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Clover gets stuck between severe drought and hard-pressed consumers

Management expects earnings to recover as drought conditions ease.

The hallmark of dairy products group Clover has been the ability to defend its profitability during tough times.

However, the devastating drought, cyclical raw milk prices and waning consumer spending have put the breaks on its resilience and earnings growth.

Although its revenue for the year to June 30 advanced by 2.4% to R10 billion, its operating profit fell by 44.3% to R314.5 million. Over the same period, headline earnings per share fell by 66.2% to 63.9 cents. This level of decline in profitability was last seen in 2009 and is the antithesis of its performance last year when Clover reported record earnings in its history.

“There’s a saying in America that a year in politics is a long time. I think it goes the same with dairy. In the 119th year [of Clover’s existence] we are not so fortunate,” Clover CEO Johann Vorster told analysts at the company’s results presentation on Tuesday.

Its total dividend fell by 63% to 24.21 cents per share, as management didn’t declare a final dividend in light of its headwinds.

Shareholders don’t have to look far for reasons behind the downbeat performance: weather conditions across SA and product price increases.

Clover’s sales volumes fell by 3.5% or R92 million. The drought, which has hit large parts of SA’s agricultural land, meant that Clover didn’t have enough raw milk supply from farmers, resulting in a product shortage.

To defend its profitability, Clover increased the average selling prices of its products by 6.8%, resulting in consumers having to rein in on their spending.

Its market share in fresh milk declined from 24.1% in 2016 to 21.8% in 2017 and UHT milk to 14.6% from 14.1%. Other categories including fresh cream, feta cheese, processed sliced cheese, ice tea and bottled water followed the same pattern.

Vorster said by March 2017, market shares had recovered as selling prices had reduced. In the fourth quarter of 2017, market shares in fresh milk and UHT milk recovered to 24.6% and 16.5% respectively.

Cratos Wealth analyst Ron Klipin, said consumers were under pressure and Clover’s results were a testament. “Consumers are spending less and buying down to cheaper goods. Next year will continue to be tough. But what Clover has is management expertise and they have done the best during difficult conditions.”

Story continues below company results announcement…

Factors within the company’s control that impacted earnings include R61 million in costs incurred on the launch of new value-added products, the combination of its City Deep and Clayville distribution centres costing it R50 million, and R46.8 million spent on retrenchment costs after its dairy products company DairyBelle was liquidated.

In a bid to cut costs, Vorster said Clover management would not receive salary increases, bonuses or short-term incentives.

Clover is fresh from restructuring its operations and creating a special purpose vehicle Dairy Farmers SA (DFSA), with its own board and separate management team. Clover owns a 26% stake in DFSA.

DFSA now manufactures low-margin cyclical products including raw milk and sets the pricing of products including non-value-added fresh milk, ultra-pasteurised milk, and ultra-high temperature milk. This new structure allows Clover to focus and develop high-margin and value-added products like yogurt and cheese.

Vorster recently said DFSA was important as there were misconceptions that Clover sets milk prices, and in doing so, favours producers at the expense of profitability. If DFSA grows its milk volumes, farmers and Clover become profitable. Klipin said DFSA will help Clover procure milk at better average prices and make negotiations easier.

Wayne McCurrie, senior portfolio manager at Ashburton Investments, said Clover might return to profitability as severe drought conditions have eased.

On the investment case in Clover, he said: “On a long-term basis, for example ten years, investors wouldn’t want to own stocks of companies that are exposed to cyclical commodities and weather factors that are beyond management’s control.”

Clover’s shares finished 3.7% lower to R13.80 on Tuesday.

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Clovers woes are due to inept management, a poor business plan and ridiculous share allocations to directors at time of listing

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