We value AVI using a blend of EVA and PE valuation methodologies and set our target price at R120. Our rolled forward EVA yields a 12m fair value of R120/sh using a WACC of 12.9% and terminal growth of 6%. Our PE method yields a 12m fair value of R120/sh, based on sum of the parts PE valuation for various businesses. We value Entyce/Snackworks using a target PE of c15x (in line with global peer average of c15x), Apparel and personal care brands on a 12.2x, (in line with SA apparel retailers ave of c12) and lastly, I&J on a target PE of c6.2x also in line with SA peers

Key risks to our target price include:

Macroeconomic conditions: The company is dependent on ongoing consumer demand for its brands, which could be affected by adverse economic conditions.

Commodity prices: As AVI is a food producer, commodity prices compose a significant proportion of the input costs of products. The company has previously been able to pass these through to the consumer with varying success, but in light of the outlook for the SA consumer still appearing constrained, commodity price increases are becoming increasingly difficult to pass on. Conversely, lower commodity prices could help margins.

Weather patterns: Not only does adverse weather affect commodity prices, but certain products within the company's stable are dependent on favourable weather patterns – eg, the beverages division is highly dependent on warm summers. Adverse weather patterns affect sales within certain divisions and, ultimately, profitability.

Threat of imported/private label products: Companies have increasingly cited the risk of counterfeit products or cheaper imports eroding their market share. In addition, private label products appear to be gaining increasing exposure at the expense of branded goods. This risk is heightened in a constrained consumer environment.

Currency risks: Although volatility in the local currency has provided a buffer of protection against imported products in the past, this is seemingly less the case now. In addition, currency volatility impacts profitability significantly given that input costs are generally dollar-driven, and a weakening currency affects the level of export earnings.

Over-reliance on third-party brands with reduced profitability if licences are not renewed: Although most of AVI’s brands are owned, certain key brands are under licence. AVI’s best mitigation to this risk is its established and successful relationships built up with licensors over the years, which in the company’s view will be tough for other licensees to match.

If the impact of these risk factors is more/less negative than we anticipate, then the share price might fail to reach/rise above our target price.