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PPC’s 1H25 performance was mixed. While revenue declined, changes implemented by management came into effect and lifted contribution margin, despite volume declines in SA and Zimbabwe. Management’s assessment of PPC and the previous group structure was scathing. None of the plants were being run efficiently and all were below optimal capacity, preventing the company from competing effectively and leading to lost market share. Management also noted the high general expenses, which they believe should be no more than 5% of revenue, while PPC’s accounted for 13% of revenue. At NPC, the team was able to reduce logistics costs by 15% and is now targeting the same reduction in costs by implementing the identical strategy, with a new contract expected in February 2025. Along with changing the company’s structure, rooting out bad management and poor corporate culture, the new team has breathed life into the business with a key focus on improving efficiency and increasing capacity. While the turnaround will be a marathon not a sprint, some of the changes have already had a strong effect on the bottom line. Implementation of the new logistics strategy could reduce costs by c. R150m and provide PPC with the scope to be more competitive in the 32.5 blender market. Further improvements to extender utilisation and a reduction in clinker factor could help PPC gain market share in Limpopo and Mpumalanga. We are concerned about the threat that imports from Mozambique could bring to the SA market, and that the potential for growth in LP and MP may be overstated as construction activity remains low in those provinces. Despite our concerns, we see a clear path to margin expansion through cost reduction and increased efficiency. The solid plan and technical support from Sinoma provide us with confidence in PPC’s recovery.

PPH delivered an improved performance in FY24, albeit off a low base due to the disposal of The Building Company. The performance of CGM was modest, mainly due to a slowdown in sales growth (+2.3% y-y) in the second half, attributable to warmer temperatures during winter months. PEP and Ackermans had more full-price sales during the period, but Ackermans’ recovery did not meet management’s expectations, thus PPH impaired the business. We also think that PPH’s over-indexed position in kids and babywear may have negatively impacted sales, which were muted for this category according to RLC data, with volumes under pressure for most of 2H24. Now that TBCo has been sold, management has initiated several acquisitions to bolster existing segments, namely through the acquisitions of Shoprite Furniture and Choice Clothing, the latter for a purchase consideration of less than R100m. This acquisition could allow PPH to increase its adultwear exposure, but we are cautious that a low-margin, off-price retailer could dampen CGM margins. Pepkor Lifestyle had a much-improved performance in FY24, with good expense control helping to expand OPM by 90bps to 5.9%. We believe the Home division should benefit from economic tailwinds such as lower interest rates and increased discretionary spend from retirement savings withdrawals, reflected in the division achieving sales growth of 11.5% y-y in the first seven weeks of 1H25. The acquisition of SHP Furniture would provide Lifestyle with greater scale and revenue, but the addition could dampen OPM as SHP’s low trading margins and lower densities would need to be rectified. FinTech experienced strong revenue growth of 24.5% y-y, mainly aided by the reclassification of the credit books and the normalisation of the Flash product mix. Although the credit book is healthy, PPH is expected to slow down book growth, particularly in A+, which should help to improve returns, in our view.

Key points from Tiger Brands’ (TBS) FY24 results presentation

Diluted HEPS from cont. ops. of 1 721 cps (+0.6% y-y). Revenue growth of 0.7% y-y to R37 662m, driven by price inflation of 7% y-y, offset by volume declines of 6% y-y. GPM up 60 bps to 28.3%, driven by continuous improvement initiatives, including value engineering savings of recipes and packaging. Expenses increased by 3.0% y-y while expenses-to-sales increased from 19.9% to 20.3%. Operating margin before non-operational items increased marginally to 8.3% (FY23: 8.2%) against the backdrop of implementing a new operating model and a challenging operating environment. Dividend of 1 034 cps (FY23: 991 cps). Cash generated from operating activities up from R1 934m to R4 589m. For the domestic business, volume declines were 8% y-y, partially offset by strong growth in exports of 6% y-y and International of 5% y-y.

Although SPP reported good diluted HEPS growth of 11.1% for FY24, the slowdown in 2H24 is worrisome. We think Spar SA’s franchisee base may have weakened. Over the past six years, Spar SA acquired 56 stores and on-sold 30 stores. The average price of stores on-sold over the last two years dropped significantly, suggesting less interest from new franchisees, in our view. In addition, another 22 franchise stores closed in FY24 without Spar intervening as a defensive buyer. We estimate these store closures may have shaved 100bps off its top-line growth in FY24. While loyalty rates are improving in KZN, the loyalty in the rest of SA may have dropped by 230bps, on our estimates. This is worrying, given that these regions were not affected by the SAP implementation. Management said they have plans to address the decline in loyalty, and we think this may come at some margin cost. Spar Ireland’s turnover growth of 2.8% y-y is the lowest since FY17, highlighting its reliance on acquisitions for growth. Acquisitions slowed in FY24, and we estimate the businesses acquired over the past seven years contributed at least 15% of FY24 turnover. We think management may be leaning toward exiting Switzerland, but there seems to be no urgency on the matter. We believe a delayed exit could reduce the amount that SPP may realise from the disposal. Spar Switizerland’s number of stores serviced dropped from 363 to 300 in FY24, and further declines could undermine the value of the operation.

