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RCL reaps diversification benefit

Showing signs of becoming the food giant.

After a year of frantic corporate activity, RCL Foods (the former Rainbow Chicken) is showing signs of becoming the food giant its backers Remgro envisage.

The company reported that headline earnings from continuing operations increased from R27.4 million to R601.6 million or 70 cents per share for the six months ended December 31 2014.

Comparisons are difficult because of the volume of corporate activity over the past 18 months.

This includes the acquisition of the balance of Foodcorp (35.8%) from shareholders in the second half of 2013; the acquisition of sugar company TSB in January 2014; the redemption of Foodcorp’s euro-denominated debt through cash and new rand-based debt; the implementation of a new BEE transaction and capital raising of R790.2 million in a minority share offer in February 2014.

The group has been restructured into new business clusters of ‘Consumer’ (which includes Rainbow and Foodcorp’s Grocery, Beverage, Pie and Speciality divisions) and ‘Sugar & Milling’ (which includes TSB, Rainbow’s Feed division Epol and Foodcorp’s Milling and Baking divisions).

Vector will continue to operate as a stand-alone business.

This new operating structure was effective from the beginning of this year.

With this in mind RCL Foods’ revenue for the six months ended December 2014 increased by 38.8% to R12.0 billion, headline ebitda increased by 73.7% from R688.3 million to R1 195.5 million, with the associated margin increasing from 7.9% to 9.9%.

Headline earnings from continuing operations of R601.6 million were increased significantly over the comparative period largely due to the improved performance of Rainbow, the inclusion of TSB and the replacement of the euro bonds with a rand-based debt package which eliminated the unfavourable mark to market impact.

Within the group, Foodcorp disappointed as a result of weak consumer demand and a seven-week strike at the Speciality division that incurred substantial costs. Foodcorp’s EBITDA decreased by 8.5% to R344.3 million relative to the previous period, translating into a margin of 9.1%.

Rainbow Chicken’s performance was vastly improved thanks to better demand in the local market, and a better business model which sees the company focus on value added food products, rather than the low margin individually quick frozen pieces. Rainbow’s EBITDA improved to R463.2 million, which is up 142.1% from the previous period.

The industry remains exposed to the two critical issues of imports and the dumping of leg quarters in the local market and the injection cap proposed by government, both of which may have a significant impact on the sustainability of the poultry industry.

TSB, benefitted from a new sugar tariff which led to fewer sugar imports and thus increased sales volumes in the local market. The company delivered an EBITDA of R290.7 million at a margin of 9.0%.

Logistics company Vector was hard-hit by industrial action costs which saw EBITDA decreasing by 11.0% to R110.5 million. However revenue grew as a result of a new customer Sea Harvest, growth in volumes in the Foodservice industry and an increase in Burger King’s volumes.

While the second half of the year is traditionally a slower trading period, CEO Miles Dally commented that restructuring the different groups into one company was a key enabler for value creation. “The operational improvements should continue to contribute positively to the earnings performance in an environment where economic conditions remain challenging.”

The group declared an interim dividend of 15 cents per share.

The results were released after the market closed on Wednesday. The share has fallen to R17.75, just down from the high of R19.40 reached after the trading update was released.

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