Clover seeks to 'milk' efficiencies this year

Patient investors look set to be well rewarded by a company with powerful brands and a huge distribution footprint.

Clover's annual results to June 2011 did not shoot the lights out: headline earnings per share came in only 1,9% up on the previous year, despite an 18,6% rise in headline earnings to R208m. Shareholders' returns were diluted by a 16% increase in average shares in issue, a legacy from Clover's listing in December 2011. This raised R575m in new capital.

At the top line, Clover did well, lifting sales 10,4% to R6,1bn. Volume growth of 2,4% was achieved in a market in which Clover chief executive Johann Vorster says consumers are under pressure and looking for value. As a comparison in the food manufacturing sector, Pioneer Foods reported volumes down 2%-4% in the 11 months to June.

Spearheading Clover's investment strategy is Cielo Blu, a R340m investment programme to up capacity and improve distribution efficiency. Clover's main reason for listing, says Vorster, was to raise capital to fund Cielo Blu.

Part of the Cielo Blu strategy is to relocate dairy production from Midrand to the heart of South Africa's dairy farming sector, Port Elizabeth. This is near completion. "It will cut out one big factory and greatly reduce transport costs," says Vorster.

Cielo Blu is already yielding cost savings. In the year to June, R30m in savings was realised; R60m in savings should come through in 2012/2013 and a final R8m the year after, says Vorster.

Another element of Clover's strategy began six years ago when it began to exit the low-margin bulk cheese and bulk powdered milk markets in which it was a price taker. Vorster says 90% of sales now come from branded products, which command premium prices.

He shrugs off a threat from the imports that plague many South African food producers. Imported dairy products, he says, land at about the same cost as local products but must then distributed.

One of Clover's advantages is its unmatched national distribution reach, enabling it to increase penetration for its products and provide a platform to accommodate acquisitions. Clover has just bolted on Real Juice, acquired from AVI for R60m, to its beverages division.

"There are other small jewels out there," says Vorster, who sees consolidation ahead for the dairy products sector. "There are more than 200 players in the."

A co-op until 2003, Clover's development is a work-in-progress, which to some extent is reflected in a low 11,4% return on equity (RoE). Vorster believes Clover is capable of lifting RoE to 18% or 19% in time.

Rising urbanisation and living standards can only benefit Clover, says Vorster. According to the UN Food and Agriculture Organisation, per capita consumption of dairy products in South Africa is among the world's lowest - about a quarter of that in the UK and Australia and less than half that of Brazil.

Clover is the lowest-rated diversified food producer. Its 12,8 profite:equity ratio is well below AVI's 19, Tiger Brands' 16,5 and Pioneer's 17,6. But Clover has attracted some valuable investors. Coronation is the biggest shareholder with a 15% stake, Allan Gray has 5%.

Source: Financial Mail via I-Net Bridge