The Finance Ghost: The lowdown on RCL Foods, Bidvest, Foschini and Shoprite

11 Sep 2023

South Africa’s poultry industry faces so many challenges that writers have nearly run out of chicken puns to describe the problem. Not only is Eskom pillaging the profitability of the sector, but our occasional electricity utility is now inconveniencing every South African and their dog. Literally.

Pet food production down by nearly 50% from November 2022 to April 2023 due to load shedding was very annoying for all the good boys out there, but not the end of the world for RCL shareholders. There are far bigger issues behind the drop in Heps of 42.2%, despite a 17.3% increase in revenue. There’s no dividend this year either.

We can’t point fingers at the South African Sugar Association’s special levy that garnered attention, as the sugar business still turned out alright in the year ended June 2023. The bakery business was flat year on year, so that’s not really the issue either. In reality, all the pain was felt in the chicken business, where Rainbow’s underlying Ebitda nosedived by 74.9%. The market couldn’t absorb the necessary price increases to offset input cost pressures.

The RCL Foods share price tends to track the levels of load shedding. If you’re looking for a way to make money off Eskom and you want to play a guessing game around when we move from Stage 4 to the disastrous higher levels, then this stock offers you a way to do it.

Bidvest gets the cash flow right

Perhaps the biggest learning of 2023 has been the relative outperformance of industrial companies vs retailers. If you’re keeping notes, the trick here is that inflation is much kinder to companies with pricing power and many fixed assets vs retailers with variable costs and exposure to price-sensitive consumers.

Bidvest is just one example, with a 15% revenue increase and a 17.6% rise in trading profit for the year ended June. When you see operating or trading profit increasing at a higher percentage than revenue, this means that margins went in the right direction.

The real story here is the cash from operations. Bidvest generated R12.2-billion in cash from operations for the year, which looks good versus R11.4-billion in trading profit. Remarkably, R10.4-billion of the cash was generated in the second half of the year.

When you see a strong cash result like this, the next thing to look for is the dividend payout ratio, or at least the trend. The quick way to do this is to consider the dividend growth (20.6%) versus the Heps growth (17.7%). The cash collection has indeed flowed into a stronger dividend for shareholders, so that’s happy news all round.

And in case you think this was just a lucky break in one of the divisions, there were no fewer than seven divisions that reported double-digit trading profit growth. With these sort of numbers, it’s no surprise that Bidvest is generating a return on invested capital of 17.3%, up by 20 basis points and surpassing the cost of capital, signifying genuine economic profits.

Foschini gives shareholders a wardrobe malfunction

The Foschini Group (TFG) issued a trading update for the 22 weeks ending on 26 August, along with a trading statement for the six months ending in September. Although there are still a few weeks of trading to go, the company already knows that Heps won’t be nearly as pretty as the clothes on the rack.

Turnover growth doesn’t look bad on the surface, up by 11.3% in the 22-week period. This includes the Tapestry division, so we need to be careful here as a large acquisition always flatters the numbers because the revenue wasn’t in the base period. TFG Africa grew turnover by 16.1% with Tapestry and 9.7% without it. Clothing outperformed other categories, growing by 11.8%.

We clearly haven’t got to the tough stuff yet, as that all looks good. Here’s the first problem: like-for-like growth was just 3.3%, which is way below inflationary cost pressures. Here’s the second problem: gross margin fell by 300 basis points in TFG Africa as the company looked to move excess inventory into a weakening consumer market.

More bad news was in the international business, where TFG London saw sales drop by 12.4% in GBP and TFG Australia was down by 6.6% in AUD, both victims of a high base period.

Perhaps the highlight here is that cash sales in TFG Africa surged by 21.8%, contrasting with sluggish credit sales at 2.9%.

Heps will be 15% to 25% lower. The share price responded sharply, down 12.5% for the week.

Shoprite is glowing even when the lights are out

We end with a beacon of hope and a reminder that great companies can take advantage of tough times to win market share. In Shoprite’s case, this means a record market share movement, firmly at the expense of its major competitors.

Supermarkets RSA grew by 17.8%, with strong results across the underlying businesses. It’s hard not to focus on Checkers, with sales up by 18% and Sixty60 scooting its way to success with sales up by 81.5%. Shoprite and Usave saw sales rise by 15.6%, including the integration of 92 Massmart stores.

Despite group sales growth of 16.9%, Shoprite could only post Heps growth of 9.6% and dividend growth of 10.5%. Although that means a higher payout ratio, the market still grimaced at the modest profit performance. The culprit, of course, is Eskom. Shoprite spent R1.3-billion just on diesel in this period, which is a huge number vs profit before tax of R9.1-billion.

If you’re worried about Shoprite, then you should be especially worried about its competitors that aren’t executing to nearly the same standard, yet they face the same cost pressures. It’s rough out there for retailers, which is why my preference on the local market remains industrial stocks. Even Shoprite’s management team can’t do much about Eskom. DM

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Business Maverick

Bidvest gets the cash flow right

Foschini gives shareholders a wardrobe malfunction

Shoprite is glowing even when the lights are out