What does the unbundling of RCL mean for investors?

On Tuesday, 4 June 2024, shareholders in RCL Foods (JSE: RCL) approved the unbundling and subsequent listing of its poultry operation – Rainbow Chicken. RCL will distribute the 890.3 million Rainbow shares it holds to shareholders. Shareholders will receive one Rainbow share for every one RCL Foods share. And the listing is set to take place on 26 June 2024. So, what does it mean for both companies and shareholders?

So, what does the unbundling of RCL mean for both companies and shareholders?

This isn’t the first time Rainbow’s been listed on the JSE…

RCL Foods started out as Rainbow Chicken more than 60 years ago. Back in the 1990s, Rainbow traded on the JSE, but it experienced a torrid time incurring sustained losses and a dismal share price performance. However, today management believes with Rainbow heading in the right direction, now’s a great time to unbundle the company from RCL.

RCL owns other brands like Ouma Rusks, Epol and Bobtail pet food, Selati sugar, and Sunbake. So, for RCL, it can focus on growing these household brands, while insulating the business from commodity cycles, that Rainbow experiences.

Rainbow on its own can also pursue its own respective growth ambitions of becoming a low-cost poultry producer. After all, Rainbow Chicken is a household name with good market share, offering a diverse range of poultry products to consumers. These include fresh and frozen chicken, processed meats and ready-to-eat meals.

In RCL’s most recent interim results, Rainbow’s turnaround plan is bearing fruit.

Revenue rose 11% to R7.3 billion, which is around 35% of RCL’s total revenue. Meanwhile, EBITDA soared +4,500% to over R270 million. This is the result of new breed rollouts, containing costs, improved margins and higher retail and wholesale volumes.

Rainbow’s expansion of the Hammarsdale Processing plant has been successful, helping it to increase volumes. The company expects full capacity in July 2024, which should further boost volumes.

Of course, every company faces risks. In Rainbow’s case, avian flu and loadshedding typically hit the company’s operations the hardest. While, the number of new Avian Flu outbreaks has declined significantly in SA, there’s still an urgent need to implement a national vaccination programme to better protect the national flock going forward.

Moreover, there’s been substantial relief of loadshedding over the past two months, so Rainbow’s in a great position to boost volumes and revenue for the rest of the year.

What is in the unbundling of RCL for investors?

Back in 2001, Tiger Brands unbundled Astral Foods and that has been a very successful move.

Astral was listed separately at about R7.75. Today, its shares sit around R150. That’s over 1,800% growth. In addition, Astral has paid generous dividends along the way.

I’m not saying Rainbow can repeat Astral’s stellar performance but if it heads on a similar path, investors could generate good returns.

In the meantime, Rainbow’s prelisting statement is expected to be released on 10 June, which will reveal the listing price and financials. Then we can get a better view on valuation on Rainbow and see if it’s worth a punt.  Follow my investment ideas in Real Wealth.