The food sector of the Johannesburg Stock Exchange is overcrowded, with too few companies offering shareholders significant returns on their investments.
In January 1996 the food index stood at 9 300. Within a year, it had fallen 100 points, recovered its losses and remained at this level until the October 1997 market correction. Between that month and January 1998 the index fell by 25% to a low of 6 980, before climbing to its present level of 8 300.
Not a single share in the sector has reached the levels achieved before the correction. At 1 110c, Cadschweps is close to its 1 210c high, while FSA Foods is on 555c (from 575c in October 1997) and Hunt Leuchars and Hepburn on 899c (930c in October 1997). These statistics do not fully reflect the true nature of change taking place in the sector, which should have a significant impact on future earnings growth and, therefore, share price movements.
There are a number of important factors to assess. The first is the level of price change, which affects turnover volumes and ultimately bottom-line growth. Recent Central Statistical Services figures show that the 12-month production price index for all South African commodities increased by only 2,3% in March 1998. During this period there were increases in food products, but the effect on annual consumer inflation was negligible, remaining unchanged at 5,4%.
Barnard Jacobs Mellet economist Chantal Friedman believes this trend will remain unchanged: ”Core inflation will show a slow and steady downward trend this year and in 1999.”
If food prices are not increasing, the next factor to determine is whether rationalisation is taking place and its effect on share prices. The restructuring of South African companies, notorious for complex and disparate cross-holdings, took another step forward this year when the Premier Group unbundled its non- food assets and emerged as a focused food firm. The sale of CNA to Wooltru has placed nearly R500-million in cash in its hands to undertake major restructuring in 1999, while its subsidiary Bonita’s connection with Italian food company Parmalat should see a turn around in Bonita.
Premier Group’s 80c share price offers investors an opportunity to climb in at a low price, before the benefits of its recent restructuring influences the share price.
Another company positively affected by restructuring is Tongaat- Hulett, which is set to sell its interests in CPC Tongaat Foods, but would in turn buy a controlling interest in a Mozambican sugar mill. Premier Group’s price/earnings ratio is below the sector 12,3 times and the price of 6 020c offers an opportunity for the more affluent investor.
However, not all restructuring is positive. Del Monte Royal Foods reported a 30% decline in headline earnings to R102-million for the 13 months to December 1997. As core European operations continue to suffer restructuring pains, Del Monte is being forced to merge or sell certain assets and could see changes to its controlling shareholding. The share price, at 380c, is still high on a price/earnings ratio of nearly 17 times.
Analysts agree on one issue: to select a company in the food sector takes skill and timing. Louis Venter, portfolio manager at stockbrokers EW Balderson, believes that there are three main choices in this sector.
His advice to clients: ”Look at companies with price/earnings ratios below the sector, buy those with high turnover potential and assess those that are starting to show value.”
He believes that Armato, King Foods and FSA Food will show short- term potential for high capital growth.