Rainbow Chicken set to fly solo

RCL Foods is giving its chicken business a chance to spread its wings. The SA food company’s announcement that it will spin off and separately list its Rainbow Chicken unit on the JSE is a wise move that should release value for both businesses and shareholders. But it also exposes the poultry producer to a tough market plagued by multiple challenges.

Rainbow Chicken, which accounts for a fifth of RCL’s core profit, or earnings before interest, tax, depreciation and amortisation, has been struggling to achieve acceptable returns for years, reflecting the malaise in the industry led by Astral Foods.

The sector is facing fierce competition from cheap imports, which have flooded the local market and undercut its pricing. The sector has had to contend with higher input costs, especially maize and soya beans, the main ingredients for animal feed. To make matters worse, high interest rates have pushed consumers choking under heavy debt load to look for bargains and cheaper alternatives such as chicken feet and gizzards.

Add the governance mess in local government, power cuts, water disruptions and bird flu, the industry is grappling with a cocktail of deep-rooted challenges facing SA, and combines to raise the cost of doing business. The result: the poultry industry barely makes 2% after paying costs, one of the thinnest margins of any industry, leaving little room to compete with imports.

RCL has tried to improve Rainbow’s performance by investing in new products, such as ready-to-eat meals, and cutting costs through operational efficiencies and automation. The efforts are paying off. In the six months to end-December, Rainbow swung into a R270m core profit after losing about R6m the same time a year earlier. Still, the outlook remains uncertain as maize prices are expected to rise again and trade barriers remain low, leaving the unit vulnerable to external shocks.

“Some of the shareholders of RCL want to remove (Rainbow’s) volatility from that business. They would prefer more consistency,” RCL Foods CEO Paul Cruickshank said, and shareholders have sound reasons for pushing for the break-up.

By spinning off Rainbow, RCL hopes to enable both businesses to pursue their growth ambitions in a more focused manner, while better allocating capital to their respective priorities. For investors, the unbundling will allow shareholders to decide which brands they wish to be exposed to as RCL’s remaining business consists of more stable and diversified consumer goods, such as pet food, sauces and spreads. These products have higher margins and enjoy strong brand loyalty and market share.

The market welcomed the news, sending RCL shares up more than 4% on Monday. But the spin-off comes with risks. Rainbow will lose the benefits of being part of a larger and more diversified group, such as access to capital, shared services and cross-selling opportunities. It will have to fend for itself in a competitive and volatile industry, where margins are thin and demand is elastic.

Rainbow will need to prove that it can fly solo.