In reviewing the JSE food producers for this feature, the opening line has to be the stellar gains that the share prices of many companies in the sector have made year to date, despite a challenging base of often frugal consumers.
A dozen days into September at the time of writing and the JSE all share index was ahead 6.2% while the food producers index had risen 21%. The food index has 11 major liquid counters, and the selection has a combined market capitalisation of almost R133bn, Tiger Brands being the largest, at almost R44bn, and Quantum Foods the smallest, at R1.4bn.
As a pub quiz titbit, the 11 food stocks in aggregate have a valuation similar to that of Nedbank. The aggregate mid-cap stocks — Libstar, Premier Group, RCL Foods and RFG Holdings — have materially outperformed the J357 food producers index. Small-cap animal feed, egg and poultry farmer Quantum Foods — which is under corporate machinations — shot the lights out to be ahead 69%.
The food producers sector has suffered many slings and arrows over the past few years, including rampant food price inflation, high soft commodity prices and load-shedding expenses. These forced manufacturing costs higher, with counters trying to recover costs to protect their margins. It proved to be a hit-and-miss attempt in an environment where much of the domestic consumer base was living from social grant to social grant or from pay cheque to pay cheque.
Food producers are seen as defensive, dependable counters for investors. People have to eat, though they can eat a little less or trade down to secondary brands or private labels. Overall, food inflation is now at 4.5%, a sharp decline from the 14% seen in early 2023, when the hangover from global supply chain issues related to the Russian war with Ukraine washed over the global food production sector.
In South Africa many basic food categories remain at elevated prices and well above average inflation. Eggs, rice, coffee, tea, sugar-rich foods and some fruits and vegetables remain high for specific reasons.
Deflation is seen in wheat-based products, oils and fats, and meats. In this environment, some manufacturers, especially those with power brands, such as AVI and Tiger Brands, have managed to maintain margin by increasing prices, though volume declines have often worn away some of the gains.
Much of the domestic consumer base was living from social grant to social grant or from pay cheque to pay cheque
Speciality producers such as miller and baker Premier have pushed operational cost efficiency to squeeze extra margin to power profits successfully. Others, especially in the chicken sector, have had no pricing power yet, but have eked out performance from recently declining input costs and ongoing efficiencies. This highlights the resilience and tenacity of management teams in the sector.
The two grandes dames of the sector are Tiger Brands and AVI. Both have a gamut of well-known grocery brands that are ubiquitous in many consumers’ pantries.
Year to date Tiger is ahead by 20% in share price terms. It has an enviable portfolio of brands, including Koo, Albany bread, Beacon confectioneries and Tastic rice — all South African favourites. However, thanks to years of misadventure, the Tiger groceries roar turned into a whimper.
The appointment of the experienced and well-regarded former Premier Group CEO Tjaart Kruger to the helm of Tiger in late 2023 cheered the stock, and that honeymoon lingers.
Tiger had a stale management culture that needed a shake-up, and Kruger clearly has the tools to repolish the company, restructure its brand image and do product innovation. The stock is about 50% below its 2018 pre-listeriosis-scandal high and should continue to attract interest due to its size and liquidity.
However, the insidious listeriosis court case continues to fester and is now in its sixth year, and IM cautions that until the case is resolved it may overshadow the endeavours of Kruger.
Recent AVI results were stellar. CEO Simon Crutchley is adept at wringing out higher prices for its basket of well-known brands such as Bakers biscuits, Five Roses tea and Ellis Brown creamer.
Its Snackworks (biscuits and snacks) and Entyce (beverages) divisions have managed to lift prices to protect gross margin and held much of its volume.
This has been a trait of AVI, with Crutchley seemingly performing pricing and volume miracles to power consistent earnings growth in the company. Year to date AVI’s share has rallied 28% as the market continues to rate the stock at a premium due to its consistency.
There have been some softer elements. Fishing division I&J has been inconsistent; similarly, the personal care, shoes and clothing brands have had lacklustre performances. Many investors would surely appreciate a cleaner AVI foods structure, but to date interest in AVI has emanated from parties keen to break up the company to gain its beverages and snacks businesses. Efforts to offload fishing have drawn no suitable buyers at AVI’s price.
The stock, trading at R104.88 at the time of writing, is not cheap, but with earnings consistency, fat dividends and a commitment to innovate, tighten operating costs and improve efficiencies, AVI is IM’s preferred choice in big-cap food.
In the mid-cap space, Libstar, Premier and RFG have beaten the performance of the J357, with RCL mixed as it unbundled its Rainbow Chicken division.
