Chantal Marx
RCL Foods - At the end of the Rainbow
Since 2020, RCL has been on a journey to reshape its portfolio with the main changes having been the separation of Vector Logistics and Rainbow Chicken Ltd. The sale of vector to AP Møller Capital was finalised in August 2023 and Rainbow is being unbundled to shareholders next week, at which point the realignment will be mostly complete.
This will leave the company with its previously termed "Value added business", operating in three distinct segments.
Groceries (21% of RCL Revenue ex-Rainbow): The Groceries division includes many well-known consumer brands such as Yum Yum peanut butter, Nola mayonnaise, Number 1 Mageu, and Ouma rusks as well as a pet food offering spanning brands such as Canine Cuisine, Feline Cuisine, Bobtail and Catmor. Its brands generally have strong market shares in their respective categories. The division was heavily impacted by load-shedding (in terms of getting product to market) in FY23 and 1H24 (to end December), but several intervention strategies have now made the supply chain more resilient. In the last financial year, another major issue for this business has been to balance price increases (necessary to counter high raw material input costs) with volumes as consumer have been under financial strain.
Baking (35% of RCL Revenue ex-Rainbow): Baking operates across four distinct units, namely Bread, Buns and Rolls (that includes the Sunbake brand); Milling (with Supreme flour and 5 Start being the leading brands); Pies (headlined by Pieman's); and Speciality. Speciality is responsible for custom-developing and manufacturing products with strategic partners such as Woolworths. These include Malva Pudding, Rainbow Celebration Cake, Ciabatta, and Hot Cross Buns. These businesses have faced similar challenges to the Groceries segment, but growth has been complimented by the acquisition and integration of Sunshine Bakeries more recently.
Sugar (44% of RCL Revenue ex-Rainbow): The segment produces a wide range of sugar products under leading brand Selati. It also produces molasses-based feeds for ruminants. The sugar business had a strong year in FY23 and the first six months of 1H24, driven by favourable export pricing.
Recent Financial Performance
Up until the financial year ended 30 June 2023, the company showed a CAGR in revenue of 8% but EBITDA growth on a CAGR basis of just 1.8%. This was primarily a function of the volatility embedded in the business by Rainbow and the Sugar unit. Excluding the Rainbow business, revenue growth would have been similar, but importantly, EBITDA increased at a CAGR of 7.1%.
In March, RCL Foods released results for half year ended 31 December 2023:
Investment case summary
Risks
Valuation considerations
We utilise a sum-of-the-parts valuation and find a fair value range of between R9.79 and R11.58 per share for RCL Foods ex-Rainbow. The combined entity fair value range is estimated at R11.77 to R14.11, implying 5% to 25% upside from current levels.The bottom end utilises current peer multiples for RCL ex-Rainbow and our bottom-end valuation for Rainbow (R1.98 per share). The top end utilises average through-the-cycle peer group multiples and our fair value estimate for Rainbow (R2.54 per share).
We would anticipate a slight rerating in RCL post the unbundling (although the share price will fall with the Rainbow unbundling) and pressure on the Rainbow share price relative to fair value post-listing as shareholders who do not wish to have exposure to the very cyclical poultry industry dispose of their stock post-unbundling.
