 3.0 billion (and earnings per share of ZAR 21.29) by about July 2028, down from ZAR 4.0 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 24.3x on those 2028 earnings, up from 11.8x today. This future PE is greater than the current PE for the ZA Food industry at 8.1x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.45%, as per the Simply Wall St company report.

Tiger Brands Future Earnings Per Share Growth

Risks

• The reliance on South Africa for 81% of its revenue, in an environment with significant economic challenges such as food inflation and unemployment, could impact future revenues and growth potential.
  
• With ongoing issues in the general trade due to food safety concerns and operational challenges, there could be a delay in sales mix improvements, which would affect revenue growth in that segment.
  
• The strategy to focus on cost leadership and execution, while necessary, indicates potential risks in maintaining product quality. This could impact net margins if cost-cutting negatively affects the brand value.
  
• Having major CapEx commitments, including the launch of Super Bakeries, while discussing the need for potential share buybacks and dividends, highlights the risk of overextension which could affect cash flow and net earnings.
  
• The risk associated with private label competition that offers similar products at a lower price can pressure Tiger Brands to cut margins to maintain volumes, which could adversely affect profitability and net margins.

Valuation

• The analysts have a consensus price target of ZAR304.75 for Tiger Brands 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 ZAR365.0, and the most bearish reporting a price target of just ZAR253.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR41.4 billion, earnings will come to ZAR3.0 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 16.4%.
• Given the current share price of ZAR301.05, the analyst price target of ZAR304.75 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.