Spreads to fat­ten mar­gins?

In­sert­ing Unilever’s mar­garine brands into RCL’S could add some fatty flavour to mar­gins

Financial Mail - - MONEY&INVESTING - Marc Hasen­fuss hasen­fussm@ti­soblack­star.co.za

Will in­vest­ment giant Rem­gro spread out the brands port­fo­lio at RCL Foods to make its un­der­per­form­ing foods sub­sidiary a more nour­ish­ing prospect for in­vestors?

As it stands, Rem­gro owns 77% of RCL, which owns brands such as Se­lati sugar, Rain­bow chicken, Supreme Flour, Sun­bake bread, Yum Yum peanut but­ter and Ouma rusks.

But RCL’S stock has floun­dered, ris­ing just 25.6% over five years — far be­hind ri­vals AVI (up 64.7% over that time), Pioneer Foods (up 108%) and Tiger Brands (37.5%).

Op­ti­mists claim RCL is long over­due a pe­riod of out­per­for­mance. And yet, ques­tions linger about whether the com­pany is re­ally lean and mean enough to com­pete with larger ri­vals.

A quick scan of the most re­cent RCL an­nual re­port shows some star­tling sta­tis­tics: RCL’S em­ployee costs stand at al­most 17% of rev­enue, with op­er­at­ing profit gen­er­ated per em­ployee com­ing in at less than R40,000.

This stands in stark con­trast to Tiger Brands, which has a staff-cost ra­tio of 10.5% of rev­enue and op­er­at­ing profit per em­ployee of more than R290,000. Pioneer Foods shows staff costs at 11% of rev­enue with op­er­at­ing profit gen­er­ated per em­ployee of about R270,000.

One en­cour­ag­ing de­vel­op­ment is that the re­mu­ner­a­tion costs for top ex­ec­u­tives — CEO Miles Dally and FD Rob Field — have fallen from R24.5m last year to about R18m this year. But the mar­ket might still ques­tion pay­ing ex­ec­u­tive bonuses of R4.6m when re­turns to share­hold­ers have been so lean over the past five years.

Quite how these ex­ec­u­tives plan to cre­ate value in a dour con­sumer en­vi­ron­ment is any­one’s guess. But what does seem cer­tain is that two is­sues — that could ma­te­ri­ally change re­turns — will prob­a­bly play out from next year.

The first is the ef­fect of the culling of the com­mod­ity arm of Rain­bow’s poul­try busi­ness to rather fo­cus on value-added of­fer­ings and ser­vic­ing the fast-food sec­tor.

The sec­ond is the op­por­tu­nity for Rem­gro to push the spreads busi­nesses it wants to buy from con­sumer brands giant Unilever into RCL.

The Rain­bow chicken busi­ness has not ex­actly feath­ered RCL’S profit nest of late. Some an­a­lysts ar­gue RCL should have un­bun­dled Rain­bow, fol­low­ing sim­i­lar ef­forts to toss out the poul­try arms by Tiger Brands and Pioneer.

But re­cent plucky trad­ing up­dates from JSE “big bird” As­tral Foods, as well as smaller poul­try play­ers such as Sov­er­eign Foods, sug­gest prof­its may fly again at a re­shaped Rain­bow.

There were al­ready signs of a bet­ter per­for­mance from Rain­bow in the sec­ond half of the past fi­nan­cial year, as the shift from com­mod­ity-type pro­duc­tion to higher-mar­gin quick-ser­vice res­tau­rants led to the num­ber of birds pro­duced ev­ery week drop­ping from 4.7m to 3.8m.

The out­break of avian flu is a risk — but it seems cer­tain that pro­duc­tion cost sav­ings should fat­ten mar­gins markedly next year.

Rain­bow has also shown en­cour­ag­ing gains in the freezer-to-fryer poul­try seg­ment, in

RCL Foods

which its mar­ket share jumped from 24% in June 2016 to nearly 40% in the past year.

The sec­ond is­sue is more fluid, as the pro­posed deal be­tween Rem­gro and Unilever has not been fi­nalised. This deal would en­tail Rem­gro sell­ing its 25.75% stake in Unilever SA back to the multi­na­tional brand giant in ex­change for R4.9bn in cash and full own­er­ship of Unilever’s spreads (mainly mar­garine brands such as Flora, Rama, Ola and Stork) in South­ern Africa.

Rem­gro CEO Jan­nie Du­rand warns against mak­ing as­sump­tions around plans for the spreads busi­ness. That’s fair enough — but it would be sur­pris­ing for Rem­gro not to usher the Unilever spreads busi­ness into RCL. It’s worth re­call­ing that in 2013 Rem­gro stirred its sugar busi­ness, TSB (Se­lati), into RCL.

The terms of the Unilever deal in­fer a value of R7bn for the spreads brands. This would be a huge deal for RCL to swal­low, as it only has a mar­ket cap­i­tal­i­sa­tion of about R14.7bn.

But the spreads busi­ness would add a dom­i­nant mar­ket niche (as well as much-needed bulk) to RCL. It’s worth not­ing that while RCL holds strong po­si­tions with Yum Yum (31% mar­ket share), Nola (43%) and Ouma (47%), there are cur­rently only a hand­ful of brands — Se­lati, Rain­bow, Supreme, Sun­bake and Epol pet food — that gen­er­ate sales of more than R1bn/year.

The es­ti­mated profit at­trib­ut­able to the spreads brands was R338m com­pared with RCL’S bot­tom line of R600m for the year to June.

As­sum­ing the Unilever deal is fi­nalised be­fore April, the big ques­tion will be how the spreads busi­ness could be re­versed into RCL.

Two op­tions seem likely.

First, RCL could pitch a rights is­sue to share­hold­ers to in­tro­duce new share­hold­ers (un­der­writ­ten by Rem­gro) to raise funds to buy the spreads brands. But there might be some re­luc­tance to do this, with the RCL price so low.

Sec­ond, Rem­gro could in­ject the spreads as­sets into RCL in ex­change for new shares, per­haps tagged to a claw­back of­fer to ac­com­mo­date mi­nor­ity share­hold­ers.

The lack of ap­petite for RCL’S shares might well give Rem­gro, which has openly stated its pref­er­ence for un­listed in­vest­ments, an op­por­tu­nity to markedly in­crease its con­trol­ling stake — even to a level at which it makes sense to make an­other of­fer to buy out mi­nor­ity share­hold­ers and delist it.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.