Endlessly disappointing
missed the RCL Foods AGM last week. I shouldn’t have, but inconvenient school exam timetables can play havoc with the best-laid plans. Still, I got an inordinate amount of feedback from the meeting, from some unexpected quarters too.
The frustration was palpable. I have some “skin” in this game too. RCL was one of my selections for the Cristal Challenge, the stock-picking competition arranged by Sasfin Wealth chief global equity strategist David Shapiro and it’s really dragged me down the pecking order.
I suppose best-laid plans at RCL which have included the separation and restructuring of the Rainbow poultry business as well as the recent sale of Vector Logistics haven’t been hugely appreciated by the market.
AGM recordings forwarded to me suggest a rather defensive affair in terms of engagement, which might well have been frustrating with RCL’s share still dribbling down and the discount to NAV widening.
A picture was circulated on social media of certain directors on their cellphones during the meeting which isn’t
Igreat body language. Opportune Investments chief investment officer Chris Logan bemoaned a lack of speed of execution, noting RCL hasn’t had a double-digit return on equity in more than a dozen years. “It takes decades for things to happen at RCL.”
Logan, in particular, was seriously miffed at low executive shareholding in RCL, arguing “there is no serious alignment”. Still, former RCL CEO Miles Dally believes the recent results were “really good” considering the trading circumstances. “There’s a lot of good stuff happening that was not recognised,” he says.
The key question for me is why RCL remains a separately listed company. Investment behemoth Remgro alone owns a commanding 80.5%. The minority portion of RCL is worth roughly R1.5bn at current market prices. If Remgro dangled R12 a share it would cost about R2.1bn to take out all minorities. That would allow Remgro to merge the operations of RCL (excluding the poultry business) with its 100%-owned spreads business Siqalo building a more compelling grocery brands basket and arguably even creating opportunities for further scale-building corporate action.
Shareholder activist Albie Cilliers asked why RCL was listed at all when 90% of the issued shares are held by one shareholder and three asset managers. RCL chair and Remgro CEO Jannie Durand acknowledged the question, but inferred that taking things private, in terms of capital allocation, opened a risk of overpaying and not getting back an acceptable return on the asset.
Indeed. Why would Remgro risk forking out a premium to buy out RCL minorities? If Remgro simply bought back its own shares it would effectively be buying RCL (and other assets) at a 40% discount noting the wide discount the market now applies on the investment company’s intrinsic NAV.
Rather build goodwill
What I found most intriguing transpired after the AGM. There was an innocuous Sens announcement detailing the appointment of RMB executive Carel
Vosloo as an alternate director to Durand with immediate effect. Some mischievous wags suggest there is more to this appointment than meets the eye. The banking group’s website describes Vosloo as the “quintessential RMB dealmaker”. Maybe he also offers fresh alternatives for Remgro beyond the confines of just RCL?
Speaking of moving and shaking, at the recent Richemont investor presentation chair Johann Rupert when asked about possible acquisitions pointed out that the group had outperformed its main competitors for about five or six quarters. “So, we have a philosophy to rather build goodwill than to pay other people for the goodwill.”
That said, in late July Richemont signed an agreement with Gianvito Rossi to take a controlling stake in the eponymous Italian luxury shoemaker. The transaction is expected to be completed in the first half of calendar year 2024, and adds another foothold to Richemont’s sprawling, but not exceptionally profitable, fashion and accessories maisons.
With the core jewellery division commanding margins well in excess of 30%, one might wonder why Richemont is so intent on building scale in the “soft luxury” segment. But there are glimmers of hope. Rupert noted specifically that sportswear and leisure fashion business, Peter Millar (bought in 2012), is now a star performer. “It’s starting to be big enough to move the needle.”
Rupert’s comments on acquisitions bear repeating. That is, buying a company with bad corporate culture means always having to spend more management time fixing the culture.
“It always turns out to be more problematic than you think. So, when you’re catching falling knives, you start diverting your attention from the truly profitable future companies. Please do not expect us to make hugely accretive acquisitions. Rather expect us to use a few of the years ... by carrying on building the brand equity and expanding on our existing maisons.”
Market share gains would indeed be gold in a fickle luxury brands market.