Buying appetite for RCL
Consumer goods companies are struggling through difficult times, but RCL Foods has been restructuring to adapt to a changing market.
south African consumer goods companies have had a tough time due to a difficult consumer environment, with headline earnings contracting by 14.6% on average over the latest interim reporting period, according to research by EY released in June.
The 13 listed consumer companies analysed earn collective annual revenues of R180bn, with the bulk of that coming from agri-business activities (25.8%), EY said.
Derek Engelbrecht, consumer products and retail sector leader at EY, said the difficult times may yet intensify before the situation for consumer goods producers improves. “The intersection of economic factors, coupled with unfavourable climate-related events, has undoubtedly led to a sharp contraction in recent reported numbers. […] We expect to see continued pressure in the near term, with strategy a critical differentiator to growth through these turbulent times.”
While companies are reluctant to invest, capital expenditure is focused on improving inefficiencies, with few companies expanding, EY said.
RCL Foods, formerly known as Rainbow Chicken, is one of the food producers that have been restructuring operations in order to adapt to a changing market. It has largely been focused on reducing its reliance on chicken, a market that has been under pressure due to imports and, more recently, the outbreak of bird flu.
The group’s operations can be classified in the following segments: groceries, logistics, milling and baking, animal feed, sugar and chicken. In the six months to end December, sugar (31%) and groceries (28%) were the biggest contributors to earnings before interest, tax, depreciation and amortisation (ebitda). RCL’s consumer portfolio includes a wide range of wellknown brands, including Supreme Flour, Selati sugar, Yum Yum peanut butter, Nola mayonnaise, Ouma rusks and Bobtail dog food.
RCL is regaining upside – forming rising bottoms – within its major bear trend, which means there’s buying appetite despite the current challenges in its chicken operations.
Over the past three years, RCL has restructured its operations to expand into sugar and other food products through acquisitions, in order to reduce its reliance on the chicken business. The group remains confident in its strategy and is making steady progress towards its goal of a diversified portfolio, focusing on adding higher margin, valueadded products and categories. The company’s sugar business unit is improving on the back of the higher industry pricing and better channel mix.
How to trade it:
Go long: Support retained at 1 400c/share increases the chances of RCL breaching the resistance trendline of its long-term bear trend. A positive breakout – which should prompt further gains towards the 1 950c/share all-time high – would be confirmed above 1 760c/share, in which case go long. A move above 1 950c/share would also end a long-term consolidation (from 2008) between 1 100c/ share and 1 950c/share.The upside target would be at 2 800c/share. I recommend a long-term buy-andhold strategy. Increase positions aggressively above 1 950c/share. Go short: Downside through 1 400c/share could see RCL fall to its third rising bottom at 1 200c/share. Key support at 1 100c/share could be retested on continued downside – thereby extending both the bear trend and sideways pattern. Go short below 1 400c/share. ■