Sink your teeth into RFG

Food brands group RFG last week issued year-end results that will have made its more illustrious competitors on the JSE a little concerned — and green with envy — at the impressive efficiencies and innovations flowing through in the numbers, thanks to some big capital spend previously.

There was a lot to like for investors, who have seen relatively poor fare from other food groups. RFG’s turnover was pushed up almost 9% to R7.9bn, with operating profit hiked a stout 32% to R757m. The operating margin came in at 9.6% — within spitting distance of the targeted 10% range set by RFG executives.

It wasn’t only the income statement that impressed. Cash generated from operations was 60% higher at R1.075bn, with the balance sheet looking a lot fatter; gearing has dropped from 36% to 21%. Not surprisingly, management hiked the dividend 35% to 62c a share.

CEO Pieter Hanekom reckons there’s more to come. “We are seeing the efficiency gains in our factories from our capital spend and we are selling to the right customers at the right margins. Things are falling into place … there is more to come with regards to improvements in our production facilities. We are well capitalised and geared for the good times.”

Yet RFG — which owns brands including Rhodes, Magpie, Ma Baker, Squish, Bull Brand, Bisto and Gold Dish — is not afforded the same market ratings as the JSE’s other diversified food players. RFG sits on a trailing earnings multiple of under seven (and a yield of 5%) against the 10 multiple slapped on Tiger, 14 for AVI and RCL, 9.5 for Premier Group and 9.75 for Libstar.

Still, on a total return basis, RFG’s shares are up 4.5% year to date, against Libstar’s 44% slump and Tiger’s 10.6% slide. AVI, regarded as the Rolls-Royce of JSE food groups, has gained 12.7%.

Leandro Gastaldi, director of Blue Quadrant Capital Management, says RFG has good management, above-average brands and a balance sheet in decent shape.

So what’s the problem?

Perhaps it’s the perception that RFG isn’t as brand dominant as Tiger or AVI.

Yet in terms of brand position, the group’s Rhodes jams range is a No 1 player, with a 50% market share. The brand holds second position in canned fruit with a 41% share. In canned vegetables it is a distant second behind Tiger’s Koo, with a 20% market share. In canned meat and meals, Bull Brand is tops, with about 75% of the market.

RFG dominates the pie and pastry segment with a 51% share in frozen pastry and 58% in retail/frozen pies. The Rhodes fruit juice brand, with a 30% market share, is the second biggest in a competitive category that includes PepsiCo’s Liqui-Fruit and Ceres.

But a serious chunk of the past year’s profit came from nonbranded exports — mostly fruit, juices and pulp and purees. International sales were nearly R1.9bn, with operating profit coming in 17% higher at R245m — despite a volume decline of 13.6% and a price push of only 4.6%. The margin sits at nearly 13%, with foreign exchange gains giving almost a 14% boost to the international division’s performance.

There is a reassuring spread of markets, with 30% of sales going to North America, 30% to Europe, 18% to the Far East, 12% to Australasia, 8% to South America and 2% to the Middle East. Hanekom says: “We continue to diversify the [international] business. We have a nice spread all over the world.”

Gastaldi says it’s important to establish how sustainable RFG’s international/export earnings are, given that they now account for such a large share of profits. “We don’t have a clear view here yet, though management is confident it is sustainable.”

It’s worth noting that the strong export performance was achieved even though shipments were hampered by extreme winter weather, particularly in September, as well as low productivity and congestion at the Cape Town port. RFG says the port delay is averaging 12-16 days, with shipping lines bypassing the port when it’s too costly to dock due to the snarl-up.

A serious chunk of the past year’s profit came from nonbranded exports — mostly fruit, juices and pulp and purees

Gastaldi is concerned about the outlook for the canned brands, given increasing competition in the market. But, he says, “RFG is strong on canned fruit and fruit juices. This should be a defensible market share for it.”

What is interesting to see in the results is that the dip in local (regional) volumes slowed in the second half. RFG’s pricing power is encouraging too. But, clearly, it won’t be easy going into the new financial year with local consumers still under the cosh. It means that pushing the operating margin to its targeted 10% by the end of this interim period would be a huge achievement.

Yet Hanekom is confident the group will do it, despite the high costs of tin cans and paper packaging.

RFG’s balance sheet does raise a few questions for the financial year ahead. Its stated capex is R280m — most notably an upgrade and replacement of equipment at the Tulbagh fruit products factory, and the replacement of canning equipment and capacity expansion at the meat products factory in Krugersdorp. There’s the inevitable spend on generators to cope with load-shedding, along with four solar projects. And R40m has been earmarked for the annual replacement of pineapple plantations in Eswatini.

Pushing the operating margin to its targeted 10% by the end of this interim period would be a huge achievement

While it’s unfair to describe the RFG balance sheet as “lazy”, there is space to spend beyond operational upgrades. Group FD Tiaan Schoombie says a higher dividend was contemplated. “In the end we decided to remain prudent and stick to our policy of three times cover. Though cash generation was good, we’d rather, in these uncertain circumstances, see how 2024 goes and then decide.”

He points out RFG had another R200m repayment to make on its term debt, as well as the overdraft of R100m. “By just repaying that, the interest savings will make a difference to our earnings per share.”

Share buybacks seem unlikely, with the RFG share already suffering from liquidity constraints. Hanekom believes there could be an opportunity for bolt-on acquisitions.

Shareholders would probably not be dejected if acquisitions did not transpire, given RFG’s internal growth prospects.

Hanekom says: “Let’s get through the next six months and look at our capital investment strategy. We’ve got a lot of headroom available in the categories we operate in. We back ourselves from an execution perspective.”