RCL Foods: It's time for a nibble
Investors keen to nibble on the JSE’s food sector certainly are spoilt for choice when it comes to consumer brands conglomerates.
Pioneer Foods, where highly rated CEO Phil Roux has suddenly retired, and Rhodes Food Group, which has taken a bruising in its international operations, have both weakened to levels that offer lots of longer-term value flavour.
Then there is AVI, which staged a remarkable secondhalf comeback, finding the balance between volume and pricing. This ensured gains in market share in key categories without the gross profit margin being ravaged. Its earnings outlook seems fairly steady, which means investors, can look forward to a sumptuous dividend policy of 80% of earnings distributed to shareholders, should there be no major acquisition.
However, IM punts Remgro-controlled RCL Foods as the month’s pick — mostly based on a gut feeling that the company has built a sufficiently lean and mean operational structure to allow earnings growth in the year(s) ahead.
RCL’s share price over the past 12 months would suggest the market was expecting the company to deliver more in the year to end-June. It touched a 12-month high of R17.05 in March, retreated to R13.58 in April and scooted back up to R16 ahead of the release of the year to end-June results.
The retreat in the share price after the release of the results suggests not all market watchers are convinced RCL is firmly back on the growth track.
Indeed, there are still some serious challenges to surmount — especially the ongoing strain in the poultry market.
The Rainbow chicken business is seen as an albatross around RCL’s neck. But it has been dramatically restructured, and a marked improvement in performance was evident in the second half of the financial year. A shift away from commoditytype production to service higher-margin, quick-service restaurant customers has meant the number of birds pro-
Indeed, there are still some serious challenges to surmount — especially the ongoing strain in the poultry market
duced a week has dropped from 4.7m to 3.8m. Saving in production costs and the potential for bolstering margins should mean improved profits in the medium term, especially if consumer spending picks up.
However, the consumer market is under strain, and there may be worries that RCL’s leading brands will have their dominant positions challenged by competitive pricing by rivals.
RCL has a handful of brands that generate more than R1bn a year in revenues: Selati (sugar), Rainbow (chicken), Supreme (flour), Sunbake (bread) and Epol (pet food). Logistics business Vector also generates more than R1bn a year.
Three brands generate more than R500m in revenue a year: Nola (mayonnaise), Pieman’s (pastries and pies) and Molatek (animal feed). Household names such as Ouma (rusks) and Yum Yum (peanut butter) fall into the “more than R100m a year” revenue category.
Lined up against the brand portfolios of Tiger Brands, AVI and Pioneer, RCL looks a little shy of the “heavyweight” cate- gory. But market share statistics presented in the company’s investor presentation make for surprising reading.
RCL’s dog food brands hold a commanding 26.5% market share (in a competitive market), while the cat food brands have extended their share to 20.9%. Yum Yum peanut butter holds 31%; Nola mayonnaise 43.2%; RCL’s sorghum brands 30.2%; and Ouma rusks 47.1%.
Perhaps the most important market share gain was in the poultry segment’s freezer-tofryer area, where Rainbow soared from 23.7% at the end of June 2016 to close to 40%.
Sugar brand Selati’s market share dribbled down slightly to 27%, but RCL brands claimed a much-improved 8.5% of the pies and rolls category. Sunbake bread held a slightly improved 9.1% market share.
RCL’s strategy is simple: maximise profit in core brands (chicken, sugar, grains and animal feed) and accelerate growth in value-added categories (speciality brands, pies, food solutions, groceries, baking, beverages and added-value chicken).
RCL will hopefully be able to fatten margins through brand differentiation. The company’s recent capital investments have created opportunities to improve existing brands and create new product ranges and service offerings.
IM reckons RCL is capable of improving earnings markedly in the year ahead — perhaps not back to the 112c/share levels of 2015, but possibly in the 75c-80c/share range.
The lull in the consumer market may also create opportunities for corporate action, particularly the acquisition of specialist brands to diversify the food basket further.