Nompumelelo Magwaza

Tiger Brands might have to wait a little longer to see returns on its Nigerian milling business, Dangote Flour Mills, as the business continued to underperform, analysts said yesterday.

In its trading update yesterday, Tiger Brands – which owns brands such as Ace maize meal, Tastic rice and Albany breads – said given the current underperformance of Dangote Flour Mills and the excess milling capacity in the Nigerian market, the food maker was considering a review of the carrying value of its investment in the business founded by billionaire Aliko Dangote.

Tiger Brands said as it was not able to assess the full impact of its underperforming Nigerian operations, it had decided to impair the full carrying value of the goodwill and intangible assets. The value of the impairment amounted to R849 million, which would be included in abnormal items in the group income statement of the half-year results next week.

Tiger Brands expected its earnings a share, excluding discontinued operations and the Dangote Flour Mills impairment, for the six months to March to increase by between 6 percent and 10 percent year on year, while headline earnings a share from continuing operations would rise by between 5 percent and 9 percent.

Including the impairment and discontinued operations, earnings a share were expected to decline by between 50 percent and 55 percent.

Ron Klipin of Cratos Wealth said it seemed that Tiger Brands did not read the Nigerian story correctly. It looked like the company would have to re-evaluate its investment in this market as it was taking a long time to see any returns. “It does look like they paid too high a price for these assets and now they cannot afford to exit the deal,” he said.

Klipin said the other challenge facing Tiger Brands was the increase in the market share of private labels of retailers. “It does look like Tiger Brands is under pressure when it comes to the popularity and more competitive prices of private label foods.”

Klipin said private brands were gaining market share and, therefore, becoming more popular as consumers were starting to trade down due to financial pressures.

In addition, Tiger Brands’s market share outside South Africa was still insignificant.

Daniel Isaacs, an analyst at 36One Asset Management, said given Dangote Flour’s performance and the price it paid, the decision to write off R849m was not a surprise.

“Many people thought that Tiger Brands had overpaid for the acquisition, and the operating performance has been worse than expected.”

Isaacs suggested management had two options going forward for Dangote Flour.

The first option was for management to manage down the business and make it smaller, limiting the amount of capital it needed. “But that was always unlikely to happen given what they paid,” he said.

The second option, which it would follow, was to try and decommoditise its offering, by adding more value-added categories.

However, Isaacs said this would demand more investment from Tiger Brands.

“This will take a significant amount of investment from the company to do this and returns on this invested capital are uncertain given how the business has performed in the Nigerian economy to date.”

Having said that, Isaacs believed that Tiger Brands’s overall trading update was mildly positive. “The growth in the bottom line was more than what the market expected.”

Tiger Brands rose 3.92 percent to R287.67 yesterday.