NEWS ANALYSIS: Food producer stocks benefit from move to cheaper eating

Shaun Harris

NEWS ANALYSIS: Food producer stocks benefit from move to cheaper eating

MANY shares listed in the JSE’s food producers sector are crossing the bridge between defensive shares and growth stocks. This is partly due to economic conditions, which have seen many consumers buying down, boosting shares that supply essential and basic foods, and because of the high level of activity in the sector.

While competition is intense between the firms, so are intercompany deals, with many mergers and acquisitions taking place in the past year.

The basic factor in the sector’s growth momentum is that people have to eat. But with pressure on consumer spending, they are eating more cheaply. Eskom’s woes are playing their part, in favour of companies that supply fairly cheap food that does not have to be kept cold in refrigerators, such as canned food and long-life dairy products.

Apart from basics such as bread, maize meal and cereals, cheaper animal protein is also being sought. For many consumers this means chicken — there are a number of poultry producers in the food producers sector. But the case for chicken being the cheapest is not clear-cut. One argument is that if the up-to-35% brine content (basically flavoured water with ingredients the producers claim makes chicken meat more tender) is factored in, it works out cheaper to eat pork than chicken.

And while chicken producers have been crying out for tariff protection against what they claim are dumped chickens from Brazil and some countries in Europe, the argument wears a little thin if it is considered that while these countries might be exporting chicken at close to a loss, they are more efficient producers. This is denied in SA.

We are not inefficient producers but you cannot compete when farmers in other countries are being protected and their product is being dumped, says RCL Foods CEO Miles Dally.

There is also no guarantee that the poultry industry will get the protection it is seeking. Astral Foods CEO Chris Schutte says it is vital for the industry. We need intervention from government and the minister of the Department of Trade and Industry to sanction the temporary antidumping measures that were introduced by the International Trade Administration Commission.

But, says independent financial analyst Ian Cruickshanks: Who is to say that these import tariffs are going to be sanctioned? They may not if the DTI (Department of Trade and Industry) is worried that the dumping countries would retaliate by imposing tariffs on South African exports — this is a critical factor in determining the long-term profitability of poultry producers.

Tariff protection was granted late last month, but not at the level poultry producers were hoping for. The debate over protection from US-based meat products is continuing.

That aside, poultry producers could still be a sound investment, as are some other food producers’ shares. Below are some of the better prospects.

• Astral Foods: despite a huge share price gain of 131.5% in the past year and a demanding price:earnings ratio of 21.5, the forward multiple drops to a more acceptable 9.5.

This is mainly due to what Mr Schutte describes as one of the worst trading periods experienced by the poultry industry in the past decade.

However, Astral took advantage of this, buying some smaller poultry producers on liquidation sales, which means it obtained a good price. This is one bullish factor that, while not without risk, makes Astral a buy.

• Clover Industries: the forward multiple of 13.3 times is attractive, and a trading statement released on February 10 says the company expects headline earnings per share to be 36% to 46% better and earnings per share up 31% to 41%. The company benefited from selling price increases across most categories, albeit at a loss of sales volumes and market share, says Clover CEO Johann Vorster.

The firm has ambitious plans to expand into Africa, where there is a need for milk that does not have to be refrigerated. It makes Clover look like a buy, before results come out next Tuesday.

• Oceana Group: the operating margin for the many fish products that Oceana supplies is a healthy 17.5%, compared to about 1.5% for chicken. Many of these, such as lobster and squid, do not fit the buying-down category. The basic product that does, however, is canned fish, under the Lucky Star brand.

Oceana recently ended a drawn-out, R400m bid for the fishing interests of Foodcorp, which would diversify its portfolio. That makes the share worth looking at, despite the risks of regulatory changes to fishing quotas and adverse weather conditions, each as unpredictable as the other.

• Pioneer Food Group: the share price has nearly doubled over the past year, yet Pioneer looks like a buy for two main reasons. It produces essential food products, such as Sasko bread, maize meal, pasta, rice, beans and legumes. The separation and separate listing of its former poultry and stock feeds into Quantum Foods has bolstered its potential.

The operating margin is a comfortable 8.2% and it has operations in the UK, Botswana, Namibia, Uganda and Zambia, countries where demand for basic foodstuffs is high.

• RCL Foods: the company, formerly Rainbow Chicken, has widely diversified and expanded its portfolio since its solely chicken days, and it now looks very attractive, despite concerns about the poultry interests.

It has two streams of products: essentials such as sugar, flour, chicken and animal feed, and higher-value products it supplies to customers such as Woolworths and KFC. While takeaway food such as KFC is not in the cheaper category, it remains something that even hard-pressed consumers often buy — when people are hungry, the first food they think about is takeaways.

Over the past two years, RCL raised R4.7bn in two equity deals. With this it bought a number of food companies and paid down debt. This, and its planned move into Africa, make RCL a buy.

• Sovereign Food Investments: a price:earnings ratio of 12.7 is attractive, as is a share price that is only marginally higher than net asset value.

A trading statement says headline earnings per share and earnings per share may be more than 20% higher.