FM editor Marc Hasenfuss received several reader requests for an updated opinion on Rainbow Chicken, so the IM obliges with a review of our March comment on the poultry stock when the counter was trading at 354c.
At the time of writing, Rainbow is 14% higher at 403c (having touched 414c).
Rainbow has had a colourful trading history since its June 2024 unbundling from RCL Foods and listing on the JSE. From a listing high of 625c, which IM was wary of at the time, the stock bottomed at 301c in early April and has since rallied by about 34%.
Rembrandt retains an 80% stake and if you include the top three institutional shareholders, underlying liquidity is tight. IM believes this is one key reason Rainbow remains below most investors’ radar.
In the March review — titled “Nearly time for the chicken to cross the road?” — IM articulated the belief that the stock was due for a sustained rally as positive tailwinds in the poultry sector started to stir. Rainbow just seems cheap and overlooked relative to the sector’s big bird, Astral Foods.
Year to date, Rainbow (up 8%) has outperformed Astral (down 3%). In comparing the two, Rainbow has a more balanced portfolio, featuring products for the quick-service restaurant (QSR) sector, food service, value-added products under the Farmer Brown and Simply Chicken brands, and individually quick frozen (IQF) chicken portions.
Astral, as a large, efficient producer, has nearly 57% of its products within IQF, and Rainbow about 25%. IM likes the non-IQF businesses in Rainbow and the higher margins those assets can generate.
This mix and the utilisation of the produced protein into a more margin-beneficial product range has been Rainbow’s key strategy to extract a higher margin than just “chopping up a chicken into IQF and selling into a competitive market”.
The decline in the key cost inputs in the past year of yellow maize and especially soya and sunflower will aid an improvement in sector earnings in the second half of 2025 and into 2026. From a peak of R5,750 a ton, yellow maize is now trading at R4,200 a ton, and this procurement saving (which accounts for about 60% of the cost of rearing a chicken) will start to feed through into the last quarter of 2025. Year to date, the biggest cost savings have come from two other key inputs: soya, the second-largest feed cost, is down 22% and sunflower 5%.
The only potential dark cloud is the
re-emergence of
bird flu
Further sector cost- and margin-enhancing benefits are the cessation (or at least sharp reduction) of costly and disruptive Eskom load-shedding, reduced fuel costs (diesel is a major distribution cost) and, from the 2023 kilogram poultry price realisation lows — mainly due to weak QSR demand and competitor (Daybreak) price dumping — the kilogram prices of IQF and whole fresh chickens have risen by 24% and 16% respectively.
The double-edged sword of bird flu has also played a part in the sector’s positioning. Parts of Europe, the US and more recently a large producing state in Brazil — the largest exporter to South Africa of poultry products — have been affected by bird flu, which has hit global supply chains. Bans by the South African government of poultry imports have assisted local producers, and the products that are imported — such as mechanically deboned meat that goes into processed meats, and offal and carcasses — are not produced in sufficient domestic quantities to meet demand from poorer consumers. Due to tariffs and duties, the contentious frozen bone-in product is a fraction of its past volumes.
The domestic chicken producers are now in a succulent place after some lean years. Input production costs of key soft commodities are falling, chicken prices are rising, and demand is picking up and should accelerate as warmer weather reappears. What’s more, a local disrupter, Daybreak, is mired in scandal.
The only potential dark cloud is the re-emergence of bird flu, which hit the sector hard in 2022/2023 but has since been kept in check. Two recent cases were reported in Mpumalanga and North West, but not at the listed players. This is the ever-present sector threat.
IM expects good earnings for the sector in the second half of 2025 and into 2026. At 403c — as per our March review — IM maintains its buy recommendation with a potential pot of gold at the end of this Rainbow starting to shine.
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.