tigerbrands290714

EQUITY RESEARCH

Tiger BrandsFood

BuyMedium Risk

29th July 2014

South Africa

BPI Capital Africa

Africa strategy to pay-off...

Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

2

Equity Research 4 Tiger Brands 4 July 2014

Africa strategy to pay-off...(Initiating Coverage)

4 Tiger Brands is the largest branded FMCG player in South Africa. The company has

been pursuing a regional diversification strategy over the years, expanding its

footprint in Africa through acquisitions and JVs in countries such as Kenya, Ethiopia,

Cameroon and Nigeria. Currently, Africa (ex-SA) operations (including exports)

contribute c25% to revenues and we expect this to represent 31% by FY17F. The

company has set a medium to long term objective to generate c35% of total revenues

from the rest of Africa.

4 We expect Tiger Brands to accelerate its earnings performance and register FY13-17F

revenue CAGR of 11%, fuelled mainly by increased performance in Africa, while SA

units should remain sound. Further, management has been looking to achieve

and maintain a consolidated EBIT margin of c15% (vs. 11.4% in FY13): we foresee

African operations to represent 26% of total FY17 EBIT vs. 14% in FY13, also

supported by a gradual improvement of DFM. We estimate Tiger Brands to record

18% EPS CAGR13-17F and generate significant cash flow: our numbers are above

consensus.

4 Tiger Brands has a sound position in its domestic markets and offers a rising exposure

to the SSA consumer sector. The stock is currently trading at premium to its SA

peers on the short term, but it is at discount to its EM peer averages. We have set

our YE14 Price Target at R360/share, which represents 17% upside. Key triggers for

earnings surprises are (i) a sustainable turnaround at DFM, (ii) margin recovery

within the Groceries division; and (iii) robust growth in the rest of Africa. Key risks

include further restructuring hurdles in Africa and intensifying competition in the

domestic market. BUY.

Stock data

Price (R): 309 Price Target (R): 360

N of shares (m): 164 Bloomberg/Reuters: TBS SJ/TBS

Market Cap (Rm): 50 619 Market Cap (USD m): 4 602

Avg.Daily Vol. [R 'm] 180.4 Avg.Daily Vol. [USD 'm] 16.4

Net Debt/EBITDA'13 1.2 Free-float: 55%

EPS CAGR ('13-'17F) 18% ROE'13: 20%

Major shareholders: PIC 9.8%; Colonial First State Global AM 9.2%; Tiger Consumer Brands 5.4%

YE June 2012 2013 2014F 2015F 2016F 2017F

EPS (R)* 16.7 15.7 19.0 23.3 27.5 30.9

P/E 19.5 19.6 16.3 13.2 11.2 10.0

Dividend Yield 2.6% 2.8% 3.2% 3.9% 4.6% 5.2%

FCF Yield 3.6% 3.8% 3.1% 5.8% 7.0% 8.0%

EV/EBITDA 13.2 12.2 10.7 9.0 8.2 7.7

(*) Adjusted for non-recurrent items.

Tiger Brands vs JSE Food Producers

Index vs JSE ALSI

Source: Bloomberg.

Avai lable on our websi te:

www.bpiequity.bpi.pt, BPI Online,

and Bloomberg at BPAF.

Tiger BrandsFood

BuyMedium Risk

29th July 2014

South Africa

3


INVESTMENT CASE

Tiger Brands is the largest branded FMCG Company in South Africa. The business started

as Tiger Oats in the 1930s and has developed into a dominant player in the food sector

through its portfolio of leading brands. The Group has been pursuing a regional

diversification strategy over the years, expanding its footprint in Africa through strategic

acquisitions and JV transactions in countries such as Kenya, Ethiopia, Cameroon and

Nigeria. Tiger Brands also has minority stakes in Oceana (South Africa), National

Foods (Zimbabwe), Empressas Carozzi (Chile) and UAC Foods (Nigeria). In FY13,

African operations (including exports) contributed 25% to revenue. However, the

underperformance of Dangote Flour Mills led to much less contribution at EBIT level.

Looking forward, we expect the contribution from the rest of Africa to increase from 25%

in FY13 to 31% by FY17F. Tiger Brands has set a medium to long term objective to

generate c35% of total revenues in the rest of Africa.

FY13 Divisional Revenue Contribution Tiger Brands Shareholder Structure

Source: BPI Capital Africa, Company. Source: Company.

The key investment case of Tiger Brands lies on its growing exposure in the rest of Africa

and its sound cash flow generation in SA:

Africa Rising. GDP growth rates of c5.5% in SSA vs. c2.5% for SA reflect the significant

value that can be realized from the group's exposure in Africa. We note that Tiger

Brands has grown its revenues and EBIT at a FY09-13 CAGR of 7.2% and -0.4%,

respectively. In our view, SA is an ex-growth market given that its operations in the

country have registered FY09-13 revenue CAGR of 3.5% and FY09-13 EBIT CAGR of

0.4% compared to a FY09-13 revenue CAGR of 18% and EBIT CAGR of 28% for the

Exports and international operations (ex-Nigeria). Looking forward, we expect exports

and international operations (ex-Nigeria) to register a FY13-17F revenue and EBIT

CAGR of 17% and 23%, respectively. We also project a FY13-17F revenue CAGR of

15% for the Nigerian operations.

4


Comparison of Revenue Growth Comparison of EBIT Growth

Source: BPI Capital Africa, Company. Source: BPI Capital Africa, Company.

Dominant Position. Tiger Brands has a dominant position on the SA market and has a

strong portfolio of brands with #1 or #2 market share positions in key product lines. We

highlight that domestic operations still remain an important growth vector for the

business constituting 75% of group revenue. Overall, we expect SA operations to

register FY13-17F revenue and EBIT CAGR of 9% and 11%, respectively.

Historic vs Forecast CAGRs FY17F Divisional Revenue Contribution

DomesticOperations

International& Exports

(exc Nigeria)

Nigeria

Group

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DomesticOperations

International& Exports

(exc Nigeria)

Group

!"(% !'(%

Source: BPI Capital Africa/Company. Source: BPI Capital Africa/Company.

A defensive business model. Tiger Brands offers consumers a basket of staple and

discretionary products. We note that while the SA economy has been facing some

headwinds, the real expenditure on food and beverages has remained positive over

time. In addition, the group has a portfolio of defensive food products that cater from a

wide range of LSM groups. Therefore, the product mix enables the business to be

cushioned against adverse shifts in demand. Tiger Brands has historically maintained

recurring EBIT margins of between 12% and 15%.

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Turnover GrossPro fit

EBITDA PBT Atrib.Income

CAGR 09-13 CAGR 13-17

5


Tiger Brands Revenue and EBIT Margin Progression EBIT Margin Comparisons: Tiger Brands Vs SSA & EM Peers

Source: BPI Capital Africa/Company. Source: Bloomberg.

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Management has maintained an aggressive growth strategy. We note that management

has driven a successful evolution of the business through various restructurings and

disposals. Examples include (i) the unbundling of healthcare interests which resulted

in Adcock Ingram, (ii) the sale of the dairy business (DairyBelle) in 2007 and; (iii) the

sale of Sea Harvest to Brimstone in 2009. However, we also note that the company has

been paying its "school fees" in its expansion in Africa, clearly visible with the acquisition

of DFM in Nigeria.

Strong cash generation capabilities. SA operations have allowed Tiger Brands to generate

sound cash flows, with FCF margin standing on average at 8.2% between 2009 and

2013. We expect this to be sustainable (projected FY17 FCF margin of 8.0%) enabling

it to: (i) develop and invest in new products, (ii) payout attractive dividends to

shareholders (FY17F Dividend yield of 5.2%) and; (iii) pursue further value accretive

acquisitions. Tiger Brands has a sound track record of acquiring value accretive

businesses, particularly in the domestic market. Some of the businesses include Nestl

South Africa confectionery business (2006), Soyatech (2006) and Crosse & Blackwell

(2009). We also recall that in 2008, Tiger Brands was considering to acquiring AVI

Limited.

Free Cash Flow

USDm FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F FY17F

Operating profit 2 527 3 477 2 828 3 371 3 479 3 080 2 790 4 649 5 362 5 959

Tax on EBIT -792 -984 -788 -951 -948 -797 -722 -1 203 -1 387 -1 542

NOPAT 1 735 2 494 2 040 2 420 2 531 2 283 2 068 3 446 3 975 4 417

add: depreciation 250 267 315 384 445 688 795 735 743 735

less: net working capital -914 -425 -113 -173 -592 -337 -465 -444 -396 -339

less: capex -870 -604 -634 -818 -480 -728 -850 -780 -784 -772

Free Cash Flow (Rm)-LHS 200 1 733 1 608 1 814 1 904 1 906 1 548 2 958 3 538 4 041

FCF Margin-RHS 1.1% 8.5% 8.3% 8.9% 8.4% 7.1% 5.1% 8.7% 9.5% 10.0%

Source: BPI Capital Africa/Company.

6


Analysis of Free Cash Flows Evolution of FCF Yield

7


Macro-economic Prospects in SSA Markets

2013 2014F 2015F 2016F 2017F 2018F 2019F

Cameroon 4.6% 4.8% 5.1% 5.2% 5.3% 5.4% 5.4%

Chad 3.6% 10.8% 7.3% 4.7% 3.6% 3.3% 3.5%

Ethiopia 8.0% 6.2% 7.8% 8.0% 8.0% 8.0% 8.0%

Kenya 5.6% 6.3% 6.3% 6.4% 6.4% 6.5% 6.5%

Malawi 5.0% 6.1% 6.5% 6.5% 6.2% 6.3% 5.9%

Mozambique 7.1% 8.3% 7.9% 7.7% 7.9% 7.8% 7.8%

Nigeria 6.3% 7.1% 7.0% 6.9% 6.9% 6.6% 6.7%

Rwanda 5.0% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

South Africa 1.9% 2.3% 2.7% 3.2% 3.0% 3.0% 3.0%

Tanzania 7.0% 7.2% 7.0% 7.1% 7.0% 6.8% 6.9%

Uganda 6.0% 6.4% 6.8% 7.1% 7.2% 7.3% 7.4%

Zambia 6.0% 7.3% 7.1% 6.8% 6.6% 6.3% 6.0%

Zimbabwe 3.0% 4.2% 4.5% 4.8% 4.1% 4.0% 4.0%

Source: WEO.

