TFG – Diversification pays off

TFG reported a reasonable income statement performance for 1H23, with the decline in TFG Africa’s profitability offset by an improved performance in TFG London and TFG Australia. With high product inflation, TFG Africa had to absorb price increases of approximately 500bps, which we estimate diluted GPM by about 250bps. The actual 140bps reduction in TFG Africa’s GPM is therefore commendable, in our view. TFG Australia has become a key underpinning for the group, contributing 19.5% of group sales but 34.0% of group operating profit.

There are some areas of concern on TFG’s balance sheet. TFG Africa’s inventory increased by 41.6% y-y excluding Tapestry stock (an increase of R2.7bn), with stock days rising from 156 to 200 in 1H23. We think the strategic stock purchases ahead of price increases come with some risk as they can result in higher markdowns if festive season sales come in below budget. This risk is heightened if the Black Friday event or peak festive season trading is disrupted by higher-stage loadshedding (as happened in the last two weeks of September). Management contends that the strategic purchases were not seasonal stock and there is no risk of higher markdowns.

TFG’s gross debt increased significantly from R6.5bn in 1H22 to R12.2bn in 1H23, while cash fell by R431m to R5.3bn. Despite the rise in debt, gearing ratios are still below the pre-Covid period, with net debt to equity at 0.34x and net debt to EBITDA at 0.7x. We are concerned, though, that TFG’s investment programme will have elevated capex, while the rollout of credit in Jet and Tapestry could drain working capital. Management said that debt has peaked and should be lower by year-end.