Our opinion on the current state of RCL

RCL Foods, a significant player in the South African food, sugar products, and chicken market, is predominantly owned by Remgro with an 80.4% stake. The company boasts an array of renowned local brands, including 5 Star maize meal, Farmer Brown poultry, and Yum Yum peanut butter, positioning it as a key competitor against foreign imports across its product lines. However, challenges such as the listeriosis outbreak have adversely affected the market for processed meats, imposing estimated costs of around R158m on the company. Moreover, RCL has faced pressures from a sluggish economy, diminished consumer spending, and high unemployment rates.

In response to these challenges, particularly in the poultry sector, RCL, via the South African Poultry Association, has lobbied the International Trade Administration Commission (ITAC) for a substantial increase in tariffs on imported chicken, advocating for an 82% rise to protect its market.

For the fiscal year ending on 30th June 2023, RCL reported a revenue increase of 17.3% alongside a notable decline in headline earnings per share (HEPS) by 42.4%. This downturn in earnings was largely attributed to unrecouped cost pressures within its Rainbow chicken division, despite a solid underlying performance in its core Value-Added Business, which saw underlying EBITDA rise by 10.8%. This juxtaposition of achievements and challenges underscores the company's resilience and effective management in navigating a particularly tumultuous year.

Looking ahead, RCL offered an optimistic outlook in its trading statement for the six months ending 31st December 2023, projecting an increase in HEPS of between 41% and 45.9%. This positive forecast follows significant corporate actions, including Remgro's increased investment in RCL through the acquisition of 100 million shares at R8.05 each on 2nd December 2020, and the strategic sale of Vector Logistics for R1.25 billion announced on 29th March 2023.

Despite these developments, RCL's share price has experienced a period of stagnation and decline since reaching a peak on 9th February 2022. Given this trend, a cautious approach is advised, with a recommendation to wait for a decisive upward shift through the long-term downward trendline before considering investment. This strategy aims to ensure that investors can capitalize on the company's well-regarded management and potential market recovery, aligned with improving economic conditions and successful strategic moves.

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