Secondly, the business is facing competitive threats in its markets. In South Africa, the

competitive landscape has become even more intense, with retailers such as Woolworths

and Shoprite driving own-label initiatives. The entry of Walmart through the acquisition

of Massmart has also increased competitive pressures. Tiger Brands also competes

with multinational groups such as Mondelez International, Unilever and Nestle. In the

rest of Africa, competition has largely been from cheap imports and informal traders.

Counterfeit products are also a serious constraint in countries such as Zimbabwe,

Mozambique and DRC.

Informal Market in Lagos, Nigeria (Balogun) Informal shops in Zimbabwe (Mbare Msika)

Source: BPI Capital Africa. Source: BPI Capital Africa.

Thirdly, significant inflation on key inputs such as maize and wheat can adversely impact

performance as they exert pressure on margins. Other key commodities include cocoa,

palm oil and sugar. In our view, the pass through of higher commodity costs to prices

takes time, which could have a negative impact on margins.

8


Fourthly, Tiger Brands faces various political and socio-economic risks in its rest of Africa

operations. Corruption is also high in some states and ease of doing business ratings in

countries such as Zimbabwe, Ethiopia and Nigeria also remains poor.

Fifthly, the business is exposed to fluctuations of various currencies. For example,

Langeberg and Ashton Foods, is one of the largest producers of canned fruits globally

exports approximately 85% of its products around the world, making the company

highly expose to currency risks.

Finally, given its dominance on the local food market, the business is exposed to regulatory

risks, which in most cases are a result of competition concerns. We recall that in mid-

November 2007, Tiger Brands was fined cUSD12.8m by the Competition Commission

for "colluding" with other bread producers to raise the price of bread. According to the

commission, the four companies involved (Premier Foods, Tiger Brands, Foodcorp

and Pioneer Foods) controlled more than 90% the wheat flour market at the time.

Tiger Brands Equity Story

Positives Negatives

Dominant market position Competitive threats from Multinationals

Regional diversification (SSA) Commodity Price Volatility

Defensive business model focus on food Exposure to political risks (Africa)

Potential for value accretive acquisitions Potential risk of overpaying

Attractive valuation Regulatory risks

Source: BPI Capital Africa.

In a nutshell, we believe that Tiger Brands will remain a key player in the domestic market

(South Africa), while the key investment attraction is its increasing exposure in high

growth markets in the rest of Africa. We believe that the group's aggressive strategy in

Africa will pay off. We estimate Tiger Brands to register FY13-17F revenue CAGR of

10.7% on the back of robust growth from exports and international businesses. In our

view, rest of Africa businesses should continue to contribute positively to performance.

We also see some scope for earnings surprises on the back of a turnaround at DFM

and margin recovery within the Groceries division. We estimate FY13-17F EBIT and

EPS CAGR of 17.9% and 18.4%, respectively. Tiger Brands offers a unique avenue to

capture food demand growth in SA as well as other SSA economies given its strong

orientation in defensive food businesses. Key risks include execution constraints in

the rest of Africa and intensifying competition in the domestic market.

The stock has been underperforming its EM peers and most of its domestic comparables,

on the back of lacklustre financial performance in the domestic market and DFM losses.

Tiger Brands is currently trading at FY15F PER of 13.2x and FY15F EV/EBITDA of 9.0x,

which represents a 15% average discount to its EM peers - we see the current multiplies

as attractive given its growth opportunities. Consequently, we initiate coverage on Tiger

Brands with a BUY rating and YE14 PT of R360 (17% upside potential).

9


VALUATION

We have valued Tiger Brands using a Sum-of-the-parts (SOTP) method. We detail our

methodology as follows;

- The Milling & Baking, Other Grains, Groceries, Snacks & Treats, Beverages, VAMPs,

Out of Home, Personal Care, Baby Care, Home Care, Exports, International Operations

(East & Central Africa) and Deciduous Fruit divisions were valued using divisional

DCFs. Our WACC assumptions for the various divisions vary slightly depending on

the risk profiles of the business model. We have applied a beta of 0.8 for pure food

businesses and 0.9 for non-food businesses such as HPCB divisions. The following

are DCF assumptions for some of the divisions;

DCF Assumptions

Milling & Baking Other Grains Groceries HPCB Exports Int. Operations

Risk free rate 8% 8% 8% 8% 13% 13%

Equity risk premium 6% 6% 6% 6% 6% 6%

Beta 0,9 0,9 0,8 0,9 0,9 0,9

Cost of equity 13% 13% 12% 13% 18% 18%

Cost of debt 10% 10% 10% 10% 10% 10%

Tax rate 26% 26% 26% 26% 26% 26%

After tax cost of debt 7% 7% 7% 7% 7% 7%

Debt/(debt + equity) 20% 20% 20% 20% 20% 20%

WACC 12% 12% 11% 12% 16% 16%

Long term growth rate 3% 3% 3% 3% 5% 5%


Other Businesses

- Deli Foods (100%) has been valued at 1.5x EV/sales (FY14F peer average)

- UAC Foods (49%) has been valued at 10.5x EV/EBITDA (FY14F peer average).

- Dangote Flour Mills (63%) has been valued at 1.5x EV/sales (FY14F peer average),

which compares with the 1.3x implied from its current market cap and 1.2x implied

by the acquisition cost in 2012.

- Oceana Group (41.9%) has been valued using our own YE14 Price Target (DCF)

- National Foods (37.4%) has been valued at the current market cap on the ZSE; and

- Empresas Carozzi (24.4%) has been valued on a /PBV of 3.6x (Tiger Brand's PBV).

Overall, we set our YE14 Price Target at R360/share, with most of the value coming from

Milling & Baking, Groceries and Exports. We also note that (i) African operations represent

25% of our target valuation, (ii) the stakes in listed assets account for 16% of our target

equity, and ;(iii) other financial investments (R1.8bn) are composed by listed/ unlisted

equities at FV and pension fund investments.

Contribution to SOTP Valuation


10


Tiger Brands SOTP Valuation

Implied EV/EBITDA

Business Description of Operations Stake Methodology Rm Valuation % as EV 2015F 2016F 2017F

Milling & Baking Bakeries & grain-based

FMCG products (mealie meal & flour) 100% DCF Valuation 16 259 25.5% 9.0 8.3 7.9

Other Grains Involved in grains such as rice &sorghum 100% DCF Valuation 3 846 6.0% 9.7 9.1 8.7

Groceries Focuses on groceries

(offering various brands) 100% DCF Valuation 7 079 11.1% 11.6 9.4 8.1

Snacks & Treats Mainly involved in treats such

as sweets & chocolates 100% DCF Valuation 4 361 6.8% 10.0 9.2 8.6

Beverages Cold beverages business

(fruit juices & energy drinks) 100% DCF Valuation 1 596 2.5% 8.8 7.7 7.7

VAMPS Value added perishables such

as bacon, viennas etc 100% DCF Valuation 1 534 2.4% 8.6 8.1 7.6

Out of Home Food products for restaurants,

catering services etc 100% DCF Valuation 909 1.4% 8.8 8.0 7.8

Personal Care Personal hygiene products 100% DCF Valuation 1 159 1.8% 7.9 7.6 7.7

Baby Care Baby products (e.g Elizabeth Anne's, Purity) 100% DCF Valuation 1 743 2.7% 8.3 8.1 7.8

Home Care Detergents & insecticides for home use 100% DCF Valuation 854 1.3% 8.4 7.9 7.5

Exports Export of branded goods into the rest of Africa 100% DCF Valuation 6 384 10.0% 10.0 8.6 7.6

Int. Operations Operations in Ethiopia, Kenya & Cameroon DCF Valuation 3 202 5.0% 9.7 8.2 7.0

Deciduos Fruit Producer of canned fruits &fruit pures 100% DCF Valuation 620 1.0% 8.0 7.1 6.5

Nigeria

Deli Foods Biscuit manufacturing business Target FY14F

based in Nigeria 100% EV/Sales of 1.5x 840 1.3%

Dangote Flour Milling business in Nigera Target FY14F

Mills (flour, pasta & noodles) 63% EV/Sales of 1.5x 4 705 7.4%

EQUITY ACCOUNTED BUSINESSES

UAC Foods Food & beverages businesses in Nigeria 49.0% Target FY14F

EV/EBITDA of 10.5x 1 235 1.9%

Oceana Group Fishing businesss in South Africa & Namibia 41.9% SOP Valuation 4 761 7.5%

National Foods Milling in Zimbabwe ZSE Market

Holdings (flour, maize, stock feeds & FMCG) 37.4% Capitalisation 591 0.9%

Empresas Carozzi Branded foods business in South

America (Chile) 24.4% NAV (PBV of 3.8x) 2 185 3.4%

Total value of operations 63 863

YE13 Net Debt (4 470)

Minorities (PBV of 3.6x) (3 790)

Investments 1 820

Equity Value 57 423

Number of Shares (m) 164

Fair Value 351

YE14 Price Target (ZAR) 360

Upside/Downside 17%


11


SENSITIVITY ANALYSIS

Given the varying growth rates applied to domestic businesses in South Africa, we

have performed a sensitivity analysis of the risk free rate (rf) to long term growth rate

(g). Overall, we have applied a long term growth rates of 3.0% and a risk free rate of 8%

for the key domestic operations.

Sensitivity Analysis (R/Share)

Risk Free Rate

7.0% 7.5% 8.0% 8.5% 9.0%

2.0% 366 354 343 333 324

2.5% 374 361 350 339 329

Long term growth rate 3.0% 383 369 360 345 335

3.5% 393 378 364 352 341

4.0% 405 388 373 360 348


We have also performed a sensitivity analysis for the various key aspects of our valuation

for Tiger Brands so that investors consider different assumptions. These sensitivity

analyses consider the different views of revenue CAGR in the outlook period and the

average EBIT margin for Tiger Brands' largest division; Milling and Baking (27% of

revenues and 45% of EBIT). We have depicted the analysis in the tables below. As

would have expected, different assumptions for the Milling & Baking division lead to

material differences in the value of Tiger Brands.

