In a review of Rainbow Chicken, South Africa’s second-largest chicken company, published in October 2024 when the share was priced at 355c, IM was positive about the business, which had flown the RCL Foods nest in June that year.
Rainbow was separately listed on the JSE but the FM suggested that the share be avoided, as the price, which had rallied to 675c, was too frothy. However, as the stock stabilised the picture became more favourable.
Since IM’s October review the price has trended to 400c, though latterly, despite stellar interim results, the counter has softened to 354c.
There are two JSE-listed poultry stocks, each with a different product mix, though both Astral Foods and Rainbow are integrated poultry producers with substantial animal feed milling operations.
Astral produces 5.4-million birds a week, of which 55% are given the IQF individual quick freezing (IQF) treatment. Rainbow, at 4.5-million birds a week, does IQF with 25%. A larger proportion of its business is for food service and for supply agreements with quick service restaurants — which include Hungry Lion and KFC — and a division for value-added chicken products and affordable proteins. This mix, and the utilisation of the produced protein into a more margin-beneficial product range, has been Rainbow’s strategy.
With the listing of Rainbow, RCL cleaned up the balance sheet. and the company started its newly independent life debt free. Further, the chicken genetics and poor farming practices that had bedevilled Rainbow, leading to lacklustre results, were resolved, placing the company back on a solid footing, hence the leap in like-on-like interim results.
In the past 12 months the poultry environment has changed, with some sector-beneficial improvement. On its JSE listing, the poultry sector was experiencing high input costs (where maize is the largest cost component), chicken had been commoditised by means of the ubiquitous IQF portions, and prices had slumped. A lack of pull-though from the fast-food sector caused flooding of the consumer market, depressing the price, which hit a low of R29.13/kg in mid-2024. Today, it is back at R33/kg (+13%).
Like its former parent RCL Foods, Rainbow also has tight liquidity, with only a 20% free float and Rembrandt controlling the balance
That may not sound like a great deal, but chicken production is a low-margin- high-volume game where control of costs is key to success. In late-January, Rainbow — from a low base of being in RCL Foods and in a different operating environment — issued a bumper interim trading update, stating that headline earnings would increase by “at least 1,100%” from the corresponding base of 2.46c a share. That was followed up by a revised higher update in late February.
Results released on March 7 saw the recovery of Rainbow’s poise, and the farming and production side improved. Revenue for the six months to December 2024, the busiest period for any poultry counter, saw Rainbow post sales of nearly R8bn (+9%) with an operating profit of R416m (+271%). The key was the improvement in margin that rose from 1.5% to 5.3% on restructuring.
The chicken division brought a material swing in profitability from a loss of R5.5m to a profit of R236m and a margin of 3.4%, still low for the cycle. The animal feeds business performed well, with profitability ahead 61% to R189m. There was no debt, so net finance costs fell R119m, further aiding results. No dividend was declared.
Rainbow said at its listing it would probably pay a dividend in 2026. Looking into the second half there are some short-term challenges and opportunities for the overall poultry sector. Tight per-kilogram pricing and higher maize prices in the year to date will have an impact on margin. That should reverse in the second half as a larger maize crop is forecast and input prices are forecast to side materially.
The delayed budget and any increased VAT may see the government allow a widening of the tax-exempt food basket. IQF products and chicken offal have been proposed by the poultry association for addition to the mix. It’s a bold ask, given the R4bn cost, but any move in that direction will aid sector sentiment. Like its former parent RCL Foods, Rainbow also has tight liquidity, with only a 20% free float and Rembrandt controlling the balance.
There are a handful of large institutional shareholders and Rainbow has little market coverage. IM forecasts a much better operational period ahead for the poultry sector into late-2025 as many key metrics now play into its favour.
IM likes the Rainbow business and product mix, and would happily establish a position in the company at lower share price levels — about 300c-330c. There may eventually be a pot of gold at the end of this Rainbow.
Anthony Clark
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