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RCL Foods (RCL) will be the stock in focus: (Price at time of writing: R14.11 (30 August 2016))
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Background and overview of RCL Foods
For those who don't know RCL Foods was formerly known as Rainbow Chicken. According to their website "RCL is a leading African food producer operating across South Africa, Swaziland, Namibia, Botswana, Uganda and Zambia. We manufacture a wide range of branded and private label food products which we distribute through our own route-to-market supply chain specialist, Vector."
Readers should note that they are involved in producing chicken (which is the most consumed meat in South Africa)
Readers should note that they are involved in producing chicken (which is the most consumed meat in South Africa)
Scroll over or click on the funnel chart to get more details of RCL's latest financial results
Financial review:
The net profit margin achieved by RCL amounted to 0.91% This is an extremely low profit margin achieved, and one has to wonder how a company like RCL can extract higher margins out of the business when AGOA trade agreements as signed with the US allowing them to dump massive amounts of frozen chicken on South African shores. Luckily for RCL, they do have other divisions within the group and they not just dependent on chicken for money. Sadly their sugar and miliing operations took a massive impairment write down affecting not only this division but RCL's overall profits. Without the impairment RCL would have a net profit marin closer to 4%
Earnings per share for RCL came in at 24.4c (placing RCL on a PE ratio of 57.8). This is extremely high, but one has to take into account that RCL's financial results where impacted by restructuring within the group.
Another concern for RCL is the massive amounts of trade and other receivables that is lying on their balance sheet. Its close to R4billion and makes up roughly 20% of their total assets (and this value is up from R3.16billion 12months ago). Suggesting clients of RCL is taking longer to pay money due to RCL. On the plus side RCL generated roughly R1.49 per share in cash, showing the business is a strong cash generator.
The pie chart below shows the contribution of RCL's different brands to their revenue and pre-tax profit earnings.
Another concern for RCL is the massive amounts of trade and other receivables that is lying on their balance sheet. Its close to R4billion and makes up roughly 20% of their total assets (and this value is up from R3.16billion 12months ago). Suggesting clients of RCL is taking longer to pay money due to RCL. On the plus side RCL generated roughly R1.49 per share in cash, showing the business is a strong cash generator.
The pie chart below shows the contribution of RCL's different brands to their revenue and pre-tax profit earnings.
Readers will notice that there is no operating profit for the sugar and milling division. This is largely thanks to a R640million odd impairment loss taken within this division. So while it makes up the biggest part of RCL's revenue, due to the impairment loss taken it did not show any profits. In addition to this, the massive impairment loss reduced profits from continuing operations to R226million in 2016 (compared to R893million in 2015). If the impairment loss did not take place, RCL would have had earnings per share closer 96c, which would place RCL on more respectible PE ratio of 14.7
A few financial ratios to mull over for RCL (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 1.01 (more than 2 shows high levels of financial leverage).
- Current Ratio: 1.64 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 1.06 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 1.12%
- Return on Equity (ROE): 2.25%
- Net Profit Margin: 0.91%
- Dividend Yield: 2.13%
Valuation:
While the numbers for RCL looks extermely bad at this point, one should not forget the impairment losses that went through the income statement that is having an impact on current profit levels. They are well placed in their business segments and one of the bigger players in the industries they are in. It is always darkest before dawn and investors should look at RCL's long term prospects and not at their short term difficulties they are facing.
Having said that, we are concerned about the massive amounts of trade and other receivables yet to be paid to RCL. This number is edging ever closer to R4billion and is almost R700million more than 12months ago. They should look to reduce this and make sure customers starts paying back money faster.
Based on RCL's current financials, its prospects, its cash generation ability and low leveraged balance sheet, we value RCL at between R14.57 and R14.85. We therefore feel at it's current price it is close to being fully valued and would suggest investors look elsewhere for now for better value stocks
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
Having said that, we are concerned about the massive amounts of trade and other receivables yet to be paid to RCL. This number is edging ever closer to R4billion and is almost R700million more than 12months ago. They should look to reduce this and make sure customers starts paying back money faster.
Based on RCL's current financials, its prospects, its cash generation ability and low leveraged balance sheet, we value RCL at between R14.57 and R14.85. We therefore feel at it's current price it is close to being fully valued and would suggest investors look elsewhere for now for better value stocks
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
