Bulls&Bears: Food sector overview: Winter doesn’t last forever

Ann Sebastian

Improving gross domestic product growth, interest rate cuts, and withdrawals from the two-pot savings system should support consumption and food sector volumes. The recovery in Food Producers’ margins and earnings will be aided by subdued commodity price inflation remains. However, food price inflation could start to increase in the first quarter of 2025 estimated (1Q25E), which would favour a shift towards food retailers, as they have historically re-rated in a rising food price inflation environment in anticipation of stronger relative earnings growth.

Shoprite: Maintaining the pressure on competitors

Shoprite’s RSA Supermarkets achieved 10.4% revenue growth without increasing promotional subsidies, despite a low inflationary period. This was done by leveraging its new loyalty partnerships and store growth. While like-for-like growth slowed to 5.4% in the first half of 2025 from 8% in the full year 2024 amid slowing internal inflation, continued strong volume growth is encouraging. This has contributed to further gross and operating margin improvements.

Lower load shedding costs boosted first half 2025 trading profit. Shoprite’s balance sheet is in good shape and should be in a net cash position once the proceeds of R2.7 billion from the proposed furniture sale are received. That said, capital intensity remains high, which is necessary to continue to deliver double-digit earnings growth. On balance, Shoprite remains a high-quality counter in the South African food retail sector, with the share price outperforming the general retailers year-to-date by 6% during the latest market weakness where the general retailers’ index was down 13%.

Spar: Reset and refocus

While Spar’s margin recovery prospects in South Africa and portfolio optimisation journey are encouraging, the recent 18-week trading update highlighted weaker-than-expected revenue growth trends in South Africa and Ireland. Spar Southern Africa recorded 3.4% revenue growth, with like-for-like growth of 3%. Sales growth was impacted by the planned closure of 13 grocery stores in the South Rand Region, lower levels of promotional activity, and erratic supply into Mozambique for the grocery business. On a more promising note, operating losses from corporate grocery and liquor stores were reduced during the period, due to improved performance and the closure of non-performing stores. The trading update has led to some underperformance, but this follows a relative re-rating in 2024 following a reset in corporate strategy.

AVI: A more cautious outlook

AVI released its 1H25 results recently, reporting headline earnings per share growth of 9% year-on-year, despite group revenue growth of only 1%. The divisional profit mix was a bit of a surprise, with I&J, Fashion, and Personal Care underperforming expectations. These were offset by an exceptional performance from the Entyce division, which experienced 44% growth in operating profit to R794m. Yet management sent a more cautious message in the outlook statement, indicating that “profit growth may not mirror the first semester” and that the “next 6 months will slow especially if there is no improvement in the operating environment”. This is a quality company that has delivered substantial returns over the years relative to its sector peers. As such, despite a lack of short-term catalysts, it is considered a worthy long-term investment with much of the pessimism already in the price.

Tiger Brands: Management is optimistic

Tiger Brands reported a 3% increase in revenue for the four months ending January 31 compared with the prior year, driven by both volume and price inflation. Volume growth was a consequence of strategic initiatives designed to reduce input costs. This was to ensure its price points were both relevant and affordable to consumers. As part of ongoing portfolio optimisation, Tiger Brands announced the disposal of its circa 24% equity stake in Chilean food producer, Empresas Carozzi, for a total consideration of $240m (roughly R4.4bn). This is positive as Tiger Brands strives to optimise capital allocation and refocus on its growth strategy. Looking ahead, Tiger Brands noted signs that the consumer environment is in the “early stages of recovery” and management “maintains its optimism for the year ahead”, with volume and profit remaining the key focus.

Ann Sebastian is a portfolio manager at Terebinth Capital and co-Portfolio Manager of the PPS Defensive Fund.
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