Something surely has to give, sooner rather than later, at food brands conglomerate RCL Foods. While shareholders, of which investment giant Remgro is the biggest, might by now be accustomed to its perennial underperformance, the latest set of financial results could represent a critical point. Yes, some of the issues that plagued the numbers for the year to end-June might be regarded as one-off occurrences and cyclical in nature. But the ongoing lag at RCL requires a rather swift grasping of the nettle — even if, judging by the post-results share price movement, some investors might still be willing to give it the benefit of the doubt.
Others are more exasperated. Opportune Investments director Chris Logan, a longtime RCL watcher, believes fresh eyes need to be cast over strategy and operational structure, and suggests appointing turnaround expert Phil Roux to the RCL board. “The appointment of Roux, with his proven track record at Tiger Brands, Pioneer and Nampak, would be a brilliant move, akin to the recent appointment of Sir David ‘Drastic Dave’ Lewis at [global liquor brands giant] Diageo.”
Logan continues: “No offence to current RCL management, but the ongoing underperformance of RCL for 15 years calls for the appointment of a proven outsider who can bring the necessary objectivity to drive a far-reaching turnaround.” I very much doubt Roux will be dragged into the RCL fold, though I’d be fascinated to see how the share price might react to such news. Perhaps a more pertinent question is whether Remgro gives RCL another financial year to find that elusive growth traction — or whether it’s time to embark on more drastic corporate action.
Though it’s difficult to argue for more leeway for RCL to execute the long-awaited sustainable growth strategy, two factors could play in the group’s favour in the new financial year. Both of these weighed heavily on the current group performance, but numbers could easily bounce back convincingly in the 2027 financial year. The unexpected setback in the pet foods segment, one of RCL’s more vibrant divisions, was hard to swallow, knocking margins in the important grocery hub from 11.6% to 8.9%. In short, the pet foods business was badly hobbled by the detection of salmonella in some dry pet food products.
This meant a nationwide product recall and production disruptions, as well as the inevitable stock write-offs. Annual volumes dropped by a gut-churning 20.5%. Fortunately, RCL has a level of business interruption cover catering for these situations, and a claim will hopefully be finalised in the next financial year. The bigger test for the pet foods segment is working out a rigorous recovery plan, restoring customer confidence and regaining market share. RCL has strong, even dominant, brands in this niche, which bodes well for quickly restoring margins and volumes.
RCL’s sugar segment is a little trickier to call. The local sugar industry has been whacked by a high level of imports and lower export pricing. RCL’s sugar division dropped 31% in ebitda to R755m. There is a glimmer of hope for a sugar recovery, with RCL reporting a promising crop for the coming season as well as a slowing of imports and a better balance between local market and export sales. But after industry-level wage negotiations faltered, a protected strike in the sugar manufacturing and refining industry started in mid-August. Overall, RCL saw a 4% dribble-down in revenue to R24.5bn, and a 9% drop in underlying ebitda to R2.2bn. The dividend was cropped by a third, which will temper shareholder enthusiasm about immediate prospects. The market has RCL on a 7.4 earnings multiple — well off its larger and more profitable rivals such as Tiger Brands (12.7), Premier Group (14.7) and AVI (11).
It’s justifiably cheaper. But is it cheap enough to trigger action? Older readers might remember that in 2007, Remgro offered to buy out RCL (then trading as Rainbow Chicken) for an effective R16 a share (essentially swapping 100 Rainbow for eight Remgro shares). That offer was not taken up with too much enthusiasm. Readers may also remember RCL initiating a R3.9bn rights issue, pitched at R14.90 a share, to acquire control of Foodcorp Holdings in 2013. Even if we add back the share price of the unbundled (and now spectacularly profitable) Rainbow Chicken, today’s RCL share price does not add up to the 2007 buyout offer pitch or the 2013 rights issue price.
This is a lost generation for long-term shareholders, and even a patient backer such as Remgro must have a limit. Remgro, which holds a 79.5% stake in RCL, has a stated bias for unlisted investments in its portfolio and will finish its financial year to end-June with a heap of cash on hand, certainly enough to comfortably accommodate buying out minority shareholders in RCL at a decent premium. I very much doubt too many of these, after enduring so many lean years, will put up stern resistance to a fair offer price.
That would leave Remgro free to properly merge its 100%-owned Siqalo Foods — which specialises in best-selling spreads brands such as Flora, Stork and Rama — with RCL to create an enlarged food group with a more extensive grocery brand offering. This would also feed the official RCL narrative as articulated by CEO Paul Cruickshank, who reiterated the group strategy of “building a better-balanced, more branded business”.
Or do Remgro and RCL still harbour hopes of an acquisition or merger transaction with one of the food sector majors? There is just not an obvious fit for RCL with any of the large listed players, unless it boils down to taking out individual components such as the pet food sector or individual brands.