VKE continues to raise capital through debt and equity, with R5.1bn in cash and offering a further DRIP for 1H25. While LAR España was a great investment, we believe its significant income has masked the underlying poor performance in Spain. Castellana’s top line (provision of services) per sqm has declined 3% y-y in euros, while operating profit fell 9.2% y-y, and operating profit net of finance costs was down 44% y-y. While bank debt decreased 11.8% y-y, finance costs rose by 82.4% y-y. Vukile recently capitalised €97m of loans to Castellana into equity, and lent a further €108.4m, lessening the true finance cost. The purchase yield on the Portuguese assets equates to an equivalent price of €9.75 per LAR España share, and thus this transaction will decrease Castellana’s FFO in FY26. If the additional purchases (two Portuguese assets and Bonaire) conclude, FFO might increase in absolute terms, but ROIC would decline. South African operations have started improving from what we believe was the bottom, with FFO having declined 51.2% over the past five years. Control of general operating expenses has been excellent. Concerningly for VKE investors, 14.1c of every R1 in contractual rental goes to corporate and administrative expenses. VKE’s admin cost-to-income is almost three times that of HYP and RES, both of which run SA and European retail property portfolios, and is significantly higher than even RDF or GRT, which run complex diversified portfolios. In our view, FY25 FFO will be in line with guidance, given a distribution is accrued for in Castellana from LAR España, even though it will not receive it after the sale. We believe FFO will come under pressure in FY26 from higher rates, more debt and with the purchase of new assets lowering ROIC.

LEW is a prominent furniture retailer with a significant presence throughout South Africa and in neighbouring SADC countries. LEW’s revenue over the last seven years grew 6.7% CAGR, higher than its closest competitors. By market share, it is the second biggest furniture retailer in South Africa, with a focus on being close to the communities it serves and building relationships with its customers. LEW’s debtors’ book is, in our view, an asset for the group, in which it has invested a significant amount of capital. Compared to other retailers offering credit, LEW has a higher provision level but fewer bad debts, and its strong balance sheet and short-term facilities are more than sufficient to support further investment in the book. The health of the debtors’ book has only been strengthened by the addition of debit orders to improve collections, which is now maintained at around 80%. The group has always strived to return value for its shareholders, and although we expect buybacks to be paused for a sustained period, the cash flow that will result from slowing the debtor’s book growth could flow into dividends for investors. LEW will reposition its Bedzone stores into a Speciality segment, along with UFO and the newly acquired Real Beds brand. This new segment will focus on the base-set market. LEW will continue to roll out its base-set stores, targeting 30-40 stores a year. This focus is strategic given that base sets are the second biggest merchandise category for LEW, but it will face steep competition in this product category, given that its footprint is small and mainly concentrated in Gauteng.

Afrimat experienced a tough 1H25 and delivered underwhelming results despite double-digit revenue growth. Although construction market conditions were much better than in recent years, the strong performances from the materials business could not outweigh the difficulties in the iron ore division. Furthermore, with the Lafarge assets in a far greater state of disrepair than expected, Afrimat was not able to deliver growth in line with expectations. We are positive about the future of Lafarge within the group and expect an improved contribution from FY26 as operations are restored and the cement business gains market share. The quality and location of the Lafarge assets could provide Afrimat with a competitive advantage once infrastructure spending increases in the country. We are concerned about the Bulk Commodities businesses, though. Transnet’s underperformance continues to weigh on Afrimat’s local and international iron ore operations. The setbacks at Nkomati have led to production delays and higher costs. Meanwhile, concerns about AMSA as a going concern and the effect this could have on Afrimat’s earnings is eye-opening. Despite our concerns, we believe that in current market conditions, Afrimat should be able to recover the iron ore business over the next 12 months, while the anthracite business could remain under pressure. The future of the Construction Materials business looks bright and as Sanral and Transnet start awarding contracts, we could see the business outperforming. Furthermore, if Afrimat receives the 2mtpa rail allocation in 2027, iron ore sales volumes could double from FY28 and would provide a sizable boost to earnings.

Key points from Quantum Foods (QFH) FY24 results presentation

Diluted HEPS increased from -17.4 cps LY to 79.3 cps TY. Turnover decreased by 8.9% y-y to R6 332m, mainly due to HPAI (bird flu). GPM increased from 17.0% to 19.3%. Expenses increased by 2.1% y-y while expense-to-sales increased by 210bps to 18.9%. OPM increased from -0.5% to 3.6%, Other income increased to R185m (FY23:-R66.4m), mainly due to fair value adjustments. No dividend declared (LY: 0cps). Cash generated from operating activities down from R280.7m to R274.8m. Gross debt increased to R99.4m (LY:0) The Group’s performance significantly improved as a result of, a decrease in key feed raw material costs resulting in lower feed costs, a significant reduction in loadshedding and a reduction in biological asset write-offs incurred as a result of HPAI outbreaks. Earnings in the egg business significantly improved due to the higher egg selling prices, together with excellent cost management and operational efficiencies.

Key points from Spar (SPP) FY24 results presentation

Diluted HEPS (continuing operations) up 11.1% y-y to 918cps. Poland was treated as a discontinued operation. Turnover growth +4.0% y-y, with SA +3.7%, Ireland +2.8% (EUR), and Switzerland -6.2% (CHF). GPM stable at 11.9% with higher margins in Ireland and Switzerland. Expense-to-sales ratio decreased from 12.4% to 12.3% with expense growth of 3.5% y-y. Operating margin improved from 1.7% to 1.9%. No dividend (FY23: nil); dividends will be reconsidered based on future macro-economic and operating conditions. Capex cut sharply from R1.9bn in FY23 to R1.1bn in FY24; capex to sales ratio at 0.7% (FY23: 1.3%). Gross debt decreased from R8.3bn to R6.7bn, while net overdraft increased from R1.7bn to R2.4bn. Net debt to EBITDA dropped from 3.02 to 2.41. Secured R2bn facility with R1.2bn used to partially settle Polish debt. Gearing within debt covenants.