Food produccers - Back on the menu

The Food Producers sector on the JSE includes well-known companies such as Tiger Brands, AVI, Astral, Oceana, Premier Group, RCL and Rainbow Chickens.

This sector has long been out of favour with investors. Limited pricing power, heightened competition from private labels, under-investment in manufacturing facilities, and rising commodity prices have squeezed margins for many players. Weak management in certain quarters has also contributed to these companies’ inability to pivot when needed. As a result, investors often overlooked food producers in favour of more attractive growth opportunities elsewhere on the JSE.

However, the tide appears to be turning. In the current environment, specific food producers such as Premier, Rhodes, and, more recently, Tiger Brands, have begun to outperform, thanks to strategic capital investments. By upgrading their facilities, these companies are generating a cost and quality advantage that has made them increasingly competitive. A prime example is Premier’s approach to close old, sub-optimal factories in favour of modern ‘mega factories’ that are highly automated. This new technology has effectively doubled bread production, while requiring one-third of the labour — a move that could double margins in the regions where these facilities operate.

Beyond these capital upgrades, the entire food producer industry is enjoying what we refer to as a ‘purple patch’ in industry parlance. After a prolonged period of negative volumes — exacerbated by steep food inflation — there are recent early signs of a rebound.

Food inflation has now stabilised. While high food inflation often benefits retailers, it can be detrimental to producers, since passing on price hikes can lead consumers to trade down or reduce purchases. Conversely, stable and more reasonable levels of inflation are far more conducive to profitability, driving higher volumes and enhancing fixed-cost recoveries within factories.

Another tailwind for food producer margins is the recent decline in commodity input prices, such as wheat, maize and rice. Also, lower interest rates, declining fuel prices and improved consumer confidence — partly due to the GNU’s policies and Two-Pot withdrawals — are supporting volume growth. As a result, food volumes have surged to some of their highest growth levels in the past decade.

Forward-thinking companies like Premier and Rhodes are leveraging these improving conditions by focusing on profitable volume growth instead of aggressive price discounting. Their investments in high-quality production and advanced technology allow them to offer competitive prices without sacrificing margins. By upgrading logistics systems, strengthening procurement processes, and maintaining a disciplined approach to capital expenditure, they are not only cutting costs but also boosting returns on capital.

This combination of better macroeconomic conditions, prudent capital allocation and tighter cost controls has led to rising earnings, improved free cash flow, and better returns on invested capital. Furthermore, these companies generally carry modest debt levels. Strong balance sheets allow them to deploy surplus cash toward higher dividend payouts and share buybacks — which, in turn, can boost share prices.

The result? Stocks like Premier and Rhodes were among the top performers last year and key contributors to the stellar returns of the Foord Equity Fund. The companies still trade at attractive valuations, especially when weighed against their revitalised fundamentals. For smaller asset managers with the flexibility to take more meaningful positions in these under-the-radar small caps, the once-stale sector remains a compelling opportunity.