TFG – Reining in debt

Despite the topline growth pressure in its international divisions, TFG’s FY24 results reflected strong cash generation and management did well to bring down debt levels. Operationally, though, we highlight some areas of concern.

TFG Africa underpinned group turnover growth, with sales growth of 10.4% y-y. However, if we adjust for the partial inclusion of Tapestry in FY23, its organic turnover growth is more modest at 7.1% y-y. We unpack TFG Africa’s GPM and note that, excluding Tapestry, its margins may have eased by 20bps. We think TFG Africa’s GPM has reset structurally lower over the past few years, which increases the operational risk of the division.

In credit, we discuss whether TFG should consider repurchasing RCS, which may be up for sale. We evaluate the performance of this consumer credit business since TFG sold it in 2014, and find significantly lower profit levels. RCS would also add debt of c. R10.7bn to the group, which may be unappealing at this stage.

TFG London is impacted by the challenging trading conditions in the UK, but we note that the average sales per store is being maintained. The shift to more owned stores can also support GPMs, in our view.

We consider whether the slowdown in Australia will be short-lived, as management expects trading conditions to improve once interest rates fall. We demonstrate the impact on bond repayments and conclude that a gradual drop in interest rates and the expected tax cuts in July may not suffice as a catalyst for increased demand. We assess the risk of impairment and review the assumptions in management’s value-in-use calculations.