RCL Foods Limited FY22 Year-End Results Equity Update

Food security is one of the biggest concerns globally as prices continue to rise. Still, for companies with a well-established footprint, the results continue to show resilience against the current inflationary environment, reflecting pricing power. One of South Africa’s leading food manufacturers, RCL Foods Limited, is one of these companies

RCL delivered satisfactory year end results for FY22 despite a constrained consumer spending environment. The consumer staple company’s performance exhibits a pleasing turnaround strategy across various segments.

The Group has five main segments: Groceries, Baking, Sugar, Chicken and Vector Logistics.

• The Groceries segment consists of Grocery, Pies and Beverages business units. Net revenue saw a 10.3% jump to R5.9bn (FY21: R5.3bn) which has been anchored by improved volumes in the grocery business unit driven by the launch of new products in the value tier, which were well received by cost conscious consumers. The slight decline of 1.4% in EBITDA to R550.1m (FY21: R557.8m) is a result of margin pressure in the Pies and Beverages business units, while EBITDA margin contracted by 110bps to 9.4% (FY21: 10.5%). Underlying EBITDA came short by R10.7m thus reaching R562.4m in FY22 and underlying EBITDA margin diminished by 120bps to 9.4% (FY21: 10.6%).

• The Baking segment comprises of Bread, Buns & Rolls, Milling and Speciality business units. The segment’s net revenue went up by 6.4% to R5.94bn (FY21: R5.58bn) driven by robust volume growth seen in the Speciality, Bread and the Buns & Rolls business units. EBITDA fell by 6.3% to R487.9m (FY21: R520.6m) whilst underlying EBITDA fell off by 6.7% to R494.5m (FY21: R529.9m). In H2FY22, margins were under duress, in view of wheat and fuel costs increasing, with both EBITDA and underlying EBITDA margins narrowing by 110bps to 8.2% (FY21: 9.3%) and 8.3% (FY21: 9.4%), respectively.

• The Sugar segment is made up of the sugar and molasses-based animal feed business units. Net revenue increased by 7.4% to R8.86bn from R8.25bn achieved in FY21 supported by stable demand coupled with price increases in tandem with the CPI. The much-improved performance is in defiance of lower production caused by heatwaves and an aphid infestation affecting the Nkomazi area. Furthermore, the Komatipoort site was engulfed in fire resulting in 41 thousand tons of sugar destroyed. Insurance proceeds will be accounted for in FY23.

• The Chicken segment consists of Rainbow chicken and Grain-based animal feed business operations. The segment’s net revenue climbed by 10.1% to R11.35bn (FY21: R10.31bn) owing to enhancements in selling prices and sales mix. The efforts of the turnaround strategy are starting to bear fruit, with EBITDA and underlying EBITDA increasing more than 100% to R347.1m and R348.6m, respectively. EBITDA and underlying EBITDA margins expanded by 290bps to 3.1% and by 200bps to 3.1%, respectively.

• Net revenue generated by Vector Logistics surged by 29.9% to R2.706bn (FY21:R2.083bn) as volumes recovered to almost pre-pandemic levels in the food service industry and strong volumes by the retail sector. This performance was despite the loss in revenue due to the civil unrests during Q1FY22 and the impact of the flooding that occurred in Kwa-Zulu Natal during Q4FY22.

   

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VALUATION
RCL has a strong and well diversified range of products with good market share in their respective categories and is relatively better positioned than its competitors due to its focus on both ends of the LSM spectrum. The Group diversification assists in insulating the Group from a pressured lower-income consumer. Despite a low spending environment, the Group managed to yield more than satisfactory results.

Both our DCF and P/E valuations indicate that the share is Undervalued, with a price target of R13.35. The DCF price is an indication of a longer-term value of the company as we have used cash flow forecasts over the next 3 years, with a discount rate of 19%1 and a terminal growth rate of 4.5%.

Our relative P/E valuation, comparing RCL to other food producers, yields an implied P/E of 11.05x which places the share at a price of R13.11.

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This research was compiled by Mechantec Capital (one of South Africa’s leading research houses) on 22 September 2022. RCL Foods declared a dividend of R0.30 per share for the year-end results. The last trading date for these shares will be 18 October 2022, with the payment date being 27 October 2022.

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Sources – EasyResearch, Merchantec Capital, RCL Foods Limited.

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