RCL Foods: It's time for a nib­ble

Financial Mail - Investors Monthly - - Front Page - Marc Hasenfuss

In­vestors keen to nib­ble on the JSE’s food sec­tor cer­tainly are spoilt for choice when it comes to con­sumer brands con­glom­er­ates.

Pi­o­neer Foods, where highly rated CEO Phil Roux has sud­denly re­tired, and Rhodes Food Group, which has taken a bruis­ing in its in­ter­na­tional op­er­a­tions, have both weak­ened to lev­els that of­fer lots of longer-term value flavour.

Then there is AVI, which staged a re­mark­able sec­ond­half come­back, find­ing the bal­ance be­tween vol­ume and pric­ing. This en­sured gains in market share in key cat­e­gories with­out the gross profit mar­gin be­ing rav­aged. Its earn­ings out­look seems fairly steady, which means in­vestors, can look for­ward to a sump­tu­ous div­i­dend pol­icy of 80% of earn­ings dis­trib­uted to share­hold­ers, should there be no ma­jor ac­qui­si­tion.

How­ever, IM punts Rem­gro-con­trolled RCL Foods as the month’s pick — mostly based on a gut feel­ing that the com­pany has built a suf­fi­ciently lean and mean oper­a­tional struc­ture to al­low earn­ings growth in the year(s) ahead.

RCL’s share price over the past 12 months would sug­gest the market was ex­pect­ing the com­pany to de­liver more in the year to end-June. It touched a 12-month high of R17.05 in March, re­treated to R13.58 in April and scooted back up to R16 ahead of the re­lease of the year to end-June re­sults.

The re­treat in the share price after the re­lease of the re­sults sug­gests not all market watch­ers are con­vinced RCL is firmly back on the growth track.

In­deed, there are still some se­ri­ous chal­lenges to sur­mount — es­pe­cially the on­go­ing strain in the poul­try market.

The Rain­bow chicken busi­ness is seen as an al­ba­tross around RCL’s neck. But it has been dra­mat­i­cally re­struc­tured, and a marked im­prove­ment in per­for­mance was ev­i­dent in the sec­ond half of the fi­nan­cial year. A shift away from com­mod­i­ty­type pro­duc­tion to ser­vice higher-mar­gin, quick-ser­vice restau­rant cus­tomers has meant the num­ber of birds pro-

In­deed, there are still some se­ri­ous chal­lenges to sur­mount — es­pe­cially the on­go­ing strain in the poul­try market

duced a week has dropped from 4.7m to 3.8m. Sav­ing in pro­duc­tion costs and the po­ten­tial for bol­ster­ing mar­gins should mean im­proved prof­its in the medium term, es­pe­cially if con­sumer spend­ing picks up.

How­ever, the con­sumer market is un­der strain, and there may be wor­ries that RCL’s lead­ing brands will have their dom­i­nant po­si­tions chal­lenged by com­pet­i­tive pric­ing by ri­vals.

RCL has a hand­ful of brands that gen­er­ate more than R1bn a year in rev­enues: Se­lati (sugar), Rain­bow (chicken), Supreme (flour), Sun­bake (bread) and Epol (pet food). Lo­gis­tics busi­ness Vec­tor also gen­er­ates more than R1bn a year.

Three brands gen­er­ate more than R500m in rev­enue a year: Nola (may­on­naise), Pie­man’s (pas­tries and pies) and Mo­latek (an­i­mal feed). House­hold names such as Ouma (rusks) and Yum Yum (peanut but­ter) fall into the “more than R100m a year” rev­enue cat­e­gory.

Lined up against the brand port­fo­lios of Tiger Brands, AVI and Pi­o­neer, RCL looks a lit­tle shy of the “heavy­weight” cate- gory. But market share sta­tis­tics pre­sented in the com­pany’s in­vestor pre­sen­ta­tion make for sur­pris­ing read­ing.

RCL’s dog food brands hold a com­mand­ing 26.5% market share (in a com­pet­i­tive market), while the cat food brands have ex­tended their share to 20.9%. Yum Yum peanut but­ter holds 31%; Nola may­on­naise 43.2%; RCL’s sorghum brands 30.2%; and Ouma rusks 47.1%.

Per­haps the most im­por­tant market share gain was in the poul­try seg­ment’s freezer-tofryer area, where Rain­bow soared from 23.7% at the end of June 2016 to close to 40%.

Sugar brand Se­lati’s market share drib­bled down slightly to 27%, but RCL brands claimed a much-im­proved 8.5% of the pies and rolls cat­e­gory. Sun­bake bread held a slightly im­proved 9.1% market share.

RCL’s strat­egy is sim­ple: max­imise profit in core brands (chicken, sugar, grains and an­i­mal feed) and ac­cel­er­ate growth in value-added cat­e­gories (spe­cial­ity brands, pies, food so­lu­tions, gro­ceries, bak­ing, bev­er­ages and added-value chicken).

RCL will hope­fully be able to fat­ten mar­gins through brand dif­fer­en­ti­a­tion. The com­pany’s re­cent cap­i­tal in­vest­ments have cre­ated op­por­tu­ni­ties to im­prove ex­ist­ing brands and cre­ate new prod­uct ranges and ser­vice of­fer­ings.

IM reck­ons RCL is ca­pa­ble of im­prov­ing earn­ings markedly in the year ahead — per­haps not back to the 112c/share lev­els of 2015, but pos­si­bly in the 75c-80c/share range.

The lull in the con­sumer market may also cre­ate op­por­tu­ni­ties for cor­po­rate ac­tion, par­tic­u­larly the ac­qui­si­tion of spe­cial­ist brands to di­ver­sify the food bas­ket fur­ther.

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