QUESTION 1 (31 marks)

RCL Foods Limited (“RCL Foods”) is a South African food manufacturer that produces a wide range of branded foods and private label food products. RCL Foods makes use of its own route-to-market supply chain specialist, called Vector, to distribute its food products.

You are provided with the following extracts of RCL Foods’s 2023 Integrated Annual Report:

RCL FOODS is the home of over 30 household brands …like:

• Ouma Rusk

• Nola

• Selati

• Sunbake

• Rainbow Chickens

• Epol

• Yum-Yum Peanut Butter

• Piemans

• Bobtail

• Catmor

• Farmer Brown

• Safari Braaipap

Within the Groceries business unit, the Grocery operating unit was most impacted by load-shedding during the year, with production being reduced by up to 50% of demand in Pet Food from November 2022 to April 2023. To address this challenge, five 1.8-megawatt generators were installed at the Randfontein facility which has enabled an improvement in stock levels, albeit at a significant extra cost as well as temporarily increasing our environmental impact. The Grocery operating unit had a good performance, bolstered by exceptional growth from its new Yum Yum and Nola value offerings. Ouma remains a strong market leader in the Rusk category. A strong Culinary innovation pipeline is being built and validated by consumers in RCL FOODS’

new consumer panel. In Pet Food, the Canine Cuisine and Feline Cuisine brands continued to grow strongly in the premium retail segment, with Feline Cuisine launching a Wet Range and expanding its new specialised diets range during the year. In the mainstream retail dog food segment, Bobtail and Catmor both maintained their leading market positions and Bobtail made history by launching the first Specialised Diets range in the mainstream dog food segment. With load-shedding resulting in supply challenges, the immediate focus is to restore volumes before launching other planned innovations.

The Beverages operating unit continues to be challenged by lower volumes in a declining category. In line with the overall business strategy, opportunities are being explored which will enhance the operating unit’s competitiveness and make it more
‘future fit’. Their current year result was aided by proceeds received from the sale of its ultra-high-temperature (UHT) equipment.

The Baking business unit’s EBITDA result was largely in line with the prior year despite lower volumes overall and compressed margins in the Bread, Buns and Rolls operating unit. This was due to the extremely price-competitive bread market in which consumers continued to trade down into value offerings and migrate away from informal traders towards formal retail. While affecting Sunbake’s margins, the channel switch has increased Sunbake’s volumes in the retail channel, where it has continued to show strong share gains. The brand successfully launched its Chelsea Buns and Snowballs range this year to expand into the confectionery category, and a sourdough bread pilot is exceeding expectations. The New Polokwane plant is integral to the business unit’s longer-term strategy and is performing well. The integration of the newly acquired Sunshine Bakery is progressing well, with several cost-saving opportunities already identified.

Despite lower volumes in the Milling operating unit, margins remained intact due to efficiency enhancements arising from best-in-class programmes executed during the year.

In the Pies operating unit, Pieman’s continued to show strong market share growth. Pleasingly, service levels are almost back to normal following supply disruptions caused by industrial action and load-shedding in the first half of the year.

Good cost control initiatives and production efficiencies helped to restore margins and offset volume challenges in the Speciality operating unit. The new Centurion plant had an excellent operational performance over the Christmas and Easter periods.

The Sugar business unit had a very strong underlying performance, driven by a combination of improved throughput due to a larger cane crop; increased local sales led by strong growth in the industrial channel; and continued favourable export pricing. Statutory EBITDA was reduced by R234,4 million being the impact of the sugar industry special levy in the second half of the financial year. Legal process is currently under way in relation to Tongaat’s non-compliance with its statutory obligations owed to SASA under the Sugar Industry Agreement. Load-shedding impacted irrigation scheduling in Sugar agriculture and led to substantially higher energy costs due to the need to irrigate at peak-hour rates. The Nkomazi floods in February 2023 caused severe damage to farms, roads and irrigation infrastructure for both us and our small- scale growers. By making R25 million in relief funding available, we were able to help
90% of affected small-scale growers to repair their irrigation by the end of the financial year, thereby limiting damage to the crop and protecting grower income. The Komatipoort raw sugar warehouse rebuild is progressing well and is on track to be commissioned by the end of the 2024 financial year.

