The truth about RCL Foods, Bidvest, Foschini Group and Shoprite

by MMC
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Pet food production falling by almost 50% between November 2022 and April 2023 due to load shedding has been very annoying for all the good boys, but not the end of the world for RCL shareholders. There are much bigger problems behind the 42.2% drop in Heps, despite a 17.3% increase in income. There is also no dividend this year.

We cannot point the finger at the South African Sugar Association’s special levy which has attracted attention, as the sugar sector has consistently performed well in the financial year ending June 2023. The sector of the bakery has remained stable year over year, so that’s not really the problem either. In reality, all the pain was felt in the chicken sector, where Rainbow’s underlying Ebitda plunged 74.9%. The market was unable to absorb the price increases needed to offset input cost pressures.

The RCL Foods share price tends to follow shedding levels. If you’re looking for a way to make money with Eskom and want to play a guessing game when we move from Stage 4 to the disastrous upper levels, then this stock offers you a way to do so.

Bidvest gets the right cash flow

Perhaps the most important learning from 2023 has been the relative outperformance of industrial companies compared to retailers. If you’re taking notes, the trick here is that inflation is much more favorable to companies with pricing power and lots of fixed assets compared to retailers with variable costs and exposure to price-sensitive consumers. price.

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

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

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 quickest way to do this is to compare dividend growth (20.6%) to Heps (17.7%). The cash raising actually translated into a bigger dividend for shareholders, so that’s good news all round.

And if you think it’s just a fluke in one of the divisions, know that no fewer than seven divisions recorded double-digit growth in trading profits. With figures like these, it is no surprise that Bidvest generates a return on invested capital of 17.3%, up 20 basis points and above the cost of capital, meaning real economic benefits.

Foschini gives shareholders a wardrobe malfunction

The Foschini Group (TFG) has published a trading update for the 22 weeks ending August 26, as well as a trading statement for the six months ending September. Although there are still a few weeks of negotiations left, the company already knows that Heps won’t look as good as the clothes on the rack.

Revenue growth doesn’t look bad at first glance, up 11.3% over a 22-week period. This includes the Tapestry division, so we have to be careful here, as a large acquisition always flatters the numbers as the turnover was not in the reporting period. TFG Africa increased its turnover by 16.1% with Tapestry and 9.7% without it. Apparel outperformed other categories, growing 11.8%.

We obviously haven’t gotten to the hard stuff yet, because everything is looking good. Here’s the first problem: Like-for-like growth was only 3.3%, well below inflationary cost pressures. Here’s the second problem: Gross margin fell 300 basis points at TFG Africa as the company sought to shift excess inventory to a declining consumer market.

Further bad news came from the international business, where TFG London saw sales fall by 12.4% in GBP and TFG Australia by 6.6% in AUD, both victims of a high reporting period.

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

Heps will be 15 to 25% lower. The share price reacted strongly, down 12.5% ​​over the week.

Shoprite shines even when the lights are off

We end with a glimmer of hope and a reminder that big companies can take advantage of tough times to gain market share. In Shoprite’s case, this means a record increase in its market share, at the expense of its main competitors.

Supermarket RSA grew 17.8%, with strong results across all underlying businesses. It’s hard not to focus on Checkers, with sales up 18%, and Sixty60 heading for success with sales up 81.5%. Shoprite and Usave saw their sales increase by 15.6%, including the integration of 92 Massmart stores.

Despite group sales growth of 16.9%, Shoprite was only able to post Heps growth of 9.6% and dividend growth of 10.5%. Even though this means a higher payout ratio, the market continues to grimace at the modest earnings performance. The culprit is of course Eskom. Shoprite spent R1.3 billion on diesel alone during this period, which is a huge figure compared to a pre-tax profit of R9.1 billion.

If you’re worried about Shoprite, you should be particularly concerned about its competitors who don’t perform to nearly the same standards, yet face the same cost pressures. It’s tough for retailers, which is why my preference in the local market remains industrial stocks. Even Shoprite’s management team can’t do much against Eskom. DM

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