Clover Industries could boost its operating profit by about a third if it reaches a medium-term target to have 15% market share in custard and yoghurt, says Kagiso Asset Management.

The asset manager views Clover’s shares as undervalued.

The dairy-based food and beverages group entered the yoghurt and custard market this year after taking over DairyBelle’s yoghurt and long-life milk businesses. The company was previously precluded from making these higher margin products because of its service agreement with French rival Danone.

Clover now plans to use DairyBelle’s business and its own brands to reach a 15% share of custards and yoghurts within a few years, and 20% share longer term. "We estimate a 15% share in both would add R600m to Clover’s revenue and R90m — a 31% increase — to operating profit," Kagiso Asset Management investment analyst Dirk van Vlaanderen said in a note.

Clover generated revenue of R8.5bn in its year ended June 2014, while its operating profit was R282.3m. The company in December said its headline earnings per share for the six months ended December would be at least 30% higher than the previous interim period.

Clover’s stock trades at a price:earnings (p:e) ratio of 19.38, with Bloomberg data indicating a forward p:e as at the end of 2016 financial year of 13.19.

Clover CEO Johann Vorster said last month new value-added products such as yoghurts, custards and desserts could make up about 20% of his company’s business within a few years.

The company plans to use the Bliss brand, a double cream yoghurt range that it bought as part of the DairyBelle deal, to launch its own range of desserts. The Bliss dessert range will be imported from Italy until Clover reaches the scale to manufacture it locally.

The company, which uses about a quarter of SA’s raw milk, has also started making custard products again under the Clover Classic umbrella. Clover sold the UltraMel custard brand to Danone in 2007.

Mr van Vlaanderen said Clover’s recent investments in its production and distribution network "is fundamental to the company’s investment case". The company, which delivers mainly its own brands but also third-party products, had the largest chilled distribution network in SA.

The company was adding its own brands but also looking for acquisitions and "is well positioned" to benefit from any additional brands and products that it added to its distribution platform.

"Clover’s strong and diversified brand portfolio and leading distribution network combines to create a unique platform with the potential to create significant value through further organic growth as well as through acquisitions," Mr van Vlaanderen said.

"We believe the current share price undervalues the future potential of this strategy and we therefore hold Clover in our portfolios on behalf of our clients.

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