Revenue FY13-17F CAGR

4.1% 6.1% 8.1% 10.1% 12.1%

YE14 Price Target 350 355 360 367 373


Average EBIT Margin (FY13-17F)

15.4% 17.4% 19.4% 20.4% 21.4%

YE14 Price Target 275 318 360 382 403


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Sector Valuation Comparisons

Market Cap PER EV/EBITDA EV/EBIT EV/Sales P/BV

S.African Food Producers Country USDm 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F

Tiger Brands SA 5 396 16.3 13.2 11.2 10.7 9.0 8.2 13.1 10.4 9.3 1.6 1.4 1.3 3.7 3.3 2.9

Pioneer Foods SA 2 417 16.3 14.3 14.3 12.4 11.1 11.1 15.3 13.8 13.8 1.4 1.3 1.3 0.1 0.1 0.1

AVI SA 2 014 15.6 14.4 14.4 10.2 9.5 9.5 11.9 11.0 11.0 2.0 1.9 1.9 4.6 4.2 4.2

Oceana SA 952 15.2 14.0 14.0 9.7 8.9 8.9 10.7 9.9 9.9 1.8 1.6 1.6 4.2 3.8 3.8

Clover Industries SA 288 10.5 12.5 12.5 5.8 6.2 6.2 7.5 7.3 6.5 0.4 0.4 0.4 1.2 1.2 1.1

Tongaat SA 492 9.3 8.1 8.1 6.1 5.5 5.5 7.5 6.5 6.5 0.6 0.6 0.6 2.2 1.9 1.9

Rainbow SA 1 409 19.1 12.4 12.4 9.8 7.1 7.1 15.3 9.7 9.7 0.9 0.8 0.8 1.9 1.7 1.7

Tongaat SA 1 559 10.7 8.8 8.8 6.7 6.1 6.1 8.2 7.2 7.2 1.3 1.2 1.2 1.3 1.2 1.2

Illovo SA 1 261 10.9 9.3 9.3 6.0 5.3 5.3 6.7 5.9 5.9 1.2 1.0 1.0 1.7 1.5 1.5

SA Food Producers Average 13.8 11.9 11.7 8.6 7.6 7.6 10.7 9.1 8.9 1.2 1.1 1.1 .3 2.1 2.0

SSA Food Producers

Zambeef Zambia 139 29.9 16.9 16.9 9.6 8.0 8.0 14.9 13.3 13.3 0.8 0.7 0.7 0.7 0.7 0.7

Innscor Africa Zimbabwe 417 11.7 11.5 11.5 5.8 5.3 5.3 7.7 7.1 7.1 0.5 0.5 0.5 1.7 1.5 1.3

Cadbury Nigeria Nigeria 923 27.0 26.0 26.0 19.3 19.4 19.4 21.4 19.5 19.5 3.6 3.3 3.3 8.5 7.3 7.3

Nestle Nigeria Nigeria 5 600 29.5 27.3 27.3 20.6 17.6 17.6 23.6 19.6 19.6 5.2 4.4 4.4 18.4 16.5 16.5

Unilever Nigeria Nigeria 1 255 30.5 27.5 27.5 19.2 17.9 17.9 21.0 18.7 18.7 2.9 2.7 2.7 20.3 19.7 19.7

Fan Milk Ghana 236 32.5 24.4 24.4 19.0 14.0 14.0 25.1 18.7 18.7 4.7 4.1 4.1 8.4 7.0 7.0

UACN Nigeria 768 17.3 15.7 15.7 7.4 6.9 6.9 8.3 7.7 7.7 1.7 1.6 1.6 2.7 2.5 2.5

Flour Mills Nigeria Nigeria 1 143 18.2 14.9 14.9 8.0 7.0 7.0 12.3 10.8 10.8 0.7 0.7 0.7 1.9 1.8 1.8

SSA Food Average 24.6 20.5 20.5 13.6 12.0 12.0 16.8 14.4 14.4 2.5 2.3 2.3 7.8 7.1 7.1

EM Food Companies

JBS Brazil 10 076 8.8 8.3 8.3 5.7 5.3 5.3 8.0 8.1 8.1 0.4 0.4 0.4 0.9 0.8 0.8

Brasil Foods Brazil 20 940 18.0 15.2 15.2 10.3 8.8 8.8 13.9 11.1 11.1 1.4 1.3 1.3 2.6 2.4 2.4

Minerva Brazil 742 8.1 6.3 6.3 5.0 4.5 4.5 5.4 4.7 4.7 0.5 0.5 0.5 1.5 1.4 1.4

M Dias Branco Brazil 5 005 15.2 12.3 12.3 11.8 9.7 9.7 13.1 11.1 11.1 2.1 1.8 1.8 3.1 3.0 3.0

Want Want China China 18 489 20.9 18.2 18.2 13.8 12.1 12.1 15.5 13.8 13.8 3.5 3.1 3.1 7.0 6.3 6.3

Inner Mongolia Yili China 11 019 14.6 12.6 12.6 10.1 8.5 8.5 12.4 10.3 10.3 1.1 1.0 1.0 3.0 2.5 2.5

China Mengniu Dairy China 9 588 22.8 19.1 19.1 13.7 11.8 11.8 20.5 17.3 17.3 1.1 1.0 1.0 2.6 2.3 2.3

China Yurun Food China 854 113.4 21.0 21.0 7.6 7.4 7.4 14.9 10.6 10.6 0.4 0.4 0.4 0.4 0.4 0.4

Nutresa Colombia 6 830 30.9 28.9 28.9 14.6 13.3 13.3 18.9 17.8 17.8 2.0 1.8 1.8 1.6 1.6 1.6

Indo Food Agri Singapore 1 115 11.3 10.1 10.1 6.9 6.2 6.2 9.2 8.0 8.0 1.7 1.6 1.6 0.8 0.8 0.8

Grupo Bimbo Mexico 13 981 23.9 20.2 20.2 9.7 8.9 8.9 13.7 12.4 12.4 1.1 1.1 1.1 3.3 2.8 2.8

EM Food Average 26.2 15.6 15.6 9.9 8.8 8.8 13.2 11.4 11.4 1.4 1.3 1.3 2.5 2.2 2.2

Universe Average 21.5 16.0 15.9 10.7 9.5 9.4 13.6 11.6 11.6 1.7 1.5 1.5 4.2 3.8 3.8

Source: Bloomberg

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Sector Performance Metrics Comparisons

Market Cap Sales Growth EPS Growth ROE Dividend Yield EBIT FCF

SA Food Producers Country USDm 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F Margin ROIC Margin Net D/E

Tiger Brands South Africa 5 396 13% 12% 10% 21% 23% 18% 17% 25% 26% 3% 4% 5% 11% 14% 8% 32%

Pioneer Foods South Africa 2 623 7% 8% 8% 17% 14% 14% 19% 19% 19% 2% 3% 3% 6% 9% 0% 23%

AVI South Africa 2 039 9% 7% 7% 9% 8% 8% 30% 30% 30% 5% 5% 5% 17% 27% 7% 19%

Oceana South Africa 970 11% 13% 13% 14% 9% 9% 32% 32% 32% 5% 5% 5% 14% 26% 5% 9%

Clover Industries South Africa 287 8% 2% 2% 26% -16% -16% 15% 13% 13% 4% 2% 2% 5% 13% 0% 6%

Astral South Africa 551 5% 5% 5% 56% 15% 15% 22% 24% 24% 5% 6% 6% 3% 9% 2% 15%

Rainbow South Africa 1 369 14% 13% 13% 226% 53% 53% 8% 13% 13% 2% 2% 2% 2% 0% 7% 43%

Tongaat South Africa 2 105 8% 9% 9% 14% 20% 20% 13% 14% 14% 3% 4% 4% 15% 9% 2% 41%

Illovo South Africa 1 250 7% 11% 11% 18% 17% 17% 16% 18% 18% 4% 5% 5% 14% 14% 2% 28%

SA Food Producers Average 9% 9% 9% 44% 16% 15% 19% 21% 21% 4% 4% 4% 10% 13% 4% 24%

SSA Food Producers

Zambeef Zambia 121 12% 5% 5% 10% 23% 26% 2% 3% 4% 0% 1% 1% 5% 3% -18% 45%

Innscor Africa Zimbabwe 401 4% 5% 5% -13% 6% 11% 19% 17% 17% 2% 3% 3% 8% 18% 0% 15%

Cadbury Nigeria Nigeria 861 8% 9% 9% 12% 4% 4% 31% 26% 26% 2% 2% 2% 16% 20% 2% -74%

Nestle Nigeria Nigeria 5 506 18% 16% 16% 19% 8% 8% 63% 66% 66% 3% 4% 4% 21% 35% 12% 34%

Unilever Nigeria Nigeria 1 233 10% 9% 9% 18% 11% 11% 58% 60% 60% 3% 4% 4% 13% 30% 7% 33%

UACN Nigeria 737 17% 10% 10% 28% 14% 14% 13% 15% 15% 4% 4% 4% 19% 11% 5% 27%

Flour Mills Nigeria Nigeria 1 147 16% 15% 15% 36% 22% 22% 11% 13% 13% 3% 3% 3% 6% 6% -9% 127%

Fan Milk Ghana 227 12% 14% 14% 27% 33% 33% 24% 28% 28% 1% 2% 2% 20% 28% 7% -23%

SSA Food Average 12% 10% 10% 17% 15% 16% 28% 28% 29% 2% 3% 3% 14% 19% 1% 23%

EM Food Producers

JBS Brazil 11 425 8% 9% 9% 20% 7% 7% 10% 10% 10% 2% 2% 2% 4% 5% 0% 103%

Brasil Foods Brazil 22 433 11% 9% 9% 38% 20% 20% 15% 17% 17% 2% 2% 2% 6% 7% 1% 44%

Minerva Brazil 756 13% 4% 4% 18% 27% 27% 23% 23% 23% 2% 2% 2% 9% 7% 4% 42%

M Dias Branco Brazil 5 107 10% 20% 20% 20% 22% 22% 22% 24% 24% 2% 2% 2% 13% 17% 8% 9%

Marfrig Global Foods SA Brazil 1 593 10% 11% 11% 17% 32% 32% 9% 11% 11% 1% 1% 1% 5% 10% -2% 23%

Want Want China China 18 489 15% 13% 13% 16% 15% 15% 36% 37% 37% 3% 4% 4% 21% 20% 14% -41%

Inner Mongolia Yili China 11 019 12% 11% 11% 23% 16% 16% 21% 20% 20% 2% 2% 2% 5% 5% 1% -24%

China Mengniu Dairy China 9 588 13% 12% 12% 24% 19% 19% 12% 13% 13% 1% 1% 1% 4% 7% 1% 17%

China Yurun Food China 854 18% 17% 17% 11% 4% 4% 3% 4% 4% 1% 2% 2% 0% 0% -10% 38%

Nutresa Colombia 6 610 8% 6% 6% 11% 4% 4% 6% 7% 7% 2% 2% 2% 11% 5% 7% 16%

Grupo Bimbo Mexico 14 870 6% 3% 3% 30% 18% 18% 16% 16% 16% 1% 1% 1% 6% 8% 5% 79%

Indo Food Agri Singapore 1 107 7% 7% 7% 14% 12% 12% 7% 8% 8% 1% 1% 1% 12% 4% 7% 22%

EM Food Average 11% 10% 10% 20% 16% 16% 15% 16% 16% 2% 2% 2% 8% 8% 3% 27%

Universe Average 11% 10% 10% 27% 16% 16% 21% 22% 22% 2% 3% 3% 10% 13% 2% 25%

Source: Bloomberg.

