We value TBS using the blend of a 24m PE and EVA and set our target price at R345/sh. Our 24m PE yields a 12m valuation of R349/sh. We apply 24m EPS of R23.3/sh to target PE of 15.0x. We use 15.0x as we believe TBS’s portfolio optimization and cost reduction initiatives are likely to drive higher EBIT margins for the group (FY 24: 8.3% to 12.4% in FY 27e). Returns (ROIC to 23.9% in FY 27e) and consistent buy backs, speci div and lower div cover to 1.5x from 1.75x. Our EVA generated 12m fair value of R342/sh (using a WACC of 12.3%, terminal growth of 6.5%).

There are both upside and downside risks to our thesis and target price.


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


Commodity prices: For Tiger Brands, as a food producer, commodity prices compose a significant proportion of the input costs of products. The company has been able to previously 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, e.g. 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 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. 


Acquisition risks: Tiger Brands' stated strategy is to expand into emerging markets as its primary means of growth. The risk thus remains that these acquisitions may not generate sufficient returns. 


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.