TRADE of the MONTH
Astral vs RFG: bet on the ‘big bird’ in the longer term
ood production is one of the key essential services still operating at near full capacity during the lockdown.
It’s not like food producers are in a particularly sweet spot, but there is sufficient activity in maintaining comforting levels of food security during this prolonged crisis to keep the cash flow taps flowing.
This month we’d suggest a long-short pairing of two very different food counters — Astral Foods and Rhodes Food Group (RFG).
Astral is regarded as the JSE “big bird” for its dominance of the local poultry sector, while Rhodes is a multifaceted operation that spans numerous niches — including juices, jams, canned fruit and pies.
IM suspects that Astral’s relentless focus on production efficiencies and stout balance sheet — coupled with CEO Chris Schutte’s street smarts — will stand Astral in good stead over the medium term.
Rhodes is an interesting business that was largely bulked up by acquisition after it listed in 2014. But there are clear stress points that could fracture, and result in the company limping along in the medium term.
Astral produced fair interim results recently. Feed input costs increased over the period on higher maize prices (following poor yields and a smaller crop for 2019), but poultry
Fproduction efficiencies were maintained and poultry selling prices increased. This led to a partial recovery of higher input costs.
Looking ahead, an encouraging start to the 2020 maize planting season suggests a crop exceeding 15Mt (2019: 11.3Mt), which will have a positive influence on maize prices.
On a macro level there is much to argue against plump prospects for Astral. A higher unemployment rate after the lockdown and general financial strain on households will keep a lid on consumer spending.
Chicken is a relatively affordable protein — but a weaker exchange rate will have a profound impact on input costs, with the rand pricing of soya and maize potentially smacked hard.
Poultry pricing could also be severely disrupted by “dumping” of chicken originally destined for the quick-service restaurant industry, which is enduring a prolonged shutdown (save for the home delivery options).
In Astral’s investor presentation, Schutte — who is not known for exaggerating — said: “All of Astral’s operations are running like clockwork, and to date no disruptions have been experienced [during the lockdown].”
He believed that the aboveaverage maize crop for the 2020 harvest season should result in favourable feed costs from August, “if not further impacted by local currency weakness”.
What’s more, higher import tariffs on frozen bone-in portions announced in March this year should help level the playing field and discourage unfair poultry trading.
And then there are production efficiency and product mix opportunities in the second half when Astral’s “festive” expansion is completed.
RFG reported in its interim results “an ongoing uplift” in demand for long-life products — particularly canned fruit, vegetables and meat. Production has been increased to meet this demand.
This should offset the slower fresh food sales — and so might the marked deterioration in the rand/dollar exchange rate in boosting profitability of RFG’S international segment (despite expectations of only a slow recovery in exports of canned fruit into China from around July).
Government restrictions on the sale of hot meals, implemented 25 days into the lockdown, caused a marked slowdown in the sale of pies. As a result, RFG’S pie production facilities in Aeroton and Pietermaritzburg are being closed periodically to balance production with the significantly reduced demand.
RFG’S fruit canning factory in Tulbagh in the Western Cape was also recently closed for four days for deep cleaning after a few employees tested positive for Covid-19.
RFG is one of the largest employers in the Witzenberg region, which is regarded as a Covid-19 hotspot.
The group has stressed focusing on cash preservation through tighter cost management and by reviewing all noncritical expenditure — including capital investment.
Other measures being undertaken include maximising exports to improve cash flow and the closure of factories where necessary. Increasing working capital efficiency and reducing debt levels also remain priorities.
RFG’S capital expenditure for the financial year will be about R150m and, even though certain capital projects are being delayed, there is still a commitment to install a new fruit juice line in the Wellington factory to meet increased demand.
On a 10 times trailing earnings multiple and forward multiple of under nine, IM would back Astral’s share price to wing it higher over the longer term.
RFG is pitching into some resilient niches, but on a 16.5 times multiple it is more prone to being dragged down by any setbacks emanating from Covid-19 complications.
Higher import tariffs on frozen bone-in portions should help level the playing field and discourage unfair poultry trading