TFG – Investing for growth

TFG produced strong FY22 results, aided by the Jet acquisition, a low base and TFG London’s swing to profitability. TFG Africa delivered a respectable performance despite the disruption from the unrest, with turnover excluding Jet achieving a 5.3% CAGR over the past two years. Although its GPMs were diluted by Jet, the GPM in its traditional business was still 400bps lower than before the pandemic. This is surprising considering the more efficient localised supply chain, which should enhance margins. The strategic investments made by TFG Africa are impressive, but we think there is a risk that the return on these investments may not be optimal if weak economic conditions persist in South Africa.

The restructuring of TFG London is delivering results, with the UK concession footprint cut by 32.0% and the international concessions reduced by 45.5%. The smaller but solid base could have scope for further margin improvement, in our view. TFG Australia recovered well from periodic lockdowns, with its cost control particularly impressive.

Similar to Mr Price (MRP), TFG is also on the acquisition trail. The proposed purchase of Tapestry Group will be its sixth acquisition since FY15, with R8.7bn invested over this period. Tapestry will increase TFG’s exposure to durable goods and we estimate it could double TFG’s homeware sales to
c. R4bn, (c.11% of group sales). Three of its chains have high average ticket prices, with a maximum price point of R126 999. Plans to bring the credit in-house may require TFG to develop a credit model like that of the furniture retailers (Lewis and JD Group), with extended terms of up to 36 months. Its slower stockturn could also consume more working capital, in our view.