Libstar, as the smaller sector player with a value of R2.9bn, has risen 22% year to date as the market warmed to the evolutionary strategy initiated by CEO Charl de Villiers. The group has been simplified; noncore assets have been sold to exit poorly performing divisions. With a focus on ambient and perishable goods — well-known brands such as Lancewood Dairy and a slew of products that are found on the shelves of Checkers and Woolworths — performance and earnings have perked up. Conditions remain challenging but underlying performance is inching higher.
Similarly, RFG CEO Pieter Hanekom has revitalised the company, whose brands include the Rhodes range of canned foods, jams and juices alongside a convenience food offering in Woolworths. After a period of operational tension, improvement in some divisional performances, especially exports and pies, has led to a pleasing lift in group margin and thus profitability. With a value of R4bn and a share ahead 26% in 2024, IM looks favourably on RFG as the stock seems to have found its footing again after eight years of share price underperformance.
The mid-cap food gem for IM remains Premier. At R86.50 and a value of R11bn, the stock has risen 35% year to date. The company is well known as a leading miller and baker, with its Blue Ribbon bread and Snowflake flour brands. Bread is the largest revenue and profit contributor and investment in new large, efficient bakeries continues to offer margin enhancement potential.
With a solid balance sheet, Premier aims to also expand its modest groceries category — it recently took a 30% stake in a large national rice brand to complement its Iwisa mealie meal offering.
IM rates management highly and despite the heady gains to date in the stock, a robust earnings period for financial 2024 and financial 2025 should keep the share elevated.
Regarding the fishing sector stocks, underlying wild catch performance across the board has been challenging for the past year. Despite a good catch allocation, firming global demand and pricing for white fish, the sector has been unable to land decent tonnage. That’s Mother Nature for you.
Oceana has been bolstered by its highly profitable US-based fishmeal and fish oil business, but that is coming off highs as competitors re-enter the global supply chain.
Despite good volumes in the ubiquitous Lucky Star brand and excellent recent results, the market looks ahead to moderated results due to Daybrook coming off peak earnings in the US. Year to date Oceana is down 5%.
Chicken prices recently turned higher as South Africa moves from spring to summer, an encouraging sign
Sea Harvest, the R3bn-value business trading at 803c, is down 11% year to date and has had three years of lacklustre results, which have pummelled the share price. With total historic acquisitions near equivalent to its valuation and debt at a similar level, there are natural concerns in the market about the company’s lack of any material earnings performance.
There always seems to be a cog out of place in a certain result or other. IM’s recommendation for some years has been wrong, and our faith was tested. IM favours Oceana for its quality and consistency. However, despite the disappointment of Sea Harvest, IM acknowledges there may be crumbs of recovery ahead. It may be a fishy finger, but IM sees better capital appreciation potential in Sea Harvest over the next 12 months relative to Oceana.
Lastly, about the two chicken stocks. Poultry prices per kilogram have been dour for much of 2024, with the sector being unable to push through higher prices to recoup costs. Only efficiency gains, lower load-shedding costs than those that slammed FY2023 earnings and modestly lower soft commodity input costs have kept the sector clucking along.
IM has noted that chicken prices recently turned higher as South Africa moves from spring to summer, an encouraging sign. Any price increase ahead of Christmas will be a boon.
Big bird Astral Foods is riding a 52-week high. The R7.6bn-valuation business is a master producer of poultry, with an ability to easily and effectively scale production. Load-shedding costs, which were a real thorn in financial 2023, have abated after terrible earnings last year. A return to positive growth and the resumption of dividends are on the cards for this year.
Rainbow Chicken was unbundled from RCL in late June. The stock initially flew higher, to 475c. Today, Rainbow trades at 350c, a discount to its original unbundling price. After a torrid couple of years, when genetics and farming issues alongside avian influenza hit Rainbow harder than most, the company has returned to profitability and IM sees a more measured, consistent recovery tack ahead for it as a separate listed entity.
IM cautions against buying Astral, as the stock has run 21% in the year to date — though as the leader of the flock it may still fly higher.
IM sees Rainbow as an intriguing sector play, more so into 2025 as the repositioned company recovers its poise. If poultry sector prospects improve, as IM envisages it will, Rainbow will play catch-up.
In closing, depending on your positioning and food sector interest, of the 11 stocks mentioned, IM favours AVI and Premier Group as core portfolio holdings, RFG in second-tier food shares and Sea Harvest and Rainbow as more speculative buy interests.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.