Is Rainbow Chicken now worth crowing about?

In June 2024 Rainbow Chicken winged it back onto the market as a standalone listed company after its unbundling from food brands conglomerate RCL Foods.

This move signalled a renewed focus on Rainbow’s core poultry operations, vertical integration and brand-led growth.

South Africa’s poultry sector, which is still the country’s largest source of affordable animal protein, faces persistent challenges: high input costs, unreliable energy, biosecurity threats and policy uncertainty. Other issues Rainbow and other industrial players have persistently highlighted are a lack of infrastructure, particularly roads and rail. Rainbow has stressed that the impact on logistics is costly and is “adverse to trying to reduce costs to make products more accessible to our South African consumers”.

Rainbow’s transformation will test whether growth remains viable in this constrained environment.

So far, so good. The results for the year to end-June were stout, with a 9% increase in sales to R15.8bn translating into a 66% gain in earnings before interest, tax, depreciation and amortisation (ebitda) to R1.06bn. Cash generated from operations increased 64% to R1.9bn, with a 20c a share dividend underpinning management’s confidence in short- to medium-term prospects. CEO Marthinus Stander, speaking at the investor presentation, indicated that while Rainbow delivered a strong set of financial results, there was further potential in the group’s core operations. “Stakeholders can expect more of the same disciplined approach to delivering results,” he said.

But investors need to look beyond the numbers.

Rainbow’s investments, especially in facilities such as those in Hammarsdale, reflect a scale-driven strategy, aiming to lower unit costs and unlock operating leverage. But macroeconomic realities undercut this logic. Inflation, joblessness and weak consumer demand limit pricing power in an extremely price-sensitive market. While scaling may bring efficiencies, it does not shield against razor-thin margins or the financial drag of underutilised capacity. Soft volumes and competitive discounting often erode the intended gains.

Stander does point out that for Rainbow it isn’t necessarily about a scale-driven strategy. “Yes, scale and volume throughput was part of the strategy, but the overarching strategy was to be ‘best in class’, going back to the basics, focusing on the engine room of our operations, improving back-end agriculture performance, cost-saving initiatives and overall driving efficiencies.”

He adds that another benefit for Rainbow is its “incredibly diverse portfolio” vs competitors. The key is leveraging this diversity.

South Africa’s poultry industry is fragmented and fiercely competitive. Top players — Astral, Country Bird, Rainbow and Sovereign — control 70%-75% of the market, but hundreds of small regional firms drive intense price competition, especially in frozen bulk segments. While large producers are vertically integrated to manage costs and supply chains, they still face vulnerability from external shocks. Imported chicken (mostly from Brazil) accounts for 20%-25% of local consumption, and antidumping duties have swung wildly between 30% and 82% since 2012, depending on political aims.

The overarching strategy was to be ‘best in class’, going back to the basics, focusing on the engine room of our operations

—  Marthinus Stander

Stander says commodity pricing will remain volatile, applying pressure on consumers. “We will continue to call for support from the government to protect the local industry and make chicken accessible and affordable to South African consumers.”

Feed — up to 70% of production cost — is a major pain point. Price and currency fluctuations can severely affect financials, while biosecurity threats such as avian flu add to risk. In response, firms are investing in automation, cold chain infrastructure and value-added brands. Yet resilience, not just scale, is what separates sustainable operators from fragile ones.

Rainbow’s Hammarsdale plant is one of the largest poultry facilities on the continent, capable of processing more than 1.4-million chickens per week — enough to feed every South African household in less than a month. This scale promises cost reductions and production efficiency. However, fixed costs in energy, maintenance and labour are high regardless of output. A 10% dip in utilisation can significantly erode expected savings.

Demand softness makes full utilisation difficult, limiting pricing power and the returns on capital expenditure. Moreover, Rainbow’s supply chain must consistently deliver huge volumes of feed, live birds and labour. During the 2023 avian flu outbreak, Hammarsdale’s flexibility gave Rainbow an advantage. It quickly shifted schedules and product lines, cushioning losses that hit less adaptable rivals. Even so, the full value of such infrastructure depends on synchronised execution across supply, demand and operations.

In poultry, margins are thin and volatility is punishing. A mere 1% rise in maize prices can slash profits by R50m. Feed inflation and currency swings are recurring risks. Rainbow mitigates this through vertically integrated feed milling, yet cost containment remains a constant battle.

