Sovereign bid now looks cheap
• Healthy turnaround in update suggests buyers will be getting a bargain
Sovereign Food’s recently released trading update has taken a lot of the lustre off what had been regarded as an attractive takeover offer.
Sovereign Foods’s recently released trading update has taken a lot of the lustre off what had been regarded as an attractive takeover offer.
The R12 a share promised by Capitalworks, in conjunction with Sovereign management, looked remarkably generous compared with the R9 that had been offered by hostile bidder Country Bird Holdings (CBH) a year earlier. It now looks exceptionally cheap.
Sovereign management is targeting earnings per share (and headline earnings per share) of at least 156c for the six months to end-August.
Albie Cilliers, an investor who tracks the industry closely, reckons earnings for the full year will be significantly more than double this because trading in the second half is always considerably stronger than the first half. Traditionally, about two-thirds of profit is made over the festive season.
Assuming full-year earnings of 400c a share, Capitalworks and management are getting the company on a price-to-earnings rating of just three times.
In its trading statement, Sovereign told shareholders that earnings for the first half of the 2018 financial year are expected to be at least 204.8c higher than the 48.8c a share loss reported for the comparative period in 2017. In the earlier period, the industry was hit by the worst drought in a century, which pushed the maize spot price 31% higher and soya up 39%.
Poultry producers also had to contend with a huge oversupply of product as imports poured into the local market from the Netherlands, the US and Brazil. These have plateaued in recent months under increasing scrutiny from the Department of Trade and Industry.
During the first half of financial 2017, Sovereign had only limited success diversifying away from commodity-type products, which are more susceptible to competition from imports. Its continued efforts to develop niche products, such as fully cooked, value-added chicken for Spar, as