Rainbow defends capex plans

Johannesburg - Chicken processor and marketer Rainbow Chicken said it would continue to spend cash on capital expenditure.

Addressing investors on Wednesday, chief financial officer Rob Field said: "The business continues to challenge itself in terms of the extent of capital that it spends on refurbishments and replacement of existing infrastructure."

Field said the company will invest in areas where it is comfortable that products, processes and customers can generate an acceptable return.

Capital expenditure decreased by 7.1% to R293.1m for the year to end-March 2009. A further R201.9m is still to be spent this year.

The group continues to follow a policy of upgrading facilities and funding normal levels of replacement capital expenditure from its own resources. However, return on equity decreased from 25.3% in 2008 to 13.2%.

Rainbow will look to invest in its value-added products (for instance polonies and viennas) division, as it believes it is under-servicing the market.

High feed costs and market pressure to keep prices low add to the challenges to a difficult environment. CEO Miles Dally said: "In spite of the difficult times that we currently face, we do believe in the long-term the business is in a good position."

He said Rainbow has a healthy balance sheet and must continue to invest in its business for the future.

"Pleasingly, our cash generation remains strong," said Field. Cash generated from operations decreased by 3.7% to R594.5m.

Rainbow Chicken estimated the industry produces an average of 14.6 million broilers per week. Of these, Rainbow supplies 4.2 million.

However, analyst at Imara SP Reid Warwick Lucas recommended shareholders to sell. "Relative to the market, there's just no value in the stock," he said.

Lucas said if Rainbow believed it could defend its market share and enhance its products by investing in infrastructure and range, it should do so.

- Fin24.com