RCL to unbundle and list Rainbow Chicken

The board of RCL Foods has given the green light for the spinoff and independent listing of Rainbow Chicken, its poultry and animal feeds business, in a decision that was first mooted three years ago.

This is welcome news for shareholders of the underperforming Remgro-owned consumer goods group, whose brands include Ouma, Yum Yum and Selati sugar. Rainbow, which was previously listed as an independent entity before becoming part of RCL (then Foodcorp), has come full circle and should stand alone on the JSE within months.

The move will allow RCL Foods to focus on its branded foods business — which includes Nola mayonnaise, sorghum porridge, maize meal, and farm and pet food — and minimise the effects of a commodity business in which profits and losses are subject to cyclical fluctuations.

Opportune Investments owner Chris Logan said the unbundling was positive.

“Chicken is a commodity business and requires a different culture to a branded food business. RCL’s fundamental problem has been poor returns, with 2011 being the last time return on equity exceeded single digits.”

Return on equity is a measure of financial performance calculated by dividing net income by shareholders’ equity.

RCL Foods CEO Paul Cruickshank said the move would be popular with shareholders and traders. “People who trade shares choose businesses that are volatile,” he said.

Rainbow, like competitor Astral, SA’s largest chicken producer, has volatility in its share price. “Traders like that because it comes with risk. But it also comes with returns,” he said.

“Some of the shareholders of RCL want to remove [Rainbow’s] volatility from that business. They would prefer more consistency.”

The diversified food group has languished for years. Its shares closed 4.5% higher at R10.45 on Monday, much lower than its record of R19.95 in 2018.

RCL Foods reported halfyear results on Monday. It had a better first half to end-December than the comparable period, with earnings before interest, taxes, depreciation, amortisation and impairments increasing 48.6% to R1.5bn, aided by lower spend on animal feed costs and the high sugar price.

But the group still ended the half year with a negative net cash position of R367.9m.

It said: “We remain in a net overdraft position, and significant attention continues to be placed on the management of cash throughout the business.”

To improve the business, RCL said in 2021 it would spin off cold-chain food group Vector

Logistics and later its sugar business, which is also a commodity business with lower margins.

Cruickshank said RCL had no immediate plans to split the sugar business, which had been performing much better.

Vector Logistics was sold off to AP Moller Capital in 2023.

Smalltalkdaily analyst Anthony Clark said: “I think investors would much rather have one large, integrated pure foods company and not have the distraction of the sugar and poultry sector.”

He said once Rainbow was split off and if the sugar business was ever sold off, Remgro was likely to delist RCL — as it did with Mediclinic. “They will run the company for their own benefit behind the scenes.”

Remgro’s chair is Johann Rupert. The Ruperts could later merge RCL with their privately owned Siqalo foods business, which owns Flora and Rama margarine, he said.

Clark raised doubts that Rainbow Chicken, which has low profit margins and less than 1% returns on invested capital, had a strong enough balance sheet to stand on its own.

He said Rupert had previously indicated he would not put any more money into the Rainbow business.

“I still have reservations that it has enough capital to standalone as a viable entity.”

Cruickshank said: “It is a question that has to be answered. But we’re confident that will be doable, and it will not be an issue. We need to make sure Rainbow is properly capitalised for the current period, given the [low] margins and volatility with the proper capital structure.”

Rainbow will keep its existing management team, headed by former Country Bird Holdings CEO Marthinus Stander, who has been working to fix the business since 2020.

Gryphon analyst Casparus Treurnicht said the listing would not bring new money to the JSE, as the value of the business was already sitting in the market capitalisation of Remgro and RCL Foods.