14


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COMPARATIVE GRAPHS

Tiger Brands vs SA Food Producers Peers Tiger Brands vs SA Indices Tiger Brands vs JSE ALSI vs JSE Food Index

64

Tiger Brands vs MSCI EM vs S&P Africa Tiger Brands vs SSA Food Producers Peers Tiger Brands vs EM Food Producers

60

100

140

180

3*$ )

Tiger Brands AVIP ioneer Foods Oceana

Rainbow Foods Astral Foods

60

80

100

120

140

74, )

Tiger Brands JALSH IndexTOP40 Index JFPPS IndexINDI25 Index JCCGD Index

60

80

100

120

140

(6

2?(

40

60

80

100

120

140

3*$ 2

Tiger Brands Nestle NigeriaFlour M ills Nigeria Unilever NigeriaUACN Innscor

60

80

100

120

140

3*$ 2

Tiger Brands JBSBrasil Foods M inervaNutresa M Dias BrancoGrupo B imbo

Tiger Brands vs JSE "Africa Plays" Tiger Brands Fwd PER (FY15F) SA Food Producers Fwd PER (FY15F)

60

80

100

120

140

3*$ 2

Tiger Brands ShopriteTongaat Illovo

Tiger Brands Fwd EV/EBITDA (FY15F) SA Food Producers Fwd EV/EBITDA (FY15F) Source: Bloomberg.

Source: Bloomberg.

1 64 2

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15


Tiger Brands has recorded a flattish share performance over the last 12-months as it has

underperformed the main indices on the JSE (JSE ALSI, Top 40, JSE Food Producers and

Consumer Good Indices). Whereas the TOP 40 Index and JSE ASI have gone up by 31%

and 29%, respectively, Tiger Brands share price has increased 1% over the past 12

months.

Compared to SA Food Producers, one can observe that Tiger Brands has underperformed

stocks such Pioneer Foods and Astral Foods that have on average increased by c38%.

However, Tiger Brands has outperformed Rainbow and Oceana that have moved by

0.3% and -5.5%, respectively in the last 12 months. We have also compared Tiger

Brands to stocks such as Shoprite, Tongaat and Illovo that are, in most cases considered

"African Plays on the JSE". Overall, Tiger Brands has outperformed Shoprite and Illovo

while it underperformed when compared to Tongaat (+33%).

When we consider our analysis on Fwd PER and EV/EBITDA it can be observed that Tiger

Brands has historically been trading at a premium to its closest peers such as AVI and

Pioneer. We however observe that since around August 2013, Tiger Brands FY15F PER

has been at a discount to AVI and Pioneers FY15F PER and this has pushed the 12-

month average premium to -0.8% and -2.4%, respectively. We believe that a premium

is justified given that Tiger Brands given its powerful portfolio of brands and its superior

growth prospects in Africa. This, in our view could points to the potential of re-rating.

Looking at comparisons with SSA Food Producers, Tiger Brands has outperformed names

such as Zambeef, Innscor, Unilever Nigeria and Flour Mills of Nigeria but underperformed

when compared to Nestle Nigeria (+11%) and Fan Milk Ghana (+13%). On the other

hand, Tiger Brands has been a clear underperformer when compared to its Emerging

Market peers such as Minerva (28%), JBS (+24%), Brasil Foods (+16%), Grupo

Nutresa (+16%) and M Dias Branco (+16%). As a result, Tiger Brands has

underperformed the MSCI Emerging Market and the S&P Africa Frontier Indices.

Overall, we attribute the underperformance to (i) negative sentiments on the growth

prospects of the South African economy and (ii) the company's lacklustre financial

performance that has largely been a result of the losses at Dangote Flour Mills and

competitive pressures on the domestic market. In conclusion, we note that consensus

is generally neutral on Tiger Brands.

Valuation and Recommendation. Comparing Tiger Brands with other SA Food Producers

indicates that the FY15F PER and EV/EBITDA multiples are at a 11% and 18%

premium to an average 11.7x PER and FY15F EV/EBITDA of 7.6x, respectively. However,

Tiger's multiples are at discount to EM peer averages. Overall, we believe that the

premium on SA Food Producers is justifiable given that the Tiger Brands business

model is more aligned to MNCs as a result of the strong focus on regional expansion.

Key triggers for positive earnings surprises in the medium to long term include: (i) a

turnaround at DFM, (ii) margin recovery within the Groceries division; and (iii) robust

growth in Africa (exports and international businesses). Key risks include political/

execution constraints in the rest of Africa and intensifying competition in the domestic

market. Overall, our SOTP valuation points to a YE14 Price Target of R360/share, 17%

upside on the current price. BUY.

Brokers Recommendations

Source: Bloomberg.

16


COMPANY DESCRIPTION

Tiger Brands is the largest branded FMCG Company in South Africa. The core of the business

is FMCG categories that span food, home and personal care as well as baby products. Tiger

Brands has footprint further in Africa in regions such as Kenya, Ethiopia, Cameroon and

Nigeria. In addition, the company holds a minority share in Empresas Carozzi (24.4%), an

FMCG Company based in Chile, Oceana (41.9%) a JSE -listed fishing company, National

Foods in Zimbabwe (37.4%) and UAC Foods in Nigeria (49%). The main business units

comprise of the Grains, Consumer Brands and Exports & International divisions.

BRIEF HISTORY OF OPERATIONS

Tiger Brands started off as Tiger Oats and its first product was a breakfast oatmeal brand

called Jungle Oats. Tiger Oat's first mill was opened in Western Cape. In 1982, Barlow

bought a considerable share of Tiger Oats. In 1988, SPAR South Africa became a

wholly owned subsidiary of Tiger Oats (SPAR was however unbundled and listed as a

separate company in 2004). During the late 1990,s Tiger Oats went through a period

of rapid expansion, buying out other large companies and competitors such as the

Imperial Cold Storage and Supply Company in 1998 and Adcock Ingram in 1999.

After these buyouts, Tiger Oats was renamed Tiger Brands. In July 2008, Adcock

Ingram was unbundled from Tiger Brands. In 2009, Tiger Brands acquired Crosse &

Blackwell's mayonnaise business. The group has also been expanding its operations

in the rest of Africa through acquisitions in the rest of Africa.

Organisational Structure

FY13 Revenue Contribution by

Business Segment

Source: BPI Capital Africa/Company


17


AFRICAN EXPOSURE

SSA (ex-SA) not only provides an avenue for geographical diversification but also attractive

growth prospects for food businesses. The pie charts below illustrate the exposure to

Africa (Nigeria and Exports & International Operations);

FY13 Divisional Revenue Contribution FY17F Divisional Revenue Contribution

Source: BPI Capital Africa/ Company. Source: BPI Capital Africa.

FY13 Divisional EBIT Contribution FY17F Divisional EBIT Contribution

Source: BPI Capital Africa/ Company. Source: BPI Capital Africa

Tiger Brands has been executing a selective regional diversification strategy through

direct acquisitions and exports. That said, the case for investing in SSA (ex-SA) is clear

as it is supported by strong macro and demographic fundamentals.

Firstly, GDP growth rates in SSA (ex-SA) remain attractive despite short term risk factors.

GDP in SSA (ex-SA) is estimated to expand 5.8% in 2014 and 5.9% in 2015 (IMF).

Improved income levels are expected to set the tone for an increase in the demand for

consumer goods in Africa.

18


2014 GDP Growth Rates in SSA GDP per capita (USD/pp) in African States

19


Urbanisation Rates in Africa

Source: Euromonitor

Urban population leves in Africa (%)

20


INTERNATIONAL OPERATIONS

Tiger Brand's international operations include (i) Nigeria and; (ii) East and Central Africa

operations.

1. Nigeria (10% of FY13 revenues)

Within Sub Saharan Africa, and more broadly within the African frontier market space,

Nigeria has become the proverbial "800 pound gorilla in the room". With a population

size of 170m and a population growth rate of 2.7%, one in every six Africans is a

Nigerian. More recently, the country has overtaken South Africa as Africa's largest

economy after a rebasing calculation almost doubled its GDP to USD510bn. Tiger

Brands has pursued a direct acquisition strategy in Nigeria having acquired a 63.35%

stake in Dangote Flour Mills, 100% of Deli Foods and 49% of UAC Foods. While

revenue contribution is 10%, the contribution to EBIT is currently negative (-10%) on

the back of underperformance of Dangote Flour Mills.

Nigeria Revenue & EBIT Margin Progression

Source: BPI Capital Africa/ Company.

Nigeria GDP Growth Forecasts

'

*$:#0; (2#

21


Tiger Brands Operations in Nigeria

Source: Company Reports.

As part of our investment thesis, we review the key Nigerian businesses that are fully

consolidated: Deli Foods and Dangote Flour Mills. We also discuss the turnaround strategy

at Dangote Flour Mills.

