RCL Foods has a market value of R8.7bn and — aside from its diverse area of business ranging from chickens and groceries to bread and sugar — the distinction of being the worst-performing stock in the JSE food producers index for nearly 20 years.
In that time, the counter has more than halved in value and generated a capital return loss of 3%, versus a gain of 288% for AVI and 401% for Tiger Brands.
RCL has been trying to shake off the shadows of its original incarnation for two decades.
Originally known and still largely recognised by its original name Rainbow Chicken, the company started from a single stall in downtown Durban in 1960 and quickly rose to become the largest chicken producer in South Africa. It listed on the JSE in 1989.
Post listing, with the powerful backing of the Rupert family and then Rembrandt (now Remgro), Rainbow diversified away from the cyclical and volatile chicken sector.
In 2004, Rainbow bought Vector Logistics for R455m as it took its largest cold chain and frozen distribution agent in-house. In 2012, Rainbow bought 64% of groceries business Foodcorp for R1.037bn to move the company into branded mainstream foods.
In 2013 Rainbow went on a spending spree, acquiring the minority of Foodcorp and acquiring Transvaal Sugar (now Selati) from Remgro for R4bn. To reflect the now diverse nature of the foods company, the Rainbow Chicken name was changed in September 2013 to RCL Foods.
All this corporate activity aimed at mitigating the volatility of chicken came at a cost. The wider market has failed to understand much of the Remgro rationale in melding these disparate assets together. This has seen the stock price stagnate.
To hammer home the underperformance and mishmash, in 2007 Remgro tried to acquire the minority of Rainbow it did not own for R16 a share. This valued the 38% minority stake at R1.72bn and the entire company at R4.5bn.
Here we are in 2023 and RCL Foods, in its larger acquisitive iteration, is now trading at 980c.
Back in 2007 then Remgro CEO Thys Visser said the company “would be more successful as an unlisted company because it would be better able to manage the volatile external factors affecting the company”. That 2007 statement is as apt today as it was then.
The market sits patiently awaiting a minority buyout, though IM does not believe any material premium will be paid. But IM is heartened by the fact that as RCL Foods has a net asset value of R13.17 a share, there could be some upside for the ultra-patient.
Despite the recent sale of Vector Logistics to a private equity firm backed by shipping giant AP Moller for R1.25bn, the volatility that remains within Rainbow Chicken and TSB Sugar continues to hamper any earnings continuity within RCL.
Rainbow is already slated for a carve-out, but that may take some time given the tribulations affecting the poultry sector. Sugar has its own problems with its cyclicality and the effects of the domestic sugar levy.
Of course, most punters are making a meal of the fact that Remgro now owns the oils, fats and spread business of Unilever, now renamed Siqalo Foods. This deal was inked in 2018 in a swap of assets and cash valued at R11.9bn. Many market analysts have long believed that RCL should remove its chicken and sugar business; leaving just the groceries assets would facilitate a merger with Remgro’s Siqalo.
The possible merger of the Flora, Rama and Stork brands into a basket containing brands such as Yum Yum, Nola, Ouma Rusks, Bobtail, Dogmor and Sunbake would make a powerful, focused foods company. IM can only hope and dream.
Recent RCL year-end numbers to June again highlighted the underlying inconsistent nature of results due to the disparate levers that can skew the profit profile.
Despite a 17% rise in revenue to R37.8bn, a R312m slide in the profitability of Rainbow Chicken and weakness in groceries and baking (despite a strong showing from sugar) saw operating profit slump 46% to R787m. Headline earnings declined 45.7% to 61c a share, and the final dividend was also passed (like the interim).
It was a tough period, beset by R158m of load-shedding costs and the impact of having to pay an extra R234m into the sugar fund to cover the demise of the Gledhow mill and Tongaat Hulett.
IM believes RCL — at its own glacial pace directed by Remgro — is slowly reorganising the business. However, investors may have to wait an aeon for any conclusion. IM can see some recovery value in RCL as well as a special situation play. But sitting on dead money is not a prudent philosophy, so we would veer away from RCL as a holding.
IM prefers the fishing sector via Oceana and Astral Foods as a direct play on poultry.