Food stocks to suit your investment wallet

Consumers are spending carefully and so should you, writes Anthony Clark

The food producers’ sector, as listed on the JSE under the J357 index, has not been all that hardy for the past year or two. This is despite the perception that it contains many defensive stocks.

Everybody must eat, but in turbulent economic times consumer spending is constrained, especially during periods of high food price inflation and interest rates. So what do people do? They become more selective, eat less or substitute and carefully watch the rands and cents.

Consumers are aware that goods and services are materially more expensive. The pandemic and Russia’s invasion of Ukraine disrupted global supply chains — especially those associated with important soft commodities such as maize, soya, sunflower and wheat, the basic ingredients in most foods consumed.

The South African headline consumer price index (CPI) peaked in June 2022, but the food and nonalcoholic beverages inflation index carried on rising and peaked at 14% in March 2023. It has been rapidly declining since; in the latest available data, it is at 7.2% vs 5.3% for headline CPI. But everything feels, and is, more expensive on the grocery shelves.

Inflation is running at 10.2% in fruit, 13% in dairy and eggs and 18.5% in sugar-rich foods, according to the Bureau for Food & Agricultural Policy think-tank. Oils and fats are down 8.3% but many basic products in the fruit and vegetable basket show 10%30% price increases year on year, with deflation seen only in meat, oils, white bread and a few green-leaf vegetables.

In the soft commodity space, white maize, a core staple for South Africa’s poorest consumers, is up 32% year to date. Soya, sunflower and wheat year to date are unchanged, vacillating either 1% up or down from 2023 prices. But all soft commodities are off their

2023 highs, aiding the decline in food inflation.

Now, inputs may fall, but the cost of manufacturing the food keeps rising exponentially and companies need to recover these costs by passing on higher prices. Culprits include electricity, diesel for generators (due to Eskom’s failures), rates and taxes, disrupted supply chains (thanks to Transnet) and the weak rand, which has declined against the dollar by 30% since 2020. These all add to production and distribution costs of the food that consumers expect to see on the shelves which, ultimately, consumers pay for as companies try to protect margins. It’s not always that easy. Just ask poultry producers.

This inflationary context has been one of the lead drivers of the profitability, or lack thereof, in many food producers.

The key nine stocks in the sector, in alphabetical order, are Astral Foods (R141.15), AVI (R89.04), Libstar (395c), Oceana Group (R70.79), Premier Group (R62.05), RCL Foods (971c), RFG Holdings (R13.39), Sea Harvest (760c) and Tiger Brands (R204.30).

Year to date the best performer has been RCL (+12.91%), followed by Libstar (+12.86%). The worst performers have been Astral (-2.18%) and Sea Harvest (15.34%).

It was a mixed groceries bag on a 12-month perspective, with mid-cap

RFG up 48.78% and blue-chip branded groceries company AVI up 24.2%. The laggards were Libstar (-15.96%) and RCL (-15.86%).

Given these data points on a year-to-date and 12-month view, what has changed in the past months to turn last year’s dogs into this year’s stars? Here is a brief overview:

Astral started 2024 well. After the devastating impact of avian influenza on the domestic poultry sector in 2023, higher soft commodity prices and an aggressive increase in self-generated energy costs to compensate for Eskom’s failures that hit production efficiencies,

Astral’s poultry business in FY2023 lost R1.38bn. Only animal feeds saved the day, but overall group headline earnings per share (HEPS) still plunged 148% to a loss per share of R13.24.

With the worst of 2023 behind it and production efficiencies and chicken production back to normal, Astral released a positive voluntary update for its six months to March which said HEPS would rise 300%. That cheered the market. However, trade, industry & competition minister Ebrahim Patel relaxed the imports of poultry due to perceived domestic production bottlenecks, which is spurious, and soft commodity prices have started to rise locally. That will squeeze already thin margins into the second half of 2024.

Everything feels, and is, more expensive on the grocery shelves

Astral is in recovery mode. It’s the big bird in the sector but it, and the poultry sector, now face headwinds. The market awaits the results on May 20 and any revised trading update. Until then Astral rates as a hold.