Deli Foods (100% held by Tiger Brands)

Deli Foods is a biscuit manufacturing business based in Lagos. The business was

incorporated in 1998 and acquired by Tiger Brands in April 2011. It produces a

variety of biscuits including cream sandwich, sweet and semi-sweet biscuits. Key

brands include Deli and Igloo. According to management, Deli Foods is the #4 player

in the biscuit market and has a market share of 9%.

22


Deli Foods Revenue and EBIT Margin Forecasts Contribution to Nigeria

Revenues in FY13

Source: BPI Capital Africa/Company

' "

*$:#0; (2#

Source: BPI Capital/Company.

The biscuit industry is projected to grow in double digits rates. According Euromonitor,

the biscuits market in Nigeria grew by c18% in 2012 driven by chocolate-coated

biscuits. The NGN90-NGN100bn biscuits market is dominated by local players - a

consequence of an import ban on foreign biscuits from 2003 to 2012. Tale Foods

leads the market with a 30% value share. Other players include Niger Biscuit Company,

Beloxxi and United Biscuits. In FY13, Deli Foods delivered strong volume growth but

this was not reflected on the bottom line as the EBIT margin was negatively impacted

by insecurity in Northern Nigeria and aggressive competitor pricing in value segments.

Margin recovery. In order to drive margin expansion, Tiger Brands has initiated

engineering efforts in the form of periodic maintenance interventions. We are projecting

a recovery in EBIT margins from 1.0% in FY13 to 2.9% in FY17F. Also, revenue should

register a FY13-17 CAGR of 12% on the back of (i) capacity additions, (ii) an enhanced

product portfolio and; (iii) increased product penetration in geographies within Nigeria.

In our view, the key downside risk is low pricing power given stiff competition in the

industry.

Dangote Flour Mills (63.35% held by Tiger Brands)

Dangote Flour Mills Plc (DFM) commenced operations in 1999 as a part of the Dangote

group, which was founded by Aliko Dangote listed on the NSE in 2008. The company's

three main divisions are Flour, Pasta and Noodles. According to management, DFM is

the second largest player in the milling industry based on contribution to the total

installed daily capacity. More recently, DFM disposed of one of its subsidiaries; Dangote

Agrosacks Limited which was involved in the manufacture of packaging materials.

Tiger Brands acquired a 63.35% shareholding in DFM in October 2012 for a total

purchase price of R1.5bn.

23


DFM Revenue and EBIT Margin Forecasts DFM Divisional Contribution to

FY14F Revenue

Source: BPI Capital Africa/Company.Source: BPI Capital Africa/Company.

DFM has however been facing significant constraints and has been registering EBIT losses.

The following are some of the key constraints;

- Excess capacity in the flour milling industry. Management estimates that there has

been an oversupply of flour market in Nigeria with current supply levels estimated

at c2.5x demand. Key players such as Flour Mills of Nigeria and Honeywell have

been increasing capacity. Capacity utilisation levels at Dangote are very low at 30%

vs average of 40%-50% for te industry. The net effect has been a squeeze on

margins, particularly in the flour business;

- Inflationary pressures. An inflationary environment (8% yoy in May 2014), has had

a negative impact on cost management in an environment characterised by

oversupply conditions. The Nigerian consumer is highly price sensitive and this

makes it difficult to pass on price increases;

- Stiff competition. DFM competes with both local and multinational groups in Nigeria

such as Flour Mills of Nigeria, Honeywell Mills and Nestl. Further, the threat of

new entrants in the food business remains high;

' "

*$:#0; (2#

Competing Brands (Honeywell in Shoprite store) Competing Brands (Golden Penny)

- Flour Mills of Nigeria-Informal Market in Lagos


24


- Security issues in Northern Nigeria. More recently, Nigeria has been burdened by

ethno-linguistic tensions and terrorist attacks which have negatively impacted the

volume of trade particularly in the northern parts of the country;

- Loose credit control. Prior to the Tiger Brands acquisition, the credit extension

policy was weak and this led to an increase in debtors. Traditionally the sales mix

has 75% credit and 25% in cash sales. As a result, management introduced

stricter measures by pulling back on credit thus negatively impacting on volumes.

The group has largely maintained a more cautious approach to the credit environment;

- Quality issues. DFM has been losing some market share to competitors as a result of

quality concerns particularly on pasta. The group has since taken some steps to

rectify the quality standards for pasta; and

- Debt overhang. As of 1H14, DFM had total interest bearing debt of R1.7bn (gearing of

51%). The debt is has also been attracting significant finance costs (average cost

at 15%-16% pa). As a result, Tiger Brands is looking to re-finance the debt.

Paying hefty school fees for the missteps in Nigeria

In the light of the above-mentioned constraints, 1H14 results indicate that DFM continued

to be a drag on total group earnings. DFM posted an operating loss of R389m, which

was also exacerbated by bad debts provisions and once-off job cuts on the back of

restructuring efforts. In 1H14, Tiger Brands impaired DFM's goodwill and intangibles

in full and took a R849m (USD82m) write down on the business. The write down

represents c45% of the USD182m that the company paid for the asset.

"We have learnt some important lessons. We are lucky in having a very strong partner

in Mr (Aliko) Dangote. He's been supportive - and hopefully we will get it right. In

future, Tiger Brands would "make sure that whatever we look to acquire meets our

standards" and that "we don't end up paying for stuff we have to then impair", we quote

the CEO; Mr Matlare, during an investor presentation. Clearly, Tiger Brands

underestimated the complexities managing a business of Dangote's size in Nigeria

and may also have acquired obsolete/old assets in the process (low capacity utilization

levels of c30% in flour milling).

DFM Historical Financial Performance

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*$:3&3; (2#

*Note: Prior to 2013 the DFM business model included Dangote Agrosacks Limited


25


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Turnaround Strategies being implemented

Despite the write down on the DFM investment, management remains committed to growing

its business in Nigeria. In fact, management has embarked on a "fix, optimize and grow"

strategy and is targeting a return to profitability around FY16F. Tiger Brands has

appointed a new CEO (ex Unilever Nigeria executive) for DFM, effective July 1st, 2014.

The new management team is implementing a number of turnaround strategies that

entail;

- Restructuring and the mothballing some mills in Nigeria;

- Optimising supply chain processes and investing in the sales force so as to enhance

distribution and penetration of DFM products (advertisement and promotional efforts

have been stepped up);

- Product innovations through new product formats so as to differentiate its offerings

in terms of packaging; and

- Debt Expulsion. DFM has recently concluded the disposal of Agrosacks to Dangote

Industries Limited for R470m. The funds from the disposal will go towards reducing

the debt burden.

Overall, Tiger Brands has a strategic goal to drive value addition initiatives so as to

increase revenue stream. The group's strategy is to leverage off its grains business and

develop new product lines such as instant porridges (wheat based FMCG products).

High-margin products are expected to drive earnings growth in the outlook period.

Currently, DFM mainly deals with basket products while its key competitors such as

Flour Mills of Nigeria and Honeywell Flour Mills are diversifying into higher margin

products. DFM has been underperforming relative to its Nigerian peers with a FY13

EBIT margin of -17% vs a market average of 15%. Consequently, ROE has been

negative at -16% in FY13.

EBIT Margin Comparisons between ROE Comparisons between DFM

DFM and Nigerian Consumer Companies and Nigerian Consumer Companies

Source: Bloomberg. Source: Bloomberg.

An analysis of 1H14 results reveals early signs of a turnaround. While 1H14 revenue was

down 2.8% yoy to NGN18.6bn (R1.2bn), quarterly sales for 2Q14 were up 8% yoy.

Sales volumes in 2Q14 were driven by a 33% increase in volumes within the flour

milling business which benefited from price reductions effected in December 2013.

26


1H14 and 2Q14 Financial Performance

F F F F

#$:3&30; &2# (0#


Margins also indicating some improvements. Gross profit increased 79% yoy to NGN

296m (R19.2m) in 2Q14 as the GP margin expanded by 115bps to 2.9%. Opex

declined 64% yoy in 2Q14, reflecting effects of a staff rationalisation exercise

undertaken in FY13. This was part of Tiger Brands' initiative aimed at cost reduction. As

a result, DFM registered a recurring EBIT margin of -3.3% in 2Q14 vs. -16.3% in 2Q13.

Based on the various management strategies being implemented, we view DFM as a

recovery play. Further, we are optimistic on the long terms prospects Nigeria. We estimate

FY13-17F revenue CAGR of 16%. DFM's key strengths are (i) established brands on the

local market, (ii) a wide distribution network and; (iii) a strong local partner (Dangote

Group). An upside in volumes to come through in the long-term from the integration of

SA Grains Business and DFM. We are forecasting a recovery in EBIT margins from -

20% in FY13 to 5.1% in FY17F. In our view, the major downside risk in the outlook

period relates to intensifying competitive threats from existing players and new entrants.

2. East & Central Africa (5% of FY13 Revenues)

In East Africa, Tiger Brands operates East African Tiger Brands Industries in Ethiopia

and Haco Tiger Brands in Kenya. In Cameroon, the group has a 74.7% stake in

Chocolaterie Confiserie Camerounaise.

East & Central Africa Revenue & EBIT Margin Progression

'

*$:#0; (2#

Contribution of Regional Businesses

to EAC Africa Revenues

Source: BPI Capital Africa/Company. Source: BPI Capital Africa/Company

27


Ethiopia: East African Tiger Brands Industries (EATBI) (51% held by Tiger

Brands)

Ethiopia has a population of approximately 95.0m and is experiencing high GDP growth

rates (c7.0%) and therefore presents an attractive investment proposition for consumer

companies. Tiger Brands signed an agreement with East African Group plc to create a

new food, household, personal care and cosmetics joint venture in 2011. The principal

activities of EATBI include the manufacture and marketing of various HPC products,

biscuits, flour and pasta. Some of the key brands include Peacock, Crown, Solar,

Micky, Miracle and Florida.

EATBI Revenue & EBIT Margin Progression Ethiopia GDP Growth Forecasts

28


"

'

*$:#0;

(2#

29


Chococam has registered a FY09-13 revenue and EBIT CAGR of 7.4% and 25.5%,

respectively and EBIT margins have expanded from 7.8% in FY09 to 14.4% in FY13.

