Buy­ing ap­petite for RCL

Con­sumer goods com­pa­nies are strug­gling through dif­fi­cult times, but RCL Foods has been re­struc­tur­ing to adapt to a chang­ing mar­ket.

Finweek English Edition - - MARKETPLACE | KILLER TRADE - By Mox­ima Gama ed­i­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re

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.

Tech­ni­cal anal­y­sis:

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. ■

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