Chickening out of the business

RCL Foods’ diverse food portfolio has proven to be effective, but might drive investors away.
Chicken and poultry plays a smaller role in RCL. Picture: Moneyweb

Africa-based food producer, RCL Foods’ shift to a more diversified food portfolio from chicken and poultry is improving business, however the decision to ‘chicken-out’ may dim the market’s focus on the company.

RCL reported a 2.4% decrease in revenue, but a 55.9% increase in headline earnings for the six-months, ending December 31, 2017. Headline earning per share was 74.5 cents.

The group took a decision in February 2017 to restructure its chicken business model. According to a statement from the company, the new business model aims to “curb commodity-driven consequential chicken categories and to provide less volatile, more consistent and sustainable returns throughout the cycle”.

CEO of RCL Foods Miles Dally, said that the approach of a diversified food portfolio and the new chicken business has proven to be effective thus far.

“We have made steady progress towards our goal of a diversified food portfolio and remain confident in our strategy,” he said.

The strategy to diversify its food portfolio might, however, not be the best strategy to attract investors. This is according to small-cap analyst at Vunani Securities, Anthony Clark.

Clark told Moneyweb that while the overall results are “good”,  this is only because of input cost reduction, and the benefit of higher prices in the sector due to avian flu outbreaks and demand that exceeds supply.

Given the cutback in poultry supply, RCL Foods, which was formerly known as Rainbow Chickens, is setting itself up for short-term success, he said. RCL Foods’ gradual shift away from the commodity chicken business, gives its rival, Astral Foods a benefit, he added. “The best thing that ever happened to Astral Foods is Rainbow Chickens cutting back production.”

RCL specialises in chicken and poultry supply, consumer household items, logistics, baking (bread), sugar, Animal Feed and the supply of soft commodities.

36ONE analyst Cobus Cilliers, concurred that the results looked “good” and attributed the performance to the groceries division alongside the chicken business.

The group reported that its basket outperformed the rest of the market in terms of volume growth. For the period, the RCL Foods basket growth went up by 7.1%, while general market only grew 1.7%.

Clark said the diversified portfolio created a kind of uncertainty in the market and for investors, despite the improvement in headline earnings. He said the figure was not sustainable and might as well be a “once-off benefit”.

Cilliers, on the other hand, said the Heps increase was driven by lower input costs (feed costs) for the chicken business and better realised prices. He expects this to continue for at least 12 months. Higher import duties from Brazil also helped the domestic market.

However, as chicken becomes a lower profit contributor, Clark warns that diversity dilutes the benefits of being part of a substantially better performing chicken market.

“To walk away from a significant part of a lower to mid-end chicken market to focus more on grocers and quick service restaurants, means they will not get the full benefit going forward if interest prices remain low, which I think they will and if chicken prices remain high, which I also think they will,” he said.

While Cilliers said the new strategy “seemed to be working” for the group, Clark feels that that it might not be working for the investor.

The shift in RCL Foods’ approach will shift investor and market perception of the group. Since investors want a more distinct idea of what they are investing in, the diversified portfolio may not be an attractive investment option.

“It’s affecting the perception of the company and its underlying valuation because people like to invest in distinct categories,” said Clark.

“There are so many other companies out there specialising in nice areas where investors look at rather than buying a basket of companies that no body knows what the grand plan is,” he added.

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