Is the local poultry sector — its prospects plucked lately by several unfavourable developments — the dripping roast that value investors so desperately crave? That’s difficult to say, but one thing is certain, the pecking order might be changing, with two major corporate actions under way.
Certainly, the latest bouts of corporate action might have punters looking past the pending Competition Commission’s insistence on a comprehensive product market inquiry and the ongoing challenges of cheap chicken imports, load-shedding and unreliable water supply.
The big news is that Remgro-controlled food brands conglomerate RCL Foods will finally split off and list its Rainbow Chicken subsidiary separately. Rainbow was listed as a standalone company in the 1990s and endured a period of sustained losses that smashed the share price.
The latest move was not entirely unexpected, as RCL had already separated out Rainbow under a new management team, headed by former Country Bird Holdings (CBH) CEO Marthinus Stander, about two years ago.
Officially, RCL CEO Paul Cruickshank has argued that the unbundling of Rainbow “will enable both businesses to pursue their respective growth ambitions … in a focused manner and with improved alignment on capital allocation priorities”.
I always thought it should have happened earlier. It’s very difficult for poultry companies, what with their volatility, to be part of another food company
— Chris Schutte
Chris Schutte, CEO of Astral Foods, the JSE’s biggest poultry business, says the proposed separation of Rainbow from RCL is a very good move. “I always thought it should have happened earlier. It’s very difficult for poultry companies, what with their volatility, to be part of another food company. It’s either boom or bust.”
Hopefully Rainbow’s emancipation from RCL works out as well as Astral’s spinning out from Tiger Brands did in 2001. Astral was listed separately at about 775c. The share price is now R144, with a long tail of generous dividend servings.
Rainbow seems to have secured a profitable perch. RCL’s financial review for the six months to end-December showed revenue up 11% to R7.3bn and a huge swing back into the black to the tune of R287m at the level of earnings before interest, tax, depreciation and amortisation.
Cruickshank says Rainbow is well into the second year of the turnaround phase, notwithstanding the challenges presented by load-shedding and the avian flu outbreak last year. “Most of the building blocks are in place, which is [resulting in] positive results.”
Cruickshank says the overall gain in the interim period stems from a better agricultural performance coupled with the new breed rollout, cost control, improved margins (a commendable 3.9%) and higher volumes in the retail and wholesale channel.
He confirms that the expansion of Rainbow’s Hammarsdale processing plant has been implemented successfully and is boosting volumes, with full capacity utilisation expected in July.
Most of the building blocks are in place, which is [resulting in] positive results
— Paul Cruickshank
If the prospect of a revamped Rainbow returning to the JSE is interesting, developments unfolding in small poultry, egg and animal feeds business Quantum Foods are far more intriguing. Quantum, which is a thinly traded stock at the best of times, was all a-flap last week, with outsized trading volumes and a more than 100% increase in the share price. To top it all, the shareholding structure has taken an unexpected twist.
Readers will remember that in 2020 unlisted poultry group CBH snapped up Zeder Investments’ shareholding in Quantum.
CBH briefly held a commanding 30.81% stake in Quantum. But out of the blue, international investment company Silverlands (also a major shareholder in JSE-listed agribusiness Crookes Brothers), which had a strategically important supply agreement with Quantum in the Western Cape, stepped in as a foil with an initial 6.42% stake. Astral subsequently built this stake to close to 10%.
CBH then sold down its stake markedly, allowing Braemar — largely believed to be a vehicle associated with the Rudland tobacco barons — to secure a roughly 31% stake.
Since then neither Silverlands nor Braemar has made a move to gain outright control of Quantum — at least not publicly.
But the cat was put squarely among the pigeons last week when Astral unexpectedly sold its significant minority stake to CBH.
Schutte explained that when Astral acquired the 9.8% equity stake in Quantum during June 2020, there were unmitigated risks the group had to manage. “These risks centred on securing the supply of live broilers to Astral’s County Fair operation in the Western Cape from Quantum.”
Schutte stressed that Astral has sufficient time to make new arrangements if the supply agreement comes under threat.
CBH’s stake in Quantum now sits at 15.8%, a level that would give the group “kingmaker” status, with Silverlands and Braemar — at the time of writing — still holding roughly 34% and 31% of Quantum respectively.
Things could change. Quantum issued a convoluted statement on the recent share trades, which pushed the share price as high as 950c last week from 450c at the start of the month.
A 950c share price seems a stretch, fundamentally speaking, even if Quantum’s most recent trading update (the four months to end-January) showed a few encouraging trends after the avian flu setbacks. The past financial year brought a loss and the previous year scant profit. The group did, however, manage 96c a share in earnings in financial 2019.
The statement from Quantum — which has just appointed Adel van der Merwe as CEO — notes that an unnamed shareholder has also received an unsolicited offer from CBH to acquire its shares “at a price above the then prevailing market price but below 725c a share”. The group adds that another, also unnamed, shareholder has informed the company of its intention to offer its shares to the market at 810c.
Quantum says 777,489 shares were traded on March 7 at an average price of 839c and the highest traded price at 920c.
Since CBH’s acquisition, Quantum says, it has been in discussions with various stakeholders and is exploring the potential for other parties to buy shares in the company.
Quantum says certain shareholders have agreed to sell their shares to “one or more such stakeholders” — including a person related to Silverlands’ associate company, Aristotle Africa. The company says one of these sales is expected to take place at 775c a share.
Silverlands, or Aristotle, is already perilously close to an ownership figure that would trigger a mandatory offer to all Quantum shareholders. Whether CBH beats them to that point by making an offer to all shareholders — or even approaching Braemar with an offer it cannot refuse — remains to be seen.
Anthony Clark, analyst at Smalltalkdaily and poultry sector expert, says the current large shareholder groupings — including management — means there is only a 5% or 6% free float in Quantum’s shares. “So, for a grouping — whether it be a combination of Silverlands and management or CBH and Braemar — to secure a 50.1% holding for outright control could take some running around the market for decent parcels of stock. Remaining minority shareholders in Quantum are in the enviable position of being able to ask what price they want for their stock.”
Interestingly, it’s not CBH’s first time on the dance floor. Back in 2016 it swooped on Eastern Cape-based poultry group Sovereign Foods — an opportunistic takeover bid that was eventually thwarted when key shareholders in Sovereign resisted the overtures. This allowed private equity group Capitalworks to step in and buy out Sovereign.
A profitable exit at Sovereign no doubt eased the frustrating outcome for CBH. Will this again be the case with Quantum? Or will CBH dig its claws in this time?
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