Juicy little gem
When Rhodes Food Group’s listing in October 2014 was pitched at an 18.5 p:e it raised more than a few eyebrows.
How, many fund managers asked, could a little-known small cap claim the rating of a sector heavyweight like Tiger Brands?
As it turned out, Rhodes was listed at a bargain price. Now, 20 months on, Rhodes’ share price is up 90% and its 21.7 p:e is the highest in its sector.
The listing enabled Rhodes to reduce debt by some R420m, giving it what it wanted: a balance sheet able to support ambitious organic and acquisitive growth.
It has done just that, lifting headline earnings per share (HEPS) by 137% in its year to September 2015 and following this up with a 37% rise in the six months to March.
While lower debt played a big role in boosting Rhodes’ maiden annual results, it was acquisitions that did the trick in the latest six months.
“Acquisitions added R480m to our sales but organic growth was also strong, with volume up 10%,” says Rhodes CE Bruce Henderson.
Overall sales were up R585m (31.5%) to R2.44bn. It still leaves Rhodes trailing bigger players like Tiger Brands — which weighed in with sales of R15.9bn in the six months to March — and Pioneer Foods Group, which achieved sales of R10bn in the same period.
But for investors it is HEPS growth that counts.
Here, Tiger was no match for Rhodes, its interim HEPS coming in flat in its sixth year of dismal performance.
After three years of solid double-digit growth Pioneer also hit headwinds, its interim HEPS advancing just 6%.
For Rhodes, being far smaller than Tiger and Pioneer brings a distinct advantage: acquisitions and new product categories that would barely move the needle for the big guys can provide a sizeable boost to its bottom line.
Since listing, Rhodes has closed two large and four smaller acquisitions at a total cost of over R430m. “Our strategy is to complement organic growth by expanding into new product categories which are complementary to our current products,” says Henderson.
Reflecting this are its two largest buyouts, which played key roles in Rhodes’ interim results.
First on board was Wellington-based Pacmar, a fruit juice producer acquired in April last year for R165m.
This was followed by fruit and vegetable concentrates maker Boland Pulp, snapped up in August 2015 for R174m.
For Rhodes, which throughout its 105-year history has been a big player in the fruit processing sector, the two acquisitions created an opening into the fruit juice market.
Entry in September through Rhodes branded products has also been a success.
“We have a 13.2% market share and are the number two player,” says Henderson.
Rhodes’ market share is up from 9.2% in late 2015.
The top spot is held by Pioneer, owner of Ceres and LiquiFruit.
Being number one or two player in niche markets is a hallmark of the Paarl-headquarted Rhodes.
Through brands such as Rhodes, Hazeldene and Bull Brand it is the market leader in canned pineapple, tomato paste, jam in glass jars and corned beef and number two in canned fruit, canned jams, canned vegetables and canned tomatoes.
Fruit juice is not the only new product in Rhodes’ pantry. Also added of late are baby food, bottled salads and pickles, and bakery products.
“We see a lot of scope to grow our market share in the baby food market in particular,” says Henderson.
More bolt-on acquisitions lie ahead.
“We are working on a pipeline of deals but it is hard to be explicit on the timing.”
With Rhodes’ debt-to-equity ratio near its targeted ceiling, future acquisitions could be funded by way of a rights issue, 240 says Henderson.
There is little doubt a rights issue would be strongly supported by investors eager to up their holdings in a tightly held stock that still has long growth legs.