Let it rain

In 1943, A.H. Maslow said: “It is quite true that man lives by bread alone – when there is no bread.” Such a simple statement, and yet so incredibly true. As human beings, our most basic need is for food. Without it, we will face starvation and ultimately perish. And it is precisely this basic need and how to control it that Henry Kissinger referred to in 1974 when he said: “Control oil and you control nations; control food and you control people.” However extreme this may sound, my message this week doesn’t concern world domination, but rather how to better control your investment portfolio. I feel quite strongly that if it’s something you can find in your kitchen or bathroom cabinets, it can definitely be considered for your share portfolio as well. Below are extracts from a number of food producers’ results. 

RCL Foods (24-month returns: -30.83%)

“The ongoing drought, which has impacted almost every aspect of our business, has had a significant impact on our financial results. The increase in commodity input prices has been exacerbated by the substantial deterioration in the value of the rand since the beginning of the financial year.” 

Kaap Agri (24-month returns: -9%)

“It reported revenue of R5.3bn across 177 operating points in South Africa and Namibia and managed to deliver encouraging profits despite the severe drought in Southern Africa.”

Quantum Foods (24-month returns: -5.36%)

“It is widely recognised that Quantum Foods will not be immune to the negative effects of the drought and correspondingly high raw material costs, but we remain confident that the restructuring of the company will ensure that it is better positioned than before to
manage these cycles.” 

Astral Foods (24-month returns: -19%)

“The impact of the severe drought gripping the country and the imbalance in supply and demand of poultry, caused by excessive levels of imports, placed tremendous pressure on the Poultry division’s results.” 

When we take a look at the rand’s performance, it seems as though its drought has experienced some relief over the short term, with the currency strengthening by 15% against the US dollar from the beginning of 2016 to 15 January 2017. When we take a look at the actual drought, things are also looking better. For the week ending 15 January, eight out of the nine provinces’ dam levels were higher than the week before, while maize crops are also in good condition at the moment. Although the rain forecast for the next few weeks looks good, it has to stay that way until the end of February in order to ensure a good harvesting season, but on both levels, things are looking up.

Even though things may look more promising, the food-manufacturing sector was still trading 1% lower over the same period (up to 15 January) compared to 24 months ago. For those who believe that the rand will hold at current levels or even continue to strengthen, and that the drought is under control for now, Pioneer Foods Group (or via Zeder for greater exposure and discount purchase) is my preference. 

Pioneer Foods (24-month returns: +7.67%)

Over the last 10 years, Pioneer has traded at an average price-to-earnings ratio (P/E) of 1.25 times, which can be contributed to good management and growth. Over the last two years, this ratio has dropped to its current figure of 0.8 times, which doesn’t necessarily mean that Pioneer is cheap, but it is relatively cheaper than the FTSE/JSE All Share Index based on historical levels. With white maize and wheat making up 40% of these companies’ cost structure, a stronger rand and more rain in February may just present an ideal opportunity for value investors.

At this stage, however, in the words of Eric Clapton, we can only hope that someone will “Let it rain”. 

Schalk Louw  is a portfolio manager at PSG Wealth. 

This article originally appeared in the 2 February edition of finweek. Buy and download the magazine here.