The molasses-based Molatek Animal Feed business performed in line with overall expectations, with an investment to improve drying efficiencies helping to reduce energy-related production costs.

Over the past year, the South African economy has faced a series of global and local disruptions, including slowing global growth, geopolitical tensions, acute power challenges, inefficiencies in state-owned enterprises and extreme weather events. At the end of 2022, there were still close to half a million fewer jobs than at the end of
2019. Inequality remains among the highest in the world, with the unemployment rate currently sitting at record highs. These trends have prompted growing social demands for government support, which places pressure on the sustainability of public finances. Manufacturing production remains muted, as load-shedding and transport bottlenecks intensify. Socio-economic challenges have been further exacerbated by rising fuel and food prices, which disproportionately affect the poor. All of these factors play a direct role in increasing the inherent risks faced by RCL FOODS.

The Economic risks are predominantly driven by factors such as weak economic growth, high unemployment rates, fluctuations in exchange rates, food price inflation, and spikes in energy prices. By addressing these identified risks head-on, we can proactively manage our business well-being and foster resilience against potential challenges in the ever-changing economic landscape.
The challenges we face also create (potential):

• continue to develop affordable and innovative solutions for cash-strapped consumers;
• leverage digital technology to create a more connected and insight-driven business;

• grow awareness of plant-based options as a sustainable protein alternative;

• reduce our water and energy use;

• decrease our waste to landfill and increase recycling, especially of plastics;

• reduce our reliance on imports by sourcing locally produced raw materials;

• be a positive influence in the communities in which we operate through our social and economic development initiatives; and
• expand our nutritional provision to vulnerable young children through the delivery of nutritionally enhanced DO MORE Porridge.

The macro-economic environment presents us with mounting challenges as we face growing pressure to meet heightened customer expectations for our products and services. The ever-changing landscape of consumer tastes and preferences adds to the complexity, increasing the risk of customers shifting their loyalty to competitor products.

The Group is persistently confronted with prevailing macro-economic challenges, leading to escalating costs that prove difficult to transfer to consumers. Compounding this is inadequate tariff protection on imports and external pressures adversely affecting the sugar and poultry sectors. A special levy raised by the South African

Sugar Association (SASA) on the Group’s Sugar business unit, attributed to the business rescue proceedings at Tongaat Hulett Sugar, adversely impacts on profitability.

Our product costs are intricately tied to the prices of underlying commodities and raw materials essential for their manufacturing. Inherent in this correlation is our heightened exposure to commodity pricing risk, which is further influenced by currency fluctuations resulting from political uncertainty, shifts in global and local market conditions increasingly impacted by the war in Ukraine, and adverse climate conditions.

Water security risk pertains to the potential scarcity or disruption in the supply of water that could affect our company’s ability to operate smoothly. Factors such as climate change, droughts, pollution, and competing demands for water resources can all contribute to water scarcity. The current water challenges in South Africa are a material concern to the Group as they directly impact on the ability of our operating units to function.

The increasing dependence on technology presents businesses with a spectrum of operational, security, and strategic risks. While embracing new technologies and innovative business practices like automation, artificial intelligence, blockchain, cloud computing, and the Internet of Things presents exciting opportunities, it also exposes us to additional risks concerning information security and business continuity. As we navigate this digital landscape, it becomes imperative to adopt comprehensive risk management measures to harness the potential benefits while safeguarding our operations and sensitive information. RCL FOODS’ IT infrastructure is safeguarded through a robust and effective IT General Control environment which covers all the layers of the IT infrastructure.

REQUIRED:

Perform the following analyses on RCL Foods Limited based on the above extract:

1.1. SWOT analysis (14 marks)

1.2. PESTEL analysis (10 marks)

1.3. Entities perform a SWOT analysis to identify various factors pertaining to the specific entity in each of the four (4) categories in the SWOT analysis. Entities then proceed by reacting in a specific manner to each of the four categories. For example, for each of the “weaknesses” identified a reparation plan is made, while for each “opportunity” it is decided how to exploit it if possible and wise.

