When RCL Foods unbundled its poultry business, Rainbow Chicken, with a separate listing on the JSE in June, investors in both companies clearly thought they’d got a pot of gold at the end of that rainbow.
For years, the cyclicality and volatility of RCL’s poultry division had led to its earnings being boom or — mostly — bust. The RCL share price, trading at R10.41 at the time of writing, has gone nowhere for more than a decade.
When the news came that RCL would unbundle Rainbow, the market cheered as a further refining of the underperforming RCL portfolio unfolded and with the volatility of Rainbow no longer a factor. RCL’s share price is ahead 50% year to date before the unbundling of Rainbow.
Rainbow unbundled and listed on the JSE, opening at 365c to value the separated poultry business at R3.24bn. It touched 475c in a brief flurry, and at the time of writing is trading at 415c a share to value Rainbow at R3.7bn.
Older readers may recall that more than decade ago, there were several poultry companies listed on the JSE. Big bird Astral Foods, with a valuation of R7bn and a weekly production of 5.5-million birds, has always led the pack.
Other listed companies were Country Bird Holdings (CBH) and Sovereign Foods. Both were delisted and acquired by private equity interests, leaving Astral the sole listed chicken stock. Quantum Foods was a hybrid chicken contract farming and eggs business.
The listing of Rainbow brings some juice to the sector and, more importantly, a foil for comparison.
RCL used to be known as Rainbow Chicken before it went on an agglomerating spree more than 20 years ago and acquired Vector Logistics (now sold), grocery business Foodcorp and then Transvaal Sugar.
Rainbow Chicken listed on the JSE in 1989 and had the powerful backing of the wealthy Rupert family of Rembrandt/Remgro fame. For years, Remgro was the majority shareholder and corporate mover and shaker within RCL; after the unbundling of Rainbow, it still controls 80% of each listed entity.
IM has pondered in past poultry articles whether Remgro would want to own such a dominant percentage of Rainbow, given that it remains a highly cyclical stock.
A new listed foil within the poultry sector to Astral has shone a different light on the sector, and the revenue, profit contribution and mix of each distinct stock. Investors can now decide where to be invested, and which chicken model appeals.
Astral, trading at R164.68, is ahead 12.5% year to date. Rainbow, since listing, is ahead 13.7%.
The sector has come through two years of devastating challenges, including an avian influenza pandemic that cost hundreds of millions of rand and resulted in the culling of 10-million birds.
Load-shedding disrupted efficient production, leading to materially higher costs. Soft commodity prices were volatile and the consumer chicken pricing environment was tough. However, all the birds are still standing and crowing, albeit some louder than others.
South Africa produces 21.4-million chickens a week, with imports, according to March 2024 data, the equivalent production of 5.8-million birds, the largest total market share at 21%.
Astral is the second-largest share player at 20%, followed by Rainbow at 16%. CBH is in fourth place with an 8% market share, closely followed by Sovereign in fifth spot with 7%. Thus, 72% of the annual R70bn poultry value chain is carved up among five players.
Within the listed and unlisted poultry sector, Astral remains the largest producer with a weekly output of 5.5-million birds, with cost-efficient capacity to easily and swiftly increase to 6.2-million birds. In second place is Rainbow, producing 4.5-million birds a week.
Unlisted player CBH is third with 1.8-million birds, followed by Sovereign in fourth place with 1.6-million and Daybreak Farms, owned by the Public Investment Corp, in fifth place with 1.4-million. Grain Field Chickens, part of the giant Free State co-op VKB, and privately owned Chubby Chick Premium produce about 1-million birds each.
Astral and Rainbow are responsible for about half of South Africa’s weekly poultry production. Imports are also an important component, mostly in product not readily available in South Africa such as mechanically deboned meat, offal and carcasses; that imported volume is said to equate to a fifth of national poultry meat supply, depending on seasonality.
Chicken is a seasonal business. In summer, production and consumption increase as the warmer weather leads to greater demand and, hopefully, some pricing power — especially in the run-up towards Christmas. Easter is the second-largest sales period, with sales tailing off in winter as consumers allocate a greater proportion of money towards heating.
The largest domestic poultry buyer is the Shoprite Group, which has immense muscle to dictate pricing
No turning off the tap
At any one point, there are about 200-million chickens in various stages of maturity in the production value chain. Unlike other food producers, you simply cannot turn off the tap if demand exceeds supply. It can take a year to rightsize production channels. Thus, week in, week out a pipeline of fresh chicken hits the domestic market, seeking a buyer.
The largest domestic poultry buyer is the Shoprite Group, which has immense muscle to dictate pricing, followed by the fast-food sector, with KFC being the largest quick-service restaurant (QSR) buyer.
