BROKERS’ NOTES: Buy Bidvest, sell RCL Foods and Rainbow Chicken

Chantal Marx, head of investment research and content: FNB Wealth & Investments

Buy: Bidvest

Bidvest is one of the most diversified industrial companies in South Africa. The well-run business has a solid track record with a committed and highly regarded management team. The group is not asset intensive and is mostly services driven, with a strong track record of efficient capital allocation. The balance sheet remains robust and cash generation is strong.

We particularly like the business as a high-quality long-term South Africa Inc pick. Bidvest is trading on a forward p:e of 13.1, in line with average levels historically, but we see scope for a rerating on growth tailwinds and an improvement in current forward-looking earnings estimates that could result in the rating unwinding quite quickly. Growth tailwinds include an improved macroeconomic outlook with structural improvements being complemented by cyclical support from lower interest rates and lower inflation.

Technically, we have seen a moderate correction in the share price, but if it holds above R275, we could see short-term moves to R298 (first target) and then R322 (second target).

Sell: RCL Foods and Rainbow Chicken

In March, when RCL confirmed the unbundling of Rainbow Chicken, we considered the valuation of Astral and the RCL ex-Rainbow peer group and predicted about a 20% value unlock from the transaction — placing the value of the entity at about R12.54. Our more detailed modelling delivered a fair valuation range for the combination of between R11.77 and R14.12. The current combined price of R14.56 is now above our most optimistic valuation — partly on the back of a rerating of South African food producers following the outcome of the election, and a very strong start to trading for Rainbow Chicken as a standalone business.

We think current prices represent an opportunity to lock in gains from the unbundling transaction and look for better, higher-quality opportunities in the sector, and indeed the broader South Africa Inc space.