Rhodes Food | A plum job

Rhodes Food Group (RFG) is benefiting from consumers downtrading. In the regional business, lower margin long life products are replacing high margin fresh products in the baskets of consumers. Rhodes has spent c.R1bn to expand its operations and improve innovation, mostly in its long life products business. The international business broke even in FY '19 after posting an operating loss in the prior year. The Group's international business began recovering from drought conditions late in FY '18 which is resulting in better quality fruit for export. In our view, the Group is past peak capex and will focus on degearing to improve bottom-line returns going forward. We have made negligible changes to our earnings estimates.

We forecast that the Group's diluted HEPS will grow by 19.8% to c.100cps as the profitability of the Group's international division continues to improve. The Group is focusing on product innovation and improving efficiencies in the regional business which should also be supportive to future margins and earnings growth. We forecast that the division will deliver a diluted HEPS CAGR of 19% to c.168cps by FY '23.

We estimate that the counter is trading at a 17x rolled forward PE (1.5x PE relative). Our sum-of-the-parts valuation methodology delivers a one-year target price of R19/share, implying a total return of 13.5%. In our view, the market is already capturing most of the 18-month profit turnaround at RFG with the share on a two-year forward PE of 14x. As such, we maintain a MARKET PERFORM recommendation.