We believe margins have been helped by better pricing in export markets and capacity

upgrades. Export volumes, particularly to Chad, have remained strong while the focus

on the local market has been to increase market penetration.

In the outlook period, we expect Chococam to post revenue and EBIT FY13-17F CAGR of

13.2% and 20.0%, respectively. The business is currently diversifying product offerings

in Cameroon to include beauty product lines (such as Miadi) as well as rice and pasta

distribution under the Tastic brand.

ANALYSIS OF GROUP STRATEGY IN EAST AND CENTRAL AFRICA

Haco Tiger Brands is considered the strategic manufacturing hub for the East Africa

Community. EAC economies are growing at an average rate of 5% and the pace is

expected to be sustained as Kenya, Uganda and Tanzania prepare to start production

of oil and gas. The strategy is therefore to increase export volumes out of Kenya into

markets such as South Sudan and Eastern DRC.

Gradual shift of portfolios into pure food product offerings. While HACO Tiger Brands has

been focused on stationery and HPC products, there is a drive to diversify the product

portfolio to include food. There has also been a progressive diversification of

Chococam's product offerings to include consumer staples. Management has cited

that there is massive potential to produce pasta in East and Central Africa.

Growth through acquisitions. In January 2014, Tiger Brands announced that it had

signed an acquisition agreement in Rafiki Mills, in a prospective transaction valued at

USD25m. Rafiki is a flour milling company that owns Magic Oven Bakeries and is the

fourth-largest miller in Kenya. While this agreement was later on terminated, it

demonstrated, in our view, the group's continued drive of increasing exposure in the

region through acquisitions. The business continues to look for new acquisition

opportunities in the region.

ZAR/USD Exchange Rate ZAR Vs African Currencies

<

"

30


All in all, we expect international operation ex Nigeria to be a key growth vector for Tiger

Brands. We forecast revenues and EBIT to grow at a FY13-17F CAGR of 20.2% and 26.4%,

respectively. We estimate margins to trend upwards from 13.4% in FY13 to 16.4% in

FY17F. More recently, given the depreciation of the ZAR, Tiger Brands has benefited from

international operations through foreign exchange gains. However, we cite that there are

also downside risks given the volatility of currencies such as the KES, CFA and ETB.

3. Exports

Tiger Brand's export operations include (i) Exports (including Davita) and; (ii) the Deciduous

Fruit business.

Exports incl. Davita (6% of FY13 revenues)

Tiger Brands operates a dedicated division that exports the group's branded products into

the rest of Africa. The export sales capability was enhanced in 2011 when the Group

acquired Davita Trading, an export distribution company, based in South Africa which

has a presence in 31 African countries, including Angola, Botswana, Malawi,

Mozambique, Swaziland, Namibia and Zambia. This has enabled Tiger Brands to

develop a strong platform to drive the growth in exports given that it has extended the

group's presence on the continent. Davita sells its products under three brands, namely

Davita (premium powdered beverages), Jolly Jus (mass market powdered beverage

offerings) and Benny (powdered seasonings).

Tiger Brands Export Markets in Africa


31


There has been sustained growth in export sales to most Southern African countries,

particularly in key categories such as Rice, Pasta, Snacks & Treats and Personal Care.

FY13 revenues were up 20% yoy to R1.5bn as there were strong performances in

Benny and Davita while markets such as Mozambique exhibited robust growth. There

was however a slight EBIT margin compression from 24.8% in FY12 to 24.1% in FY13

due to domestic cost-push in most of the markets.

Exports Revenue & EBIT Margin Progression GDP Growth forecasts in export regions

'

*$:#0; (2#

32


Deciduous Fruit Revenue & Deciduous Fruit: Analysis of

EBIT Margin Progression Revenue Growth

'

*$:#0;

(2#

'


The Deciduous Fruit Division has registered an average top-line growth of 17% in the past

two years while EBIT margins have been around 3.0%. Given that the business is export-

oriented, it has been benefiting from a weak ZAR. Demand has also been boosted by

poor crops (deciduous fruit) in key producing countries. In the outlook period, we

expect revenues to grow at FY13-17F CAGR of 14% and forecast EBIT margins to

increase from 3.2% in FY13 to 3.6% in FY17F.

4. Strategic Stakes/JVs in Companies with exposure in SSA

As part of its Africa strategy, Tiger Brand's has accelerated its expansion on the continent

through the acquisition of strategic stakes in various businesses. These companies

either offer direct or indirect exposure to high growth markets in Sub Saharan Africa.

This has had a positive impact on the growth of equity accounted earnings, which have

registered a FY09-13 CAGR of 26.1%.

Evolution of Income from Associates Breakdown of Income from

Associates in FY14F

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74&*1 (01%*AA )*0,0

5%** 3,****


33


Companies offering direct exposure to SSA markets

UAC Foods (49% held by Tiger Brands)

UAC Foods is a JV business with UAC of Nigeria (UACN) wherein Tiger Brands holds a 49%

stake. UACN is a Nigerian conglomerate with a significant exposure to food, beverages

and real estate development. Tiger Brands acquired the business in May 2011. UAC

Foods is involved in the manufacture of food and beverage products and its key product

categories are Snacks (Gala Sausage Roll, Funtime Cake, Funtime Coconut Chips,

Gala Crunchies, Snaps Cheeseballs), dairies (Supreme Ice Cream, Supreme Flavoured

Milk) and beverages (Delite Fruit Juice, Swan Water and Swan Soft Drinks). The

business has two manufacturing facilities in Lagos and one in Plateau State.

UAC Foods Revenue & PBT UAC Foods Contribution to Margin

Progression Associate Income (Rm)

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The strategic partnership has been instrumental in strengthening the business model.

While UACN provides local expertise, Tiger Brands is involved in upgrading

manufacturing assets and R&D. UAC Foods has posted revenue FY09-13 CAGR of

12% and average EBIT margins of c17%. In FY13, the business registered a 3%

increase in revenues and a 21% increase in EBIT (EBIT margin increased from 12%

in FY12 to 14% in FY13).

Competitive threats in the food sector remain elevated. The business serves the lower

end of the market where most prices are sticky (e.g. gala). Margins also remain under

pressure on the back of competition from small food players and large food producers

such as Nestle Nigeria. In dairies and soft drinks categories, the major advantage for

key competitors such as the Coke and Pepsi bottlers or Nestle Nigeria is the well

established distribution network which serves a wider market. In terms of the bottled

water business, key competitors include Coke and Nestle Nigeria.

34


Sausage Rolls Market Share Ice Cream Market Share

Source: Euromonitor. Source: Euromonitor.

Informal sale of Gala at Bus Terminus Gala (Sausage Roll brand)

in Lagos (Nigeria)

UAC Foods dominates in the sausage roll market

with its strong brands such as gala. It is expected

that increased MGR (Mass Grocery Retail) in Nigeria

will offer new opportunities for foods segment.


In the outlook period, we expect revenue growth to be driven by new product developments

such as the launch of Gala Tinkies and capacity increases in the snacks business. EBIT

margins should improve on (i) higher margin products such as the mini gala (priced

at NGN50), (ii) the optimisation of internal synergies in the area of procurement and

distribution and; (iii) the extraction of efficiencies in the factories. Overall, we are

forecasting a revenue FY13-17F CAGR of 16% and expect the EBIT margins to increase

from 14% in FY13 to 20% in FY17F. Consequently, we expect equity accounted earnings

from UAC Foods to register a FY13-17F CAGR of 33%.

National Foods Holdings (37.4% held by Tiger Brands)

National Foods is a diversified conglomerate involved in the manufacturing of food products

in Zimbabwe with a distribution network of about 30 depots. The main business lines

are flour, maize meal, stock feeds and FMCG. Innscor Africa has a 37.5% stake in

National Foods. The two are the key strategic shareholders in the business.

35


In the same way as UAC Foods in Nigeria, National Foods has benefited from its strategic

investors. National Foods has a technical partnership agreement with Tiger Brands,

which has been in place for the past 4 years. It includes technical support on issues

such as the rehabilitation of PPE and marketing strategies. Further, approximately

10% of goods sold by the FMCG division are imported from Tiger Brands. On the other

hand, Innscor Africa has been providing market access and financial support to National

Foods.

National Foods Revenue & EBIT National Foods Contribution to

Margin Progression Associate Income (Rm)

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Since the adoption of the multicurrency regime in Zimbabwe, National Foods has been

registering solid growth, posting a revenue and EBITDA FY09-13F CAGR of 40% and

22%, respectively. In 1H14, the business registered a 9.8% growth in revenue to

USD166m as total volumes increased 7% yoy to 257kt. However, EBIT margins came

under pressure, declining from 7.0% in 1H13 to 6.0% in 1H14. While the group has

been making efforts to defend its margins through improved raw material procurement

strategies, we cite some key risks in the form of;

- Competition from local players. Local competitors include the likes of Probrands

(FMCG) and Blue Ribbon Industries.

- Competition from SA imports. The weakening ZAR has driven the influx of cheap

South African products into the market. This has put pressure on National Foods to

counteract by adjusting its prices; and

- Raw material supply constraints. National Foods imports c80% of its maize

requirements from the SADC region and 90% of wheat from countries such as

Russia, Australia and Ukraine. The group's pricing strategy is largely market related

implying that prices are adjusted whenever commodity prices increase.

Overall, we believe the key risk in the outlook period is the slowing consumer demand in

Zimbabwe on the back weak macro fundamentals in the country. We estimate National

Foods revenues and EBITDA to grow at a FY13-17F CAGR of 4.3% and 6.8%,

respectively. While the business will face some margin pressure, we expect margin

36


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recovery to be driven by improved capacity utilisation levels. We expect the EBITDA

margin to decline from 6.9% in FY13 to 5.5% in FY14F and then recover to 8.2% in

FY17F. Consequently, we expect equity accounted earnings from National Foods to register

a FY13-17F CAGR of 21%.

COMPANIES OFFERING INDIRECT EXPOSURE TO SSA

Oceana (41.9% held by Tiger Brands)

Oceana is the largest fishing company in South Africa and is currently listed on the JSE.

