Rising cost pressures mute AVI’s profit expectations

JSE-listed manufacturer of food, beverages, footwear and cosmetics AVI’s rising cost pressures are eating away at profits and consumers are struggling to carry the load, hampering the group’s profit forecast for the first half of the 2023 financial period.

In a trading update to the market on Thursday, the group said it expects headline earnings per share (Heps) for the six months ended 31 December to remain disappointingly unchanged from the previous period.

Consolidated Heps are expected to increase by a percent at most, to 320.1 cents, up from the 316.9 cents reported in the previous year.

The tough economic environment characterised by rising inflation, high interest rates and even higher unemployment has created impossible conditions for the consumer. As such, the group – which owns well-known household brands like Freshpack, Bakers, Willards, I&J and Provita – says it has seen lower sales volumes in some categories as competitors offer better deals.

Read: Eskom tariff hike will cut national minimum wage offer by 47%

“Whilst we have strong and resilient brands, affordability is a growing constraint for consumers, limiting their ability to digest higher prices.

“Sales volumes were lower in some categories, exacerbated by competitor discounting, with cost pressures not always recovered through higher prices,” the group added.

Adding to costs were above-inflation selling and administrative expenses, which the group said increased partly because of “the impact of substantially higher fuel prices on distribution costs, fair value accounting of the group’s hedge positions and the nonrecurrence of insurance proceeds recognised last year”.

AVI’s share price took a knock during day trade on Thursday, dipping past 3% in the red following the update, but closed the day 2.69% weaker at R72.98.

Load shedding

Like many other businesses, record levels of load shedding continue to chip away at the bottom line, with AVI reporting that despite efforts to shield its operations from the darkness, its manufacturing, distribution and retail operations still suffer.

It says load shedding added R22 million to the group’s operating costs.

“While the indirect costs of chronic load shedding are difficult to quantify, they are significant, exacerbating the complexity this imposes on our operations, supply chains and distribution logistics.

“We have invested in back-up power options for a number of years and continue to do so; there is however a meaningful capital cost to this.”

Read: Cost to produce chicken surpasses selling price – Astral

Group performance

Price increases in the Entyce and Snackworks businesses during the period offset the impact of input cost pressures and boosted the group’s revenue growth of 7.2% on the last prior period.

Also seeing growth in the first half was the group’s fashion business, which hosts brands like Lacoste, Spitz, Carvela and Kurt Geiger. Volume growth coupled with price increases lifted revenue in this business by 17.4%.

Not sharing the same fortunes however is the group’s I&J business, which registered a revenue decline of 2.3% during the period. Revenue was impacted by lower catch rates as well as the re-emergence of lockdowns in China and Hong Kong, which according to the group affected abalone sales for the period.

“I&J’s gross margins were substantially constrained by materially higher diesel costs for the fishing fleet that were not fully recovered through selling price increases, and the unfavourable abalone sales mix,” AVI said.

Read: Safety still a concern for Tiger Brands going into 2023

Comments

Despite the disappointing earnings forecast, analysts believe the AVI business remains strong and the challenges placing the company under pressure will subside considerably by its year-end.

In the second six months its expenses “will come down quite a bit” but it won’t have the non-recurring insurance proceeds recognised in its previous financial year, FNB Wealth and Investments portfolio manager Wayne McCurrie tells Moneyweb,

“Obviously, the price of diesel and all of the operating expenses will come down a bit because that’s [already] fallen and also the other expense they had was the mark-to-market on their hedging position, which doesn’t repeat itself in the second half.

“So in the second half they should show earnings growth, but the earnings growth for the year will still be a little bit disappointing.”

Senior equity analyst at Intellidex Tinashe Kambadza says that were it not for the country’s poor economic growth AVI would be performing much better.

“Despite competition and high input costs, we believe AVI’s effective brand management strategy – particularly in the food categories – will enable the group to navigate the prevailing inflationary environment over the short term and protect margins.

“Brand strength remains at the core of AVI’s product premiums and underpins the competitive advantage relative to its peers in the market.”

Listen to Agbiz chief economist Wandile Sihlobo discussing the pace of food price increases with Fifi Peters:

You can also listen to this podcast on iono.fm here.