Merger of Pioneer's brands should fatten margins

Phil Roux says outlook is improving for Pioneer Foods with the consolidation and restructuring plans underway. Image: Pioneer Foods.

On the other hand, the recent merger of Pioneer's consumer brands segments, Bokomo Foods and Ceres Beverages (CB), should fatten margins.

As an enlarged brands basket, the new segment looks compelling, even if there are (currently) a number of products in it that are not category leaders.

Bokomo's brands include its well-known breakfast cereals and rusks as well as additional brands like Weet-Bix, Moir's, ProNutro, Safari, Marmite, Bovril, Peck's and Redro. CB's brands include fruit juice brands Ceres, Liqui-Fruit, Fruitree and Wild Island, as well as soft drinks Pepsi and Lipton.

Brands remain strong

While Quantum's pre-listing bulking-up will be an interesting process, the combining of Bokomo and CB into a broader consumer brands division could provide the growth Pioneer has been missing to push beyond its core foods business, Sasko

In the group's recently released annual report, chief executive Phil Roux makes two key observations. First, many of its brands are number one or two in their respective markets and could grow their value. Secondly, Pioneer is well positioned to strengthen its participation in the "no name" products in supermarkets.

This suggests there could be developments at the newly formed consumer brands division in 2014.

A number of Bokomo brands are category leaders says Pioneer. Image: Pioneer Foods

Certainly it would balance the operational profile if the Sasko (bread and milling) division were not quite as dominant as it has been in recent years.

At the end of September 2013 Sasko churned R11bn in revenue for R808m in operating profits. The new consumer brands division should generate more than R8bn in revenue and perhaps as much as R650m in operating profits.

Profits rolling in

In the year to September, Ceres turned R3bn in sales into operating profits of R264m - a bubbly margin of close to 9%. Bokomo earned R289m in operating profits from R3,5bn of sales - also a fairly decent margin of just over 8%, considering the array of brands.

The margins in the two components of the consumer brands division are higher than the 7,6% earned by Sasko. It seems reasonable to assume that the merged entity will achieve fatter margins as new efficiencies take effect.

The consumer brands division is already operating under a single management structure. Roux says the merger will result in a more efficient cost structure and a more focused approach to brand and customer management.

Ceres will merge with Bokomo to become a major force in the retailing sector. Image: Global Village Directory

Reassuringly, he says revenue growth at acceptable margins is possible, enhanced by innovation and expansion into adjacent and new markets. Aside from new product launches and brand adaptations, both Bokomo and Ceres (particularly on the fruit juices side) made strong advances into African markets.

What might also enhance margins is Roux's admission that Pioneer Foods' portfolio includes certain under-performing businesses and brands "that are under scrutiny to be revitalised, rationalised or exited".

The biscuit offering under Moir's looks a bit crummy (against market leader AVI), and the soft-drinks thrust through Pepsi has hardly made an effervescent ripple in the market. Whether the group presses on with these ventures or looks for exit deals or strategic partnerships remains to be seen.

More intriguing, though, will be whether the newly merged division might not offer Pioneer an opportunity for a large transaction, bearing in mind that opportunistic investment company PSG (via Zeder Investments through its shareholding in unlisted AgriVoedsel) holds sway at Pioneer.

Both RCL Foods (controlled by Remgro) and Premier Foods (controlled by Brait) could find quite a lot to their taste in Pioneer's new brands basket. Maybe a big deal could be the cherry on top of the value cake that PSG has already made out of the group.