National Foods a good buy stock


Barbican Asset Management

NATIONAL Foods is a company that specialises in the production of household foods and edible oils, together with specialized animal feeds.



erdana, Arial, Helvetica, sans-serif”>Based on the Barbican Equity Model, Natfoods is classified under the consumption counters. The company was founded and listed on the local bourse in 1970.


Shareholders


The top three major shareholders are Security Nominees, Waughco Nominees, and Tiger Brands, and these have a 21,52%, 20,90%, and 19,32% stake respectively. Worth noting is the significant interest of institutional investors in the counter.


An interesting feature of the shareholder structure is that it is acutely negatively skewed due to the significant stake held by shareholders with controlling interests. This tends to negatively affect the marketability of the shares given that a significant chunk of the shares are tightly held. The 365-days trading volume average is 52 586.


Financial performance


The historical financial performance of the company is a clear demonstration that Natfoods can be considered as a classic growth stock on the local bourse. What is even more interesting is the fact that this growth path continues to be sustained despite the harsh operating environment. Operating margin increased from 14,16% to 18,26% in 2002; and this was mainly contributed by the packaging division. The increase in net margin from 9,46% to 12,12% was rather marginal mainly due to the decline in volumes produced in 2002.


There has also been an increase in shareholder value as can be seen by the increase in the return on equity from 20,86% in 2001 to 21,49% in 2002.

Earnings per share increased by 184% to $53,01 and the Net Asset Value increased by 167% to $358,29 in 2002. The significant upsurge in shareholder funds by 170% contributed significantly in maintaining low gearing levels of 6%. Such low levels of gearing are indeed prudent given that interest rates appear to be gradually going up.


Features


Management: The moststrategic resource that Natfoods has is arguably its management which tends to be dynamic and has the ability to adapt to changes in business environment.


Brand names: The pro-ducts of Natfoods are mainly marketed under the well-established brand names, which are Gloria, Red Seal and NF stock feeds. In fact, it is difficult to find a household without a product from Natfoods and this follows from their dominance in the production of basic commodities.


Staff: The loss of key personnel has been mini-mal and the workforce hasbeen reasonably stable.The company is impleme-nting a Prosperity Part-nership programme to enhance communication at all levels throughout the organisation.


Technology: The pro-cessing plants for the company are equipped with the most modern machinery and technology available in the world today.

Environmental policy: National Foods is an environmentally responsible company, with new effluent treatment plants which fully comply with all existing and future environmental requirements, operating at both the Harare and Bulawayo oil processing plants. This is a sign of how the company seeks to address all its stakeholders’ concerns.


Challenges


Price controls: Most of the company’s products are price controlled. It should however be noted that despite this constraint, the company is in a position to mitigate the adverse effects of price controls by attaching more weight to its packaging operations, which happen not to be directly affected by price controls. In addition, the fact that the company is regional will also help it diversify its market, which reduces its exposure to the local market.


Input allocations: The Grain Marketing Board continues to control the allocation of maize and wheat to millers. The level of maize imports by the Grain Marketing Board and the current reduced ration levels to Natfoods are the major factors behind the decline in volumes by 10%.


To augment volumes, the company has been involved in the milling of maize for certain food aid organisations. Worth noting is the fact that the current excess capacity will be of strategic importance once there have been improvements in the local operating environment.


Valuation


Natfoods is trading at a discount to net asset value of 27%. Interestingly, this happens to be the highest discount to net asset value any investor can get on the local bourse. A discount to NAV of such magnitude is a sign of an undervalued company and such a scenario cannot be sustained in a market with the slightest level of efficiency.


Natfoods is trading at a historical PE of 4,9, which is relatively lower than the market weighted PE ratio average of the food counters of nine. The share price can also be considered cheap given that the relative market weighted PE is around 0,6. Hence, the counter can be considered cheap relative to the market and the food sector.


Despite the worsening operating environment, we believe management can sustain a growth rate of at least 100% and this translates to a perspective PE ratio of around 2,5x. This further solidifies our perception that the current share price for the counter is quite cheap.


In addition to the above valuation methodologies,another attractive feature of the counter is its dividend growth path from a historical point of view. In the year 2002, the annual dividend grew by 100% whilst the dividend cover increased from 6,2 times to 8,8 times. This is a sign of improved fundamentals and it also enhances our confidence that the dividend growth path can be maintained.


Conclusion


Based on the above valuation, we consider the current market price of around $260 as an understatement of the intrinsic value of the share. Consequently, we recommend a strong buy at the current market price.

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