Libstar has been a special situation recommendation from IM for the past year. Its share price rebounded in

2024 as a 6% rise in financial 2023 headline earnings to 47.7c a share pleased the market, as did the narrative and restructuring noises from a more confident-sounding management team.

IM believes Libstar has at last got a grip on the sprawling food business and is looking to gain efficiencies and optimise the assets.

We are also aware that Libstar’s largest shareholder, UK-based Actis, with a stake near 40%, has been acquired by a US private equity investor. We wonder if that manager will want to own a splinter of a food business at the tip of Africa?

IM has commented on and is well aware of significant interest in Libstar’s assets. For instance, the Lancewood dairy business, ambient groceries and fresh products supplied to Woolworths and Checkers would be coveted by many rivals looking to bulk up their baskets.

Despite the stock rallying 13% year to date, IM maintains its special situation buy on Libstar.

Premier was featured in IM in November 2023 at R63, with a R72 target. The share exceeded this target, hitting R82 in late January. IM still likes Premier. Full-year results to March 2024 should be released on June 11. After a scintillating interim result to September 2023, when normalised headline earnings rose 25% to 331c a share, a recent voluntary update suggested a similar second half.

The stock was performing well until major shareholder Brait, the private equity business, announced it planned to offload a chunk of its shares. That accelerated bookbuild occurred on March 18, with Brait looking to raise R750m by placing Premier shares at R60 a share. The bookbuild was oversubscribed and R1bn was raised. However, that led the share price to fall from close to R70 to its current levels.

With the investors’ appetite for Premier currently satisfied, IM would use this opportunity to buy shares at current levels. The management team is possibly the best in the food producers space and there are solid growth vectors for some years. A solid stock for longterm growth portfolios.

RCL has been a perpetual laggard in share price terms for 20 years. The share has gone nowhere as the mishmash of assets — at one stage ranging from logistics to sugar, chicken and groceries

— failed to coalesce and deliver consistent earnings growth. There was always a division, usually chicken or sugar, which turned results and the share price sour.

Over the past few years, management has exited

Vector Logistics and recently announced the unbundling and separate listing of Rainbow Chicken. At last, the cyclical animal feeds and poultry stock will fly the coop. That has cheered investors and boosted the share price. In due course, IM believes, sugar will also be exited, leaving a more cohesive foods grouping.

Remgro owns 80% of RCL so will also end up with 80% of an unbundled Rainbow. IM does not believe that ownership of that stake will sit well with the meneers of Stellenbosch. IM would speculate that Rainbow would potentially make a far better fit as an integrated poultry producer if it were to ride to the rescue of ailing Daybreak Poultry (owned by the Public Investment Corp, or PIC), where a fortune has been lost.

IM can see a permutation of the PIC owning a large chunk of Rainbow and asking for its expertise to resurrect Daybreak. As it stands, RCL without Rainbow looks modestly better, but the portfolio needs more refinement. IM rates RCL a hold and would avoid

Rainbow until the poultry sector has some better earnings squawk.

Let’s look at the two fishing counters. IM has been bullish on Oceana since June 2022 at R56.39. The stock attained and exceeded the R72 target to hit a high of R79.90. For the past year the stock has flatlined over concerns of the ability of the US fishmeal and fish oil business to excel and some pressures at domestic canned fish leader Lucky Star. IM sees another solid 12 to 18 months of growth ahead for Oceana and maintains a buy with a target of R80.

Sea Harvest has been IM’s nemesis. IM called it too early and a range of issues from weak fishing, higher fuel costs and problems at its dairy operations curdled results. Financial 2023 headline earnings dropped for the second year — down 5% to 100c a share. After a slew of deals that have yet to fully engage earnings, Sea Harvest recently bought Terrasan for R1.2bn to add pelagic fish and a scale abalone business to the portfolio. IM likes the deal — but not the debt that is piling up at Sea Harvest.

On a relative basis, Sea Harvest looks cheap, especially if an asset such as Ladismith Cheese is sold to reduce the group’s R2.8bn debt pile. IM speculates that such a move may be on the cards. The Terrasan deal is astute. It adds more scale and specie to the product mix and turbocharges the Sea Harvest Viking Aquaculture business into China.

At 760c the stock is a rand lower than our company review in the March issue. IM maintains a buy, with a R10 target price.