AVI again proves to be Mr Dependable

Investors buy AVI shares not because they expect sustained scintillating performance but because they value the predictability of earnings and the strong likelihood of regular special dividends.

Investors also like AVI management’s strong financial discipline, honed to perfection over many years. The result is an iconic brands company — conveniently located in the food processors segment of the JSE

— that produces mid-singledigit earnings and dividend growth, even under the most challenging circumstances.

The latest results, for the year to June 30, were no exception. Against a background of rising raw material prices and continued load-shedding, AVI managed to increase revenue 7.8% and kept gross margins steady, even though cost pressures were significant.

Gross profit margin, at 39%, is much lower than the 41.1% recorded in financial 2019 and the trend is definitely down. The main reason for the decline relative to the historical level was the lower profit at I&J.

To illustrate the impact of higher raw material prices, flour rose by 84%, butter 46%, glucose 41%, coffee/chicory 37%, milk products 28%, tea 22%, arabica 21% and palm oil 15%.

The second half of the financial year was much better than the first, with operating profit rising 14.5%, and 6.9% for the whole year. The only real negative was the fishing division, I&J. Excluding I&J, operating profit for the year would have risen 12.7%. Over the past 18 years since 2005, AVI’s operating profit has grown 10.7% compounded.

Headline earnings per share rose 4.3% to 553.6c and a final dividend of 310c per share was declared, making 483c in total, also up by 4.3%. The dividend yield at year end was a very enticing 7.1%. The effective dividend payout ratio since 2005 has been 95.2% of headline earnings.

Divisionally, Snackworks remained the strongest contributor to operating profit, with a R1.038bn contribution to the group total of R2.714bn. Conversely, I&J went backwards by R109m to an operating profit of R196.8m, affected by higher fuel prices, poor catch rates and loadshedding costs. Additionally, lockdown affected abalone sales in East Asia, especially in the first half.

The footwear & apparel division’s performance was erratic, with a strong first half, helped by price increases, strong peak season demand, improved stock availability and non-recurrence of the previous year’s unrest.

Operating profit for the year was R354.8m. Personal care showed a strong improvement throughout the year, contributing a R233.1m operating profit. Entyce Beverages contributed R920.2m.

Prospects for financial 2024 and beyond will still depend on consumer demand and will be affected by load-shedding and the spectre of water disruption from local municipalities.

The impact of load-shedding will be ameliorated by current interventions such as backup power solutions at all sites and key retail outlets. Investment in water storage capacity and treatment should reduce the risk associated with water disruption. Abalone volumes should improve from a particularly depressed base in the first half of last year.

By June 2024, it will have been three years since the last special dividend was paid. There would appear to be potential for a special dividend to be paid this financial year, depending on the eventual level of capital expenditure and how well I&J recovers.

At the current share price of R74.37, the historical priceearnings ratio of AVI shares is 13.4x and the dividend yield is 6.5%. In common with most JSE-listed consumer stocks, the AVI share price is still languishing at levels well below its peak of five years ago. Even the payment of a special dividend is unlikely to make a sustained material difference to the share price. That will only occur with a significant improvement in consumer spending.