While South Africa & Namibia constitute c69% of revenues and the rest of Africa

contributes c20% to revenues, we believe there is scope for Oceana to grow it revenues

in Africa. The Oceana investment therefore offers Tiger Brands exposure to some high

growth markets in Sub Saharan Africa indirectly. The demand for fish in Africa is likely

to be sustained by strong macro-economic fundamentals in SSA (GDP growth of c5.5%)

and relatively low per capita fish consumption of 7kgs vs. a world average of 18kgs.

Oceana Contribution to Associate Income (Rm) Oceana: FY13 Geographical

Revenue Breakdown


Africa strategy in place. Oceana's plan to tap into the various SSA markets includes

increasing the penetration of pilchards (Lucky Star) in Africa and driving export sales

of frozen horse mackerel. In West Africa, Oceana runs Oceana International a JV with

Falcon Foods, which specialises in the procurement and sale of frozen horse mackerel

in Angola and Cameroon.

All in all, we are bullish on the long term prospects of Oceana and expect the group to

show some healthy numbers in the outlook period. The domestic market is likely to

continue facing some headwinds in the form of slow demand but we believe growth

will be driven by: (i) increased export revenues on the back of a favourable exchange

rate and (ii) improved industrial fish landings. We are forecasting a revenue and EBIT

FY13-17F CAGR of 8% and 13%, respectively. Consequently, equity accounted earnings

from Oceana should to register a FY13-17F CAGR of 12%.

In conclusion, Africa offers a significant growth opportunity for Tiger Brands in the long

term. While there is inherent execution risk in Africa, we note that Tiger brands has not

37


been going it alone in its African expansion but engaging local partners in its businesses

in the various countries. For example, in East Africa the local groups are Haco Industries

and the East African Group of Companies. Other key strategic partnerships include (i)

the partnership with UACN in Nigeria, (ii) Dangote Group in DFM and; (iii) Innscor

Africa in the National Foods investment. This approach ensures that Tiger Brands

benefits from local knowledge in the various markets that it operates, thus providing a

platform to develop local brands that are relevant to the respective markets and establish

regional hubs that are also focused on driving export sales to neighbouring countries.

Overall, we estimate that Africa will contribute 31% to revenues and 26% to EBIT by

FY17F.

FY17F Divisional Revenue Contribution FY17F Divisional EBIT Contribution


38


SOUTH AFRICAN EXPOSURE

Tiger Brands' domestic businesses remain a key pillar of the business constituting c75%

of group revenues. However, we believe the domestic market has reached some level of

maturity. We also note that growth rates in the businesses have been lower than the

exports and international divisions (Historic FY09-13 revenue and EBIT CAGR of

3.5% and 0.4%, respectively).

Domestic Operations Revenue & EBIT Margin Progression Evolution of Divisional EBIT Margins

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M illing & Baking Other GrainsGroceries Snacks & TreatsBeverages VAM PSOut o f Home Personal CareBaby Care Home CareExports International OperationsDecidous Fruit Nigeria


SA CPI and PPI (yoy) Forecast GDP Growth in South Africa

Source: Bloomberg. Source: WEO.

39


GRAINS DIVISION (37% OF FY13 REVENUES)

The grains business is involved in the manufacture of grain-based FMCG products

such as rice, mealie meal and flour. Key brands include Ace, Albany, Aunt Caroline,

Golden Cloud, Jungle, King Korn, Morvite and Tastic. The grains business has two

sub-divisions: Milling & Baking and Other Grains.

Tiger Brands' Key Brands in the Grains Business

Competing Brands in the Grains Business (Premier Foods and Pioneer Foods brands)

Milling & Baking (27% of FY13 revenues)

Milling & Baking Revenue & EBIT Margin Progression Milling & Baking: Evolution of Contribution to Group

Revenue & EBIT

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Source: BPI Capital Africa/Company. Source: Bloomberg/Company.

40


The Milling & Baking division is the mainstay of the business given its 27% contribution to

revenues. The division has registered revenue and EBIT FY09-13 CAGR of 3.7% and

4.9%, respectively. However, the business is exposed to commodity price volatility

(maize and wheat) implying that procurement and hedging are key strategic elements

in the business. In FY13, EBIT margins declined from 22% to 19.3% on the back of

cost push pressures (CPI of 6%) and competition from players such as Premier Foods

(Blue Ribbon bread, Snowflake flour and Iwisa maize meal).

Defending EBIT margins. Notwithstanding cost push factors, the division has been

defending its market shares. In 1H14, revenue increased 11.5% yoy to R3.8bn but

margins were slightly down from 18.0% in 1H13 to 17.8%. Revenue growth was

helped by strong volume performances in key categories. The slight margin decline

was a result of (i) cost push pressures, (ii) volatility in most soft commodities which was

exacerbated by a depreciating ZAR and; (iii) intense pricing competition.

Global Wheat Prices (USD/MT) Global Maize Prices (USD/MT)

Wheat price reflects significant Maize price volatility and record prices

upward cost pressure. experienced in H1 due to local maize

Source: Bloomberg. shortage. The maize business saw volumes

decrease ahead of the market decline and

margins were squeezed in a very

competitive environment.

Source: Bloomberg

Overall, we expect a strong recovery in the Milling & Baking division in 2H14F. Management

has indicated that the business has seen a recovery in consumer demand while volume

declines in some categories had been arrested. We are forecasting revenues to grow at

FY13-17F CAGR of 8.1%. We expect EBIT margins to increase from 19.3% in FY13 to

19.5% in FY17F. However, the main downside risk to our forecasts is the continued

down trading to regional and dealer owned brands (DOBs) as consumers search for

value products.

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41


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MilIing & Baking- Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 6 267 5 849 6 192 6 682 7 243 7 993 8 703 9 345 9 902

yoy -7% 6% 8% 8% 10% 9% 7% 6%

EBIT 1 158 1 364 1 382 1 473 1 400 1 543 1 688 1 822 1 933

yoy 18% 1% 7% -5% 10% 9% 8% 6%

EBIT Margin 18.5% 23.3% 22.3% 22.0% 19.3% 19.3% 19.4% 19.5% 19.5%


OTHER GRAINS (10% OF FY13 REVENUES)

Other Grains Revenue & EBIT Other Grains: Evolution of Contribution

Margin Progression to Group Revenue & EBIT

Source: BPI Capital Africa/Company. Source: Company

The Other Grains business manufactures products such as rice and sorghum. The division

has registered revenue and EBIT FY09-13 CAGR of 2.7% and 3.1%, respectively. The

rice business is largely affected by the price differential of Thai and Indian rice. Rice

farmers in Thailand are supported by the Thai Government, which has an impact of

increasing the competitiveness of Thai rice relative to Indian rice. In 4Q13, the

government lowered its levels of support to rice farmers although much of this benefit

has been eroded by the depreciation of the ZAR.

Thailand White Rice (USD/MT) Sorghum Prices (USD/MT)

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42


In 1H14, revenues increased 2% to R1.5bn while the EBIT margin increased from 9.1%

in 1H13 to 9.7%. The sorghum beverages business registered satisfactory profitability

despite the increase in raw sorghum costs. The rice business benefited as pricing was

adjusted to reflect a more realistic premium to other rice origin offerings. In the outlook

period, we expect revenues to grow at FY13-17F CAGR of 6%. We are forecasting EBIT

margins to increase from 10.3% in FY13 to 12.2% in FY17F. The decline in the

premium commanded by Thai rice relative to Indian rice should allow for a modest

expansion in margins going forward.

Other Grains-Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 2 526 2 236 2 157 2 172 2 809 3 010 3 212 3 407 3 550

yoy -11% -4% 1% 29% 7% 7% 6% 4%

EBIT 256 314 364 259 290 340 385 412 431

yoy 22% 16% -29% 12% 17% 13% 7% 5%

EBIT Margin 10.2% 14.0% 16.9% 11.9% 10.3% 11.3% 12.0% 12.1% 12.2%


All in all, the grains division has registered revenue and EBIT FY09-13 CAGR of 3.4% and

4.6%, respectively. We expect the segment to register a revenue and EBIT FY13-17F

CAGR of 7.6% and 8.8%, respectively.

CONSUMER BRANDS (38% OF FY13 REVENUE)

The consumer brands division is a core segment of the Tiger Brands business model and

is involved in the manufacture of key consumer brands. The sub-divisions include Groceries,

Snacks & Treats, Beverages, Value added Meat Products, Out of home and HPCB.

Groceries (12% of FY13 revenues)

The Groceries division focuses on food products such a tomato sauce, mayonnaise,

peanut butter, canned fruit and baked beans. The key brands are All Gold, Black Cat,

Colmans, Crosse & Blackwell, Fatti's & Moni's and KOO (voted #1 in the Sunday Times

Top Brands Survey 2011).

Tiger Brands' Key Brands in the Groceries Business

43


Competing Brands in the Groceries Business (Pioneer, Nestle, Unilever)

Groceries Revenue & EBIT Groceries: Evolution of

Margin Progression Contribution to Group Revenue & EBIT

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The Groceries Division has registered revenue and EBIT FY09-13 CAGR of 5.1% and -

11.1%, respectively. In FY13, revenues were down 14% yoy to R3.2bn and the EBIT

margin declined from 14.3% in FY12 to a 5-year low of 9.1%. The decline was a result

of intense pricing competition, high input costs and volume pressures.

Strategy focused on recovering volume and market share. In 1H14, revenues recovered

significantly, increasing 18% yoy to R2.0bn. However, the EBIT margin almost halved

from 13% in 1H13 to 7.4%. According to management, this was a deliberate strategy

to recover volume and market share. While other competitors increased prices in

1H14, Tiger Brands withheld price increases in order to recover market share.

Consequently, the business registered volume growth of 17% and value growth of 18%.

The growth momentum should continue in the outlook period and we are forecasting

FY13-17F revenue CAGR of 15.7%. Further, management have stated that the business

will increase prices in 2H14F in order to recover margins. We expect a gradual recovery

of EBIT margins from 9.1% in FY13 to 13.1% in FY17F.

