Rhodes Food Group (RFG) – Mapping capex returns

RFG’s market shares were resilient in FY20, however, we are concerned with the downward trend in the contribution of volumes to organic growth. Organic growth has come under pressure, and the increasing importance of price inflation to drive growth suggests subdued organic growth potential for RFG if higher price inflation is difficult to achieve in FY21. We revisit RFG’s capital expenditure programme to forecast the likely trajectory of returns on capex under different EBITDA growth and capex scenarios. Our analyses suggest that some efficiency gains have been made leveraging RFG’s larger asset base, but incremental EBITDA gains have not been satisfactory. The implication is that investors may need to wait a few years to realise sustainable operating margins above c.12% in the absence of substantial volume growth through RFG’s facilities. The consolidation of RFG’s pie facilities through the closure of the Ma Baker plants in KZN is a positive efficiency move in our opinion. In the short-term, we believe that the consolidation may cause production and distribution issues as RFG beds down the leaner operating model.