By: Edward West - BUSINESS REPORT
RCL Foods’ board has approved the unbundling and separate listing of its poultry business, Rainbow Chicken, “sooner rather than later”, RCL CEO Craig Cruickshank said yesterday.
RCL Foods share price rose 4.5% to close at R10.45.
“On March 1, 2024 the board gave its preliminary approval to pursue the formal separation of Rainbow via an unbundling to shareholders, and a concurrent listing on the JSE,” RCL said in its interim results for the six months to end-December. Rainbow is one South Africa’s largest poultry producers.
“The board is of the view that the unbundling of Rainbow will enable both businesses to pursue their respective growth ambitions and investment theses in a focused manner and with improved alignment on capital allocation priorities,” a statement said.
Cruickshank said in an interview that the listing, which he hoped would occur in a matter of “months”, would give shareholders the opportunity to elect to invest in a pure chicken play through Rainbow’s listing, or to invest in RCL’s value-added branded products businesses.
Smalltalkdaily Research analyst Anthony Clark said the listing was a good move, as RCL had been disliked by the market for years because of its collection of “hodgepodge” interests that were not aligned to being a branded food-producing company.
He said the big question was whether Rainbow would have sufficient capital to stand on its own feet on the JSE, as poultry was a volatile business that required significant capital reserves.
Clark said the main shareholder, Rembrandt, had indicated it would not put any additional funds towards the listing, and a rights issue might not be well received by the the market, so “it will be interesting to see what RCL does”.
Anchor Capital investment analyst Stephan Erasmus said the fact that chicken was the most popular and affordable meat in South Africa, and that demand was growing, boded well for a locally listed poultry producer, but on the other hand, the other listed poultry company, Astral, had struggled of late due to issues such as avian flu and competition from cheap imported chicken.
Erasmus said although there was not enough information regarding the capital structure, it was conceivable that a stand-alone Rainbow Chicken business would need funding.
“We see it providing upside for both companies,” said Cruickshank.
For RCL, the separation was in line with its value-added branded products strategy, while for Rainbow, and given the volatile environment and the fact that the benefits from the breed transition were starting to take effect, it was a good time to list, he said.
There remained some preparation before the listing, but much work had already been done, he said.
RCL’s earnings before interest, tax, depreciation and amortisation (Ebitda) increased by a substantial 48.6% to R1.51 billion in the six months to end-December, largely driven by a turnaround at Rainbow and in RCL’s Sugar division.
This was in spite of a tough trading environment, where high input costs, load shedding and a weak rand/dollar exchange rate exerted pressure on prices and consumer demand.
Rainbow’s revenue increased 10.8% to R7.27bn in the six month, while underlying Ebitda increased by 364.8% to R286.8m due to a better agricultural performance, improved volumes and margins and sound cost control.
This result was even though the performance was compromised by load shedding and the impact of the avian flu outbreak.
The Hammarsdale Processing plant expansion was implemented, which resulted in increased volumes and the creation of 346 direct and 143 indirect job opportunities. Full capacity utilisation was expected in July 2024.
Rainbow’s Animal Feed business benefited from improved margins, although volumes were affected by avian flu and strong market competition.
Cruickshank said consumer demand was likely to remain soft in the coming months, with cost pressures persisting despite moderating from recent highs.
The Poultry Sector Master Plan was progressing slowly despite significant capacity investment by the industry.
Rainbow and its growers invested more than R600 million at Hammarsdale to double processing and grow capacity to return the jobs lost in 2017. Greater and more urgent government support was required to access new markets in line with the plan, he said.
Trade measures to support the local industry were a key pillar of the plan. Anti-dumping duties on chicken imports from Brazil and four EU countries were reimposed in August 2023 after a year-long delay in implementation.
But on January 26, the International Trade Administration Commission (Itac) recommended certain rebates of duties on frozen poultry imports be implemented as a temporary measure to mitigate potential impacts of the avian flu outbreak.
RCL said these rebates were “concerning” as the local industry had taken costly steps to ensure there was no shortage of poultry on the local market and that the supply chain was well stocked.
Last month, the Competition Commission announced an investigation into the broiler and layer industries over concerns their concentrated structure might lead to anti-competitive behaviour.
Cruickshank said globally, the poultry industry required vast scale to be able to drive down costs and be competitive.
“The scope of the Competition Commission investigation is wide and is likely to take an extended time to complete,” he said.
“Rainbow has made considerable progress with its turnaround. The final phase of ramp-up of production in Hammarsdale and the continued benefits of the breed change are expected to impact positively going forward,” said Cruickshank.
RCL Foods share price rose 4.5% to close at R10.45.