Revenue strategies hinge on brand-led pricing. Rainbow’s Simply Chicken, Farmer Brown and Ready2Go enable modest price premiums in value-added segments. Ready2Go has even posted double-digit growth during times of flat commodity pricing, proving the resilience of convenience-focused offerings.

Stander argues, though, that Rainbow is more about the value proposition these added value brands offer consumers. “Yes, convenience somewhat warrants a premium. However, our added-value strategies are centred on offering consumers value … listening to what they need and delivering quality at a reasonable price. This has enabled us to be the No 1 brand in most of the added-value categories in which we play [in terms of defined market/retail market share].”

Still, challenges remain in bulk segments. Quick-service restaurants such as KFC account for 15% — 20% of revenue but operate under volume-based contracts with limited pricing flexibility. These deals reduce Rainbow’s ability to pass on cost increases. The company’s blended portfolio of high- and low-margin products is key to smoothing earnings, but navigating these dynamics demands tactical agility and constant innovation.

With domestic growth slowing, Rainbow is eyeing Southern African markets for regional expansion. But this path is complex. Despite having Africa’s largest poultry industry, South Africa exports less than 3% of its production, mostly to Mozambique, Namibia and Botswana. Meanwhile, the region imports more than 400,000t annually, much of it from Brazil and Europe.

Logistical barriers are formidable: cold chain gaps, custom inefficiencies and border delays — up to 12 days in some cases — drive up costs and jeopardise freshness. Currency volatility adds further strain, with fluctuations of 15%-30% against the rand. To succeed, Rainbow must craft market-specific strategies, establishing partnerships, local processing hubs and compliance systems for halal certification and labelling.

Opportunities such as exporting “day-old chicks” offer higher-margin expansion, leveraging Rainbow’s genetics and breeding capabilities. The African Continental Free Trade Area agreement, if realised, could be a game-changer, reducing tariffs and boosting intra-African poultry trade by up to 50% over a decade.

Stander says the Poultry Master Plan 2.0 is centred on driving exports. But he adds: “The South African poultry industry requires further engagement between the department of trade, industry & competition; the department of agriculture, land reform & rural development; and the African Trade Desk to cohesively drive this agenda and support access to export markets.”

Rainbow must now choose: deepen its value-added focus or continue competing in bulk segments. Value-added products promise better margins and consumer loyalty, but require investment in tech, branding and insight-driven marketing. Regardless of direction, foundational pillars remain critical — biosecurity, operational discipline, traceability and cost control.

Stander says: “We don’t believe we are at the point of making a decision of whether or not we choose added value or bulk. We believe a diverse portfolio has its benefits.” 

Capital allocation will shape outcomes: reinvestment in capacity vs shareholder returns. Strategic clarity on what to prioritise and where to invest will define Rainbow’s competitiveness and role in the sector’s future.

Rainbow Chicken’s valuation hinges on its ability to balance scale with agility in a structurally constrained industry. While its expanded capacity and brand portfolio offer strategic upside, persistent margin pressure, volatile feed costs and regulatory unpredictability temper aggressive multiples.

A discounted cash flow-based approach would likely reflect modest revenue growth (3%-5%) and thin operating margins (5%-7%), with reinvestment needs keeping free cash flows modest in the near term. Given these dynamics, Rainbow is more appropriately valued as a stable cash-generative operator than a high-growth play, warranting a conservative enterprise value divided by its ebitda, in the five to seven range, aligned with global peers in low-margin protein sectors. At a current share price of about 430c, Rainbow trades at a multiple of about 3.3, notably below this range.

Its trailing p:e stands near seven, also slightly below the peer average of about 9.7. On an enterprise value to sales basis, the company trades in the 0.2-0.3 range, reflecting its participation in a capital-intensive, low-margin sector. This discount suggests investors remain cautious, pricing in execution risk, input cost volatility and exposure to trade policy swings.

Nonetheless, for long-term investors the current valuation may represent an opportunity, especially if Rainbow can demonstrate improved margin resilience and operational leverage over time.

Rainbow’s evolution shows that scale, once a dominant advantage, is no longer sufficient in South Africa’s poultry sector. Structural constraints — volatile inputs, shifting policy and soft consumer demand — diminish the financial payoff of simply getting bigger. However, Rainbow’s strengths in vertical integration, brand management and operational agility offer a path forward.

In a maturing and margin-squeezed industry the winners won’t just be the largest, they’ll be the most adaptive. Competitive advantage now lies in how well scale is deployed, not just how much of it a firm possesses.