In the days preceding the stellar trading update released by mid-cap food producer RCL Foods on February 7, the stock — which had been mired in pedestrian, sideways trading at about the 800c level since October 2024 — surged 26%.
The trading update for the six months to December 2024 and the recent results release, IM believes, were the reset that the lumbering RCL Foods needed.
IM has looked askance at RCL as the share price barely changed in two decades. The agglomeration of assets, which made sense to RCL and majority shareholder Remgro, seemed at odds with the more focused and streamlined groceries business that investors would have liked.
RCL often moved at a glacial pace (much like its 80% shareholder Remgro), but did eventually pare back the business, winning plaudits from the market. The Vector logistics business was sold in March 2023 for R1.25bn. Then the volatile and cyclical core founding component of RCL, Rainbow Chickens, flew the coop in June 2024 to its own separate JSE listing.
What remains within RCL Foods is a groceries operation principally derived from the 2013 acquisition of Foodcorp, a baking business. It has seen some regional bolt-on deals and the legacy acquisition, also in 2013, of a former Remgro asset, Transvaal Sugar Board (TSB), to “broaden the portfolio”.
The market has been sour on TSB, with investors repeatedly asking RCL management when it will follow Rainbow Chickens and be sold or spun out. But in recent results, TSB has made a sweet contribution to RCL profits.
Cuts in interest rates, a reasonably stable rand and low relative fuel prices all aid the fragile consumer environment and will help the macroeconomic environment
The latest interim results were driven by meaningful profit and margin growth within groceries and baking, which had previously been lacklustre in comparison with sugar, the key mainstay, which accounted for about 45% of profits.
Overall, RCL reported a 5% rise in revenue to R13.4bn with a 29% increase in operating profit to R1.23bn. Profit before tax also rose 29% to R1.3bn — all driven by margin enhancement. Headline earnings rose 38.8% to 109.4c a share with a 20c a share interim dividend declared. The results are all the more commendable as RCL notes that the consumer environment remains challenging with input costs and production costs rising. What’s more, competition has intensified in the bread market, where RCL has the No 4 position.
In the period, profit contribution by groceries and baking rose 29% and 173% respectively, with solid margin improvement in both cases. The absence of load-shedding during the six months aided costs and efficiency, with categories such as pet food recovering well. Management judiciously trimmed some category promotional activity to push margin. Many of RCL’s key brands already enjoy leadership positions, such as mayonnaise and rusks.
At the time of writing, the postponed and revised budget had yet to be published. It may involve hardship for consumers as the government tries to balance the books. There have also been calls to increase the sugar tax under the health promotion levy.
Cuts in interest rates, a reasonably stable rand and low relative fuel prices all aid the fragile consumer environment and will help the macroeconomic environment.
RCL says it remains optimistic despite a problematic consumer landscape. The sugar division is well placed though the global price of sugar has softened in recent months. RCL says that after two successive years of record performance and higher local prices, TSB is well placed into 2025.
Additional tweaks within groceries and baking should result in further enhancement into the second half. Mix and pricing change dynamics in the first half put a renewed spring in RCL’s step and that was clearly evident in the management results narrative.
At R10, given the bumper first half, IM believes the unwind of the historic p:e of 8.2 will be evident in the second half. Tight liquidity is an issue but IM sees good value in RCL Foods and hopes the recent share price reset momentum can continue.
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