As mentioned earlier, you cannot shut down chicken production if consumer demand suddenly tightens. This has been evident since late 2023, when a weak domestic economy caused consumers to pare spending.
Because of a slowdown in the QSR segment, chicken reared for that segment had to find a sales channel. That excess product was allocated to the individually quick frozen (IQF) segment, dominated by the 2kg bag.
This crushed pricing, pushing prices 17% lower year to date and constraining sector margins. Furthermore, given the market, poultry stocks have been unable to pass on any price hikes in 2024 despite increasing production input costs, unlike, for example, the bread and milling sector.
This IQF issue and the weakness in the domestic chicken price have not been aided by government investigations into the poultry sector value chain and, at the start of 2024, the lowering of tariff-free and rebated imported chicken. This hit producers and neutered prices.
This government action has given leverage to the retailers, pressuring desperate domestic chicken producers to hold pricing despite increasing production costs. IM believes this is unsustainable — something at some stage has to give, and chicken prices will have to rise.
This sector dynamic has played out within the two listed players, Astral and Rainbow. Both counters have battled many of the same industry challenges. In late 2022 and into 2023, the avian influenza pandemic slammed the sector, leading to mass slaughter and significant losses, with no compensation given by the government despite the slaughter mandate.
Load-shedding hit the sector hard as birds could not be slaughtered, leading to sheds full of fat chickens which needed to be fed as they had missed their optimum slaughter age and weight to maximise returns.
Soft commodities maize and soya are the biggest costs in rearing a bird, and both have had a volatile year, hitting production cost dynamics.
The GNU honeymoon rally has pushed share prices too hard too fast as there have been no material changes in any of the key poultry sector drivers
Some benefits after a tough year
All of these factors led to a difficult year for the poultry sector. The chicken division of Astral lost R1.3bn in 2023; Rainbow was also loss-making.
Rainbow had a further challenge as a genetic issue with its Cobb bird led to lower productivity; it spent two years and substantial costs transitioning to the Indian River bird. That is now completed and efficiencies are returning.
How would IM now classify the listed poultry sector? Swathes of the JSE had a euphoric uplift after the election and the confirmation of a government of national unity (GNU). Poultry has followed this rise, with Astral ahead 18% and Rainbow 13.7%.
Some of this exuberance is warranted, but IM believes the poultry sector has flown a little too high.
Benefits have come from the country having had no load-shedding for 130 days. This availability of power has sharply curbed the cost of running generators, which, in Astral’s case, was R60m a month when load-shedding was at its worst.
Further benefits will accrue into this quarter as global soft commodity prices have remained weak, which has fed into lower South African Futures Exchange maize prices. A firmer rand after the election has also helped. Yellow maize is 10% lower than its April high and, at R3,800 a ton, will help, alongside lower load-shedding costs, in rebuilding thin poultry production margins and profitability.
However, what has not changed despite the GNU feel-good factor is consumer spending and sentiment in the retail and QSR segments. Poultry stocks have been unable to increase prices and the IQF market per kilogram is down 17% year to date, with no sign of recovery. Hopefully a price increase can be implemented in the spring.
Overall, the poultry sector is better positioned in winter 2024 than in winter 2023, when all players’ profits were severely frostbitten. There has been some thawing with Astral and Rainbow moving back into profit, but margins remain slim.
In reviewing both counters, IM would not rush into the chicken sector. Both birds have been roasted and IM remains concerned about the fragile consumer and kilogram realisation pricing ability. Both need to recover to keep sector momentum going.
In revenue and mix terms, IM prefers the composition of Rainbow. About 54% of its chicken sales are in the food service and value-added segment, where margin tends to be more stable with scope to grow revenue and profitability. Only 24% of Rainbow’s mix is the commoditised IQF segment, vs 54% for Astral.
Astral, however, is highly efficient and has scope to further squeeze costs and recover after an awful financial 2023. Interim results were encouraging.
Similarly, Rainbow, after its genetics issue, is also recovering its earnings poise and it listed with a debt-free balance sheet, with much of the hard work undertaken under the RCL wing. Its product mix also appeals more to IM’s sensibilities in the longer term.
Astral, trading at R164.89, and Rainbow at 415c are at prices IM cannot justify chasing, given the current poultry fundamentals.
The GNU honeymoon rally, IM believes, has pushed share prices too hard too fast as there have been no material changes in any of the key poultry sector drivers over the past few weeks. Chicken kilogram prices remain weak, and the consumer is not suddenly spending more.
Once the recovery and earnings growth within Rainbow start to flow into 2025 and 2026, IM likes the mix and business profile. Time to buy is on investor’s side. Astral is a wild card as its sheer productivity, recovery and positioning will attract interest and earnings recovery.
For now we rate both Astral and Rainbow a hold, but would gladly buy Rainbow should it fly back towards its original listing price.
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