Rhodes to increase capacity

• Food producer’s regional gains in SA and sub-Saharan Africa offset by lower international profitability

Rhodes Food will spend R350m in the 2018 financial year to, among other things, expand capacity at its pie and bakery facilities, and install clear juice concentrate plant at the Groot Drakenstein production hub to further vertically integrate the fruit juice operation.

The group will also spend the money on consolidating production facilities acquired through recent acquisitions. It bought Pakco and Ma Baker, which are expected to be earnings accretive in the 2018 financial year. The businesses contributed R230m to turnover.

Rhodes reported a 10.8% increase in turnover to R4.6bn for the year to October, lifted by strong growth from SA and subSaharan Africa where sales were driven by robust customer demand for canned meat and fruit juice. This accounted for 80% of revenue, up from 73%.

However, performance from the international businesses was disappointing, owing to the combined effect of the strengthening rand, reduced global demand for industrial pulp and puree products, foreign pricing pressure and increasing costs on canned fruit as a result of the prolonged drought in the Western Cape.

Regional segment gains were offset by the reduction in international profitability, which resulted in group profit after tax declining by 20% to R234.8m, said CEO Bruce Henderson.

While the results were at the better end of the weak guidance at -27% down, much of what has affected other food retailers in the region also had an effect on Rhodes Food, Anthony Clark, equity analyst at Vunani Securities, said.

The strong rand, as well as increased pricing for internationally sourced fruit concentrate and puree used in its juices, not only hurt Rhodes Food’s international segments but also the business of close competitor Pioneer Foods.

On Monday, Pioneer posted a 49% drop in profit due to high maize prices during the first part of the year after the drought, while its revenue declined 5% to R19.6bn due to, among other factors, raw material deflation, volume declines and resistance to price hikes.

Rhodes said its fresh foods sales increased by 30.1% with continued growth in the pie category across all sales channels and growth in ready meals. Long Life Foods also grew turnover by 15.9% with volume growth and market share gains in key product categories.

“The focus in the year ahead will be on brand architecture, product upgrades and improved distribution,” Henderson said.

Diluted headline earnings per share decreased by 27.0%, to 93.4c and the board had declared a cash dividend of 31.1c per share.

Clark also raised concern about the sharp drop in the operating profit margin, which plummeted to 8.9%, from 12%. “I have consistently harped on that no matter what Rhodes do [in terms of deals etc] it simply can’t get margin traction,” he said.

Although the outlook for the international canned fruit market was upbeat, the company said the continued drought in the Western Cape was expected to adversely affect input costs owing to poorer quality fruit, which would give rise to lower yields and higher labour costs.