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The Finance Ghost: Tiger Brands has a purr-fectly average year, but investors roar anyway

The Finance Ghost: Tiger Brands has a purr-fectly average year, but investors roar anyway
The Finance Ghost
By The Finance Ghost
8 Dec 2024
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Tiger Brands has released results for the year ended September. You don’t need to hold on to your hats for this one, as revenue is up just 1% and Heps came in 4% higher. The total dividend for the year was 4.3% higher. So, why has the share price returned about 30% this year?

It’s all about expectations, with the benefit, of course, of a major improvement in sentiment towards South African assets. You do need to be careful when ­companies have strong expectations baked into the share price, as they can lead to disappointment. Naturally, disappointment leads to a share price heading firmly in the wrong direction.

One of the wins that should support the share price in future is the improved balance sheet. Tiger Brands is now in a net cash position thanks to a solid cash operating profit, which is a huge difference to the net debt position at the end of the comparable year. Interest rates are taking their sweet time to go down, so it’s better to be in a cash-generative position to sort out your own debt versus waiting for central banks to make the burden easier for you.

Nampak - a can-do turnaround story


Nampak is the turnaround story that leaves Tiger Brands for dead when we look at year-to-date performance. With a share price jump of 116% this year, investors have been richly rewarded.

Although Tiger Brands may also be a turnaround story, the difference is that Nampak was on the verge of death. The risk-reward trade-off is the fundamental underpin of financial markets. If you’re willing to take more risk, you can enjoy better rewards. You can also lose everything.

The other lesson from Nampak is that a share price can sell off sharply after such a strong run. Down 10% in the past 30 days, the market seems to have become a little nervous about the momentum in the turnaround. After all, Nampak only managed to grow revenue from continuing operations by 1% in the year ended September.

The far more important stuff happens on the profit lines. Ebitda (earnings before interest, tax, depreciation and amortisation) has skyrocketed to such an extent that Nampak has even recognised reversals of impairments rather than further net impairments, a remarkable shift in momentum. Another positive is that cash generated from operations more than doubled to R1.6-billion, driving net finance costs lower. Nampak has managed to get itself to the point where there’s actually a future for the group. The management team had to pull off a few miracles in a row, not least of all in terms of non-core asset disposals.

Capital Appreciation’s software business needs a turnaround now


Capital Appreciation is an interesting fintech play on the JSE. The group includes a strong payments business that generates dependable profits over time. It also has a lumpier software business. The difference between the divisions has never been more stark than in the six months to September.

The group result reflects a 10.4% increase in revenue, which sounds great at first blush. Sadly, Ebitda fell 3.1%, with the Ebitda margin down by 260 basis points to 18.6%. That’s exactly what investors don’t want to see, and Heps (headline earnings per share) are down 8.3%.

Although a 5.9% increase in the dividend helps to blunt the damage from this period, the reality is that these numbers are at odds with share price growth of 37% this year. The market clearly believes that Capital Appreciation can get better from here.

The payments business isn’t the problem. The issue is the software business, which grew revenue by just 2.4% after the international segment in this business saw revenue decline by a nasty 18.6%.

The cost base in the software business is fixed in nature, as it has teams of developers who need to be deployed to projects. The group has been consistently telling the market that these are scarce skills and that it makes sense to carry low utilisation rates for a while until things pick up.

But with the software business now in a loss-making position, I’m not sure how much more patience there will be for this division. The latest results include commentary about an improved sales pipeline and an expected recovery in profits, so that’s encouraging at least. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.


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