TFG – Pitfalls of diversification

TFG has diversified on several fronts over the past two decades – expanding offshore, reducing its credit retail exposure and integrating vertically to enable a quick-response strategy. Yet, these efforts did not result in improved valuation multiples relative to its peers. We analyse the performance of the company before and after its transformational strategies and find that TFG Africa’s GPM and OPM did not improve despite its vertical integration and quick-response strategies. Local sourcing also did not provide a shield against the weak rand, and with stock holdings structurally higher, TFG now has to fund more of its stock holdings.

We contend that the significant dilution caused by TFG’s two capital raises in the last five years has not been adequately compensated by higher earnings. Its rising debt levels are a concern as they coincide with higher interest rates.

The stellar performance of TFG Australia in recent years could be followed by a much more challenging period ahead. High inflation and rising interest rates in Australia could dampen consumer spending as there was a spike in fixed-rate mortgages in Australia during the pandemic. Most of these loans are due to be reset by late 2024, with homeowners facing a significant step-change in bond payments.

Following the Tapestry acquisition, TFG Africa now operates 25 chains spread across seven merchandise groups covering the entire income spectrum. We think this diverse mix of businesses could lead to inefficiencies and may make economies of scale more difficult to achieve. The growing manufacturing base adds to the complexity of this retailer, regardless of the benefits of quick-response capability, in our view.