44


Groceries-Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 2 652 3 167 3 423 3 772 3 239 4 014 4 705 5 297 5 810

yoy 19% 8% 10% -14% 24% 17% 13% 10%

EBIT 472 446 524 539 295 321 494 636 761

yoy -5% 17% 3% -45% 9% 54% 29% 20%

EBIT Margin 17.8% 14.1% 15.3% 14.3% 9.1% 8.0% 10.5% 12.0% 13.1%

Source: BPI Capital Africa

SNACKS & TREATS (7% OF FY13 REVENUES)

The Snack and Treats business is mainly involved in treats such as sweets and

chocolates. Key brands include Anytime, Beacon, Black Cat, Inside Story, Jelly Tots,

Maynards, Smoothies, Wilsons and Wonderbar.

Tiger Brands' Key Brands in the Snacks & Treats Business

Competing Brands in the Snacks & Treats Business (AVI, Mondelez, Nestle)

45


Snacks & Treats Revenue & EBIT Snacks & Treats: Evolution of

Margin Progression Contribution to Group Revenue & EBIT

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The Snacks & Treats Division has registered revenue and EBIT FY09-13 CAGR of 2.4%

and 1.9%, respectively. EBIT margins have historically been on a positive trajectory,

rising from 11.3% in FY11 to 15.9% in FY13. In 1H14, the division registered a solid

performance as revenues increased 7% yoy to R1.0bn and the EBIT margin increased

from 16.6% in 1H13 to 17.1%. The business benefited from: (i) an excellent Easter

performance, (ii) favourable sales mix and (iii) strong operational leverage resulting

from cost efficiencies. In the outlook period, we expect Snacks & Treats revenues to grow

at FY13-17F CAGR of 7.9%. EBIT margins should increase from 15.9% in FY13 to

17.8% in FY17F as the division benefits from the continued focus on cost reduction

and product innovations.

Snacks & Treats- Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 1 747 1 726 1 734 1 762 1 924 2 086 2 257 2 436 2 609

yoy -1% 0% 2% 9% 8% 8% 8% 7%

EBIT 282 235 195 267 305 355 397 431 464

yoy -17% -17% 37% 14% 16% 12% 9% 8%

EBIT Margin 16.2% 13.6% 11.3% 15.1% 15.9% 17.0% 17.6% 17.7% 17.8%


46


BEVERAGES (4% OF FY13 REVENUE)

The Beverages division business is mainly involved in the manufacture and sale of

cold beverages such as fruit juice drinks and energy drinks. Key brands include

Energade, Hall's, Oros and Rose's.

Tiger Brands' Key Brands in the Beverages Business

Competing Brands in the Beverages Business (AVI, Pioneer (Ceres), Clover and Nestle)

Beverages Revenue & EBIT Beverages: Evolution of Contribution to

Margin Progression Group Revenue & EBIT

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48


The VAMPS Division has registered revenue and EBIT FY09-13 CAGR of 5.3% and 1.4%,

respectively. In 1H14, revenues were up 4.6% to R943m while the EBIT margin

declined from 7.1% in 1H13 to 6.6%. Margins were negatively impacted by maize

prices (feed) and a weak exchange rate. In the outlook period, the business is set to

benefit from an enhanced distribution network. We are forecasting FY13-17F revenue

CAGR of 6.3% and an increase in EBIT margins from 6.9% in FY13 to 7.7% in FY17F.

VAMPS- Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 1 413 1 385 1 419 1 450 1 736 1 850 1 968 2 089 2 214

yoy -2% 2% 2% 20% 7% 6% 6% 6%

EBIT 113 147 121 93 120 128 148 159 170

yoy 30% -18% -23% 29% 7% 16% 8% 7%

EBIT Margin 8.0% 10.6% 8.5% 6.4% 6.9% 6.9% 7.5% 7.6% 7.7%


OUT OF HOME (2.0% OF FY13 REVENUE)

The Out of Home or catering service division is a relatively small business, constituting

2% of revenues. The unit is involved in the marketing of a wide range of Tiger Brands'

products to restaurants, catering services and other out-of-home institutions.

Out of Home Revenue & EBIT Out of Home: Evolution of Contribution to


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Out of Home- Operational Performance (ZARm)

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Revenues 261 269 295 351 403 416 429 438 446

yoy 3% 10% 19% 15% 3% 3% 2% 2%

EBIT 38 63 69 68 80 84 103 114 117

yoy 69% 9% -1% 18% 5% 23% 11% 3%

EBIT Margin 14.4% 23.6% 23.4% 19.5% 20.0% 20.2% 24.0% 26.0% 26.3%


HOME, PERSONAL CARE & BABY (7% OF FY13 REVENUE)

The Home, Personal Care and Baby (HPCB) division is mainly involved in various

health, personal care, baby and hygiene products. Some of the key brands include

Gill, Ingram's Camphor Cream, Dolly Varden, Kair, Lemon Lite, Perfect Touch, Protein

Feed, Elizabeth Anne's, Purity, Airoma, Bio-Classic, Doom, Fast Kill, ICU, Jeyes, Peaceful

Sleep, Rattex. The key sub divisions include are Homer Care, Baby Care and Personal

Care.

Tiger Brands' Key Brands in the HPCB Business

Competing Brands in the HPCB Business (Unilever)

50


HPCB Revenue & EBIT HPCB: Evolution of Contribution to


51


OTHER EQUITY ACCOUNTED BUSINESSES

EMPRESAS CAROZZI (24.4%-OWNED)

Empresas Carozz (founded in 1898) is a leading branded foods business in South America,

which is based in Chile, and has a manufacturing site in Peru. The company offers

various foods, including pasta, rice, cookies, chocolates, candies, biscuits, sweets,

flour, breakfast cereals, desserts, meals, drinks and refreshments, tomato sauces, juices,

and fruit pulp and tomato paste, as well as dog and cat food. Since Tiger Brands

acquired a shareholding in Carozzi in 1999, Carozzi has performed well and Tiger

Brands has received dividends in excess to its original investment in the company.

Empresas Carozzi Contribution to Breakdown of Income from Associates

Associate Income (Rm) in FY14F

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While there is limited visibility in the company, equity accounted earnings from Empresas

Carozzi has registered a FY09-13 CAGR of 14%. We are forecasting a FY13-17F of 21%

on the back of significant investments that have been made since 2012 in the upgrading

of production facilities and capacity expansions (chocolates and biscuits). In September

2013, Tiger Brands subscribed for additional share capital of USD 24m in the company.

The subscription was in proportion to its 24.4% shareholding in the company. The

capital injection was used to strengthen Carozzi's B/S following a number of capital

projects to upgrade the company's manufacturing facilities and to increase capacity.

52


CONSOLIDATED FINANCIAL REVIEW & OUTLOOK

1. INCOME STATEMENT

Evolution of Divisional Revenues (Rm)


Overall, we estimate Tiger Brands to register FY13-17F revenue CAGR of 10.7%. We

expect revenue growth to be driven by exports and international businesses. In fact,

exports and international businesses should continue to contribute positively to the

Group's performance and therefore we estimate a 31% revenue contribution and

26% EBIT contribution by FY17F. Overall, subdued demand in the domestic market

(South Africa) will be offset by fast-growing African markets. However, Tiger Brands'

strategy on the domestic market that has seen the Group limiting price increases in

order to gain market share should bear fruit in FY14F and beyond. For example, the

Groceries division has been restraining some price increases and therefore is set to

turnaround given that there is scope to increase prices in the outlook period.

FY17F Divisional Revenue Contribution

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M illing & Baking Other Grains Groceries

Snacks & Treats Beverages VAM PSOut o f Home Personal Care Baby CareHome Care Exports International Operations

Decidous Fruit Nigeria


BPI vs Consensus

FY14F FY15F FY16F

Rm Cons. BPI Diff. Cons. BPI Diff. Cons. BPI Diff.

Sales 29 392 30 383 3% 31 998 33 893 6% 34 913 37 323 7%

EBITDA 4 207 4 421 5% 4 906 5 384 10% 5 505 6 105 11%

EBITDA Margin 14.3% 14.6% 15.3% 15.9% 15.8% 16.4%

EBIT 3 586 3 625 1% 4 227 4 649 10% 4 710 5 362 14%

EBIT Margin 12% 12% 13% 14% 13% 14%

Net Income 2 822 3 112 10% 3 263 3 821 17% 3 743 4 510 20%

EPS Adjusted+ 17.3 19.0 10% 20.1 23.3 16% 23.0 27.5 20%

Source: BPI Capital Africa/ Bloomberg

Compared to consensus, our revenue growth estimates are on average 7% ahead of

consensus between FY14F and FY17F. In our view, the market could be understating the

growth prospects in the rest of Africa.

53


Evolution of Sales (Rm) Consensus Evolution of Adj. EPS (ZAc) Consensus

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We expect net financing costs to decline by 3% in FY14F to R369m. Finance charges will

remain relatively high on the back of the group's borrowing levels which include the

underlying debt in DFM of R1.5bn. Nonetheless, the proceeds from the sale of Agrosacks

will assist in reducing the overall debt in DFM, which currently bears interest at

approximately 15% pa. The refinancing of the remaining debt in DFM at more favourable

interest rates is being explored. We estimate net finance costs to decline by 36% in

FY15F. The lower finance charges can be attributed to improved cash generation

driving debt repayments and benefits of the associated finance income. We forecast

interest cover to increase from 8.0x in FY13 to 20x in FY15F and 58x by FY17F.

Income from associates is estimated to register a FY13-17F CAGR of 18% driven by

strong earnings growth from Oceana and other international operations. There is also

scope for foreign currency translation gains relating to international associates.

Interest Costs Vs Interest Cover Growth of Income from Associates

(FY13-17F CAGR)


Overall, we estimate adj. EPS FY13-17F CAGR of 18.4%. We expect stronger growth in

FY15F and FY16F as the group benefits from margin upliftment from key divisions. We

have estimated a dividend pay-out ratio of 52% in the outlook period.

55


2. BALANCE SHEET & CASH FLOWS

The net debt position has increased from R1.2bn to R4.5bn in FY13 mainly as a result

of DFM's underlying debt of R1.5bn as well as additional group borrowings of R1.5bn.

We are however expecting a strong improvement in normal operating cash flows in the

outlook period and estimate a reduction in the net debt position to R3.1bn in FY14F,

R2.0bn in FY15 and R625m in FY16F. The net debt to EBITDA ratio of 1.2x is set to

tigerbrands290714

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