For each of RCL Foods Limited “threats” that was identified in question 1.1, explain how the entity is or can mitigate that risk. (4 marks)

1.4. Only an environmental evaluation as referred to in the Socially Responsible Investment (“SRI”) index. (3 marks)

Please remember to always motivate statements made to demonstrate a high level of understanding.

QUESTION 2 (45 marks)

The following two cases are separate, individual case studies and do not relate to each other:

CASE 1: MR OTHON JACKSON

Mr Othon Jackson has been approached by three Financial Brokers from different entities. All have offered him a 9-year annuity for an initial purchase price of R33 700 however the terms attached to each annuity (Annuity A, Annuity B and Annuity C) are different.

Annuity A offers an interest rate of 12.4% compounded annually and quarterly payments of R1 980.

Annuity B offers 10.95% interest semi-annually compounded and annual payments of R2 350 made in advance.

Annuity C offers 11.4% interest monthly compounding and monthly payments of R1 050 made in advance.

CASE 2: MISS JENNIFER ROBERTS

Miss Jennifer Roberts and her friends are eager to go on a holiday trip once they have finished their studies two years from today.

Miss Jennifer Roberts drafted a budget of the amount she will be able to deposit into a savings account each quarter.

According to this budget, Miss Jennifer Roberts will be able to deposit R290 into the savings account at the end of the first quarter. She will be able to pay 6.7% more into the savings account in the second quarter. In the third quarter, she will only be able to pay a deposit which will be equal to a 4.1% decrease compared to the previous deposit. In quarter four, she will be able to increase her deposit made with 5.6%, compared to her previous payment made. She will be able to match quarter 4’s deposit in quarter 5. Unfortunately, due to obligatory other expenses to be incurred, Miss

Jennifer Roberts will not be able to make a payment into the savings account in quarter six, but in quarter seven she will aim to aid this, by depositing R940 into the savings account, which she will increase with 8.1% in the next quarter’s payment.

The savings account offers an interest rate of 9.5% quarterly compounding per year. Furthermore, Miss Jennifer Roberts has R430 currently available, which she wishes to deposit into the savings account immediately after opening the savings account.

REQUIRED:

2.1. Refer to CASE 1: MR OTHON JACKSON. Assist Mr Othon Jackson by calculating the current worth of Annuity A, Annuity B and Annuity C, respectively.
Supplement your assistance by concluding whether or not Mr Othon Jackson should pursue each annuity and which annuity should ultimately be purchased.

Round to two decimals where required. (24 marks)

2.2. Refer to CASE 2: MISS JENNIFER ROBERTS. Assist Miss Jennifer Roberts by calculating the amount she would have saved up at the end of two years.

Round to two decimals where required. (21 marks)

QUESTION 3 (24 marks)

Summa Laude (Pty) Ltd (“Summa Laude”) is an entity that owns various properties that the entity rents out as student accommodation.

Summa Laude has identified a property (hereafter referred to as “Property 26”) that, after thorough market research on the quantity and accommodation specification of student accommodation demand in the area, has been concluded to have a high probability of being a profitable investment. Property 26 can be purchased at a price of R1 637 000.

Summa Laude currently only has R250 000 cash at hand to allocate to the Property

26 purchase, according to the entity’s cash flow budget. The entity intends to allocate the R250 000 to the purchase, and have also entered negotiations with Fluxul-De- Numerar Bank for the remaining finance required.

Fluxul-De-Numerar Bank has indicated that the bank is willing to provide the loan to

Summa Laude. The loan will have a 10.9% monthly compounding interest rate and a

3-year period attached to it. Repayment must occur in equal annual instalments.

REQUIRED:
Assist Summa Laude (Pty) Ltd by drafting the loan amortisation schedule. Round to two decimals where applicable. Show all calculations.

Answers to Above Questions on Financial Management Techniques

Answer 1: SWOT analysis stands for strengths, weaknesses, opportunities and threats. An analysis of RCL Foods Limited indicates that the main strength of the company is its diverse product portfolio which comprises 30 household brands in various food categories, and it also has strong market presence. Another strength point of the company is its ability to innovate in offering new products and services and thereby achieve growth in its performance.