Teigue Payne reports on the coming to market of dairy company Bonnita
DAIRY products company Bonnita, to be listed this month, could have better prospects than its agriculture-related image might suggest.
Farming-related companies have poorer ratings than food companies on the Johannesburg Stock Exchange, which probably explains why so few are listed. Raw materials make up most of the direct costs of food processing companies, but investors find the real-life vagaries of agriculture distasteful.
Though Bonnita is more closely related to agriculture than most listed food processors, it is increasingly pulling away from its raw material roots. This is happening to all major dairy companies: the raw milk market has become hardly profitable for them since deregulation allowed smaller operators to lower prices.
Bonnita management has adopted the new motto of the Premier Group (which holds 53 percent of Bonnita): “Value-added products for the mass market”. Bonnita justifies the motto by pointing to the fact that though it handles about 20 percent of SA’s milk production, from that it manufactures 30 percent of gouda and cheddar cheese and produces over 50 percent of long-life, “ultrapasteurised” milk. It has acquired up-market Aylesbury ice-cream operation, which inter alia supplies Woolworths under the Royale name; and it has a small chain of frozen yoghurt outlets.
Its other value-added products include yoghurt, sorbet, drinkable dairy dessert, cottage cheese and juices and nectar. New products are being designed, and brand promotion is particularly important to Bonnita.
It is SA’s second largest processor of dairy products, the total SA market for which is worth R4-billion. The recently-corporatised National Co-operative Dairies (NCD), now operating as Clover, has 30 percent. Bonnita, which converted from a Cape Dairy Co-operative (CDC) into a public company in 1992, has 22 percent and ICS has 13 percent. Swiss-owned Nestle which, unlike the other majors, does not produce raw milk at all, has 10 percent.
Bonnita has been particularly strong in development of the long-life milk market. This may partly be because almost all of its primary production comes from factories in the Cape while it sells extensively in the Transvaal and Natal. And though primary dairy products are slightly more expensive in the Cape, Bonnita is likely to intensify distribution in the north rather than to establish factories. Premier’s extensive distribution organisation in the north will obviously be used.
While the consumption of dairy products by whites is unlikely to show stunning growth, value-added products have good growth potential among the black majority, who are now the target for economic empowerment, Bonnita points out.
Then there are exports. Bonnita is now exporting some value added products, primarily to the middle East and sees further potential there and in the Far East. In theory a new dispensation in the General Agreement on Tariffs and Trade — the set of agreements between countries which governs trade — could open up big markets like the United States. Export-oriented companies are always sexy, but the dangers of agriculture-related export markets have been fully impressed on investors by Langeberg’s performance.
While exports look promising, illegal imports have rent the domestic market recently, partly accounting for Bonnita’s lower operating margin in the year to end-April.
Du Plessis believes the situation is now under control, and that the replacement of physical controls on the quantity of imports by tariffs will help stem the problem in the long term. The replacement of the old quantitative controls with tariffs has been applied for — as is required by Gatt — and should be in place shortly.
Bonnita’s accounts show a rapid improvement in capitalisation, the real reason why co-ops tend to convert. As managing director Louis de Villiers says: “It’s very difficult to get permanent capital from farmers.” Premier has pumped in more than R100-million since acquiring the controlling interest in 1993.
The effects on gearing — the amount of debt incurred relative to the capital base — and interest payments, have been dramatic. Bonnita has virtually extinguished both. This is in stark contrast to its over-200 percent gearing when it was a co-op, and the current position of NDC and many other co- operatives.
Most disappointing about Bonnita’s recent results has been the decline in operating margin from 8 percent in 1993 to 7,1 percent in 1994 — the result of poor market conditions last year and the illegal imports.
Most urgently needed to convince investors about Bonnita is an improvement in these operating results. That may not be far off given the reported improvement in controlling illegal imports and, more important, that for the first time in many years, milk production has fallen short of demand in the past few months.
Members of the CDC and staff of Bonnita still hold 45 percent (CDC itself has 2 percent) of Bonnita. That 45 percent holding amounts to 95-million shares. Du Plessis estimates that if the price is right, about half of those shares could soon find their way to the market because of farmers’ need for capital. The listing is not accompanied by any share issue and no capital is being raised.
The average internal price — a price based on trade between existing shareholders — in the past few months has been 228c. At that level Bonnita is on a price:earnings ratio of 15,7. As a rule of thumb, the lower this figure, which is the share price divided by the current earnings per share, the cheaper the share. The food sector average of 20,1 now makes Bonnita look fully priced at around 228c, and especially as farmer sales could depress the market for them for some time.
But, given the increasing value-added profile of Bonnita, and its strong base in the domestic market, the share might be worth longer-term accumulation.