Something to nibble on
Anthony Clark
The large food companies have had a torrid time, but there’s potential in the mid-cap sector, writes
he past year has been an eventful one for J357 — the JSE food producers index.
The largest sector deal yet occurred with Pepsico making a R25bn offer for Pioneer
Foods, SA’S second-largest food company. A consortium led by an Israeli-based company also acquired dairy business Clover Industries for R4.8bn. So two well-known sector stocks have delisted from the shrinking JSE.
There was also a costly scandal at Enterprise Foods — involving mainly processed meat products. The development wiped billions of rands off the market value of bluechip food group Tiger Brands. The after-effects of the deadly listeriosis outbreak still weigh on Tiger’s reputation and earnings profile.
Even AVI, a stock with legendary brands that have strong pricing power and market share, took a hit, with headline earnings growth falling into negative territory.
Year to date AVI shares have declined 16.7% and Tiger
Brands 18.8%. These blue-chip stock performances are in stark contracts to better performances from the mid-cap food counters: Libstar (-6.7%); RFG, the new name for Rhodes Food Group (-4.8%); and Sea Harvest (-12.6%).
The future might be very interesting for these mid-cap food stocks, which all have
Tmarket values of less than R5bn. Libstar, RFG and Sea Harvest have all been involved in significant acquisitions. All three also have majority shareholders which, perhaps, could be the catalyst to greater business combination permutations in the years ahead.
The largest mid-cap food counter is Libstar, with a value of R4.8bn. Its listing in May 2018, in an IPO at R12.50 a share, was disastrous. The price opened lower than the offer price and within months of the listing, maiden results saw a shock profit warning released. The share tanked to 550c and caused waves of recriminations towards the company, its backers and bankers.
Libstar is an amalgamation of myriad acquisitions, and an interesting vehicle. The business was founded in 2005 to acquire and grow operations in the consumer packaged goods industry.
Over the years, the group has followed a strategy of acquiring controlling equity stakes in food and beverage, and household and personal care businesses. It has major categories in the ambient grocery and perishable value chain, with it most important client being Woolworths.
It has revenues of about R10bn and had an operating profit of R702m in financial 2019. About 92% of its revenue is derived from food — its bestknown brands are the Lancewood dairy range and Denny mushrooms.
Dairy — under Lancewood — is clearly the key category in Libstar. But breads and related baked goods under Amaro Foods, and meat specialist Finlar, which processes and manufactures food products for the food service and retail markets, have clients such as Mcdonald’s and Woolworths.
Libstar has worked hard to buff its tarnished image after the IPO and maiden profit warning. The company reported a 21% increase in headline earnings in 2019, and the share recovered to R10 during 2019. However, 2020 has taken its toll as the weakness in the domestic economy tightened and Covid-19 hit. The share has retreated to about 700c, placing the counter on a historic earnings multiple of 11.7 times.
RFG has a valuation of R3.7bn. Again, a plethora of private equity deals took place before RFG listed on the JSE in October 2014 at an offer price of R12.
The group’s product range includes canned fruit, jam, vegetables and meat products, ready-made meals, pies, pastries and fruit juices. Apart from the Rhodes label, it also has an extensive export business for its fruit-based products.
Like Libstar, RFG has a strong relationship with Woolworths, supplying the retailer with a range of ready meals and grocery products.
From its listing, RFG per
RFG’S prospects for the second half seem better as overseas markets start to reopen and the weak rand aids exports
formed strongly, with the counter racing to near R30 by October 2016. But for the past three years it has had a mixed earnings record, and some operational and integration issues with acquisitions bedevilled the group’s performance. The stock has drifted lower and for the past year has traded in a narrow band between R14 and R17.
RFG’S latest interim results to March saw good top-line revenue growth of 9.6% to R2.9bn, but with the Chinese market shut off due to Covid-19 and the effects of the weak rand in the second quarter, operating profit declined by 5% to R161m and the operating margin was squeezed to 5.5%. Headline earnings for the six months fell 2.8% to 31.2c a share.
RFG’S prospects for the second half seem better as overseas markets start to reopen and the weak rand aids exports. Domestic sales gained a boost ahead of the lockdown, with strong demand for its range of canned foods — though sales in certain categories such as hot pies declined.
With an earnings multiple of 18.1 times, RFG is the most expensive of the three counters in this feature and needs to overcome several periods of disappointing earnings. Management is focusing on cash management, debt reduction and pushing its long-life and export segments to try to recover margin.
Sea Harvest has a market value of R3.7bn, and is best known for its range of prepared fish products.
It listed on the JSE in March 2017, with 42% of the company floated at a price of R12.50 a share. The listing raised R1.3bn, which was mostly used to repay debt. Its majority shareholder is Brimstone, with a 54% stake. Brimstone’s ownership is crucial in providing the BEE credentials needed in the statecontrolled fishing rights allocation process.
Sea Harvest may be the smallest, but it has an aggressive acquisition policy. In 2018 it undertook two large transformative deals. It expanded its fishing interests by acquiring Viking Fishing for R885m and entered a new category via a new subsidiary, Cape Harvest Foods, which spent R527m on dairy business Ladismith Cheese. In 2019, Sea Harvest also acquired the minorities of its Australian seafood affiliate, Mareterram, for R163m.
Sea Harvest’s recent results for the year ended December 2019 were stellar, bolstered by ongoing deal benefits. Revenue for the year rose 54% to
R3.9bn, and there was a similar increase in operating profit to R599m. Headline earnings rose 33% to 149c a share.
About 44% of Sea Harvest’s revenue is derived from exports, with fish and shellfish representing 70% of total group revenues. The new food division comprises 23% of revenue and 16% of operating profit, while the smaller Australian division and Viking Aquaculture were disappointing and are both set for rejuvenation in the year ahead.
Sea Harvest is reducing deal debt, which is now below R1bn, and submitting its updated credentials for the long-term fishing rights allocation process, which has been delayed into 2021. Once the fishing rights have been awarded, IM expects Sea Harvest to return to the acquisition trail in a bid to fatten up its nonseafood interests.
On a historic earnings multiple of 8.4 times, Sea Harvest is the best value stock. But the lower sector rating is due to its sizeable proportion of fishing interests — which tend to be viewed as riskier by the market. Obviously as Sea Harvest invests in more food-related assets, this rating might normalise.
Libstar, RFG and Sea Harvest all share a common shareholding structure. Libstar and RFG — born out of private equity vehicles — still have significant shareholders anchoring the ownership structure. Interestingly, Sea Harvest’s controlling shareholder, Brimstone, also holds a 25% stake in bigger Jse-listed fishing rival Oceana. In essence, Sea Harvest has what Libstar and RFG lack — a material black controlling shareholder.
The food sector has been slow to transform its ownership structure, with only the fishing side fully transformed due to the demands of empowerment to gain long-term fishing rights. IM wonders when Libstar and RFG will transform to better represent the economy they operate in.
It is this empowerment question that could lead to some catalyst for sector consolidation — deals perhaps aided by the Public Investment Corp, which is a shareholder in all three mid-cap food stocks.
IM is aware of Sea Harvest’s intent to expand its foods interests. IM believes Sea Harvest cast an eye over Clover back in the day, but the price was a bit too creamy at Sea Harvest’s (then) stage of development.
To have a black-owned and -controlled mid-cap food company in SA is a critical ambition. IM wonders whether there is not a deal to be made by Sea Harvest with either Libstar or RFG.
Both Libstar and RFG would be a strategic fit and would balance the Sea Harvest portfolio away from its current dominance in fishing into greater grocery and foods categories—extending its scope of clients, revenue and profit base.
Brimstone, IM believes, should focus its interest in fishing in Sea Harvest. That would mean Brimstone’s 25% stake in Oceana — worth R2.3bn — could be placed to fund its portion of any acquisitive deal. Sea Harvest, IM presumes, would also not be averse to placing new paper, which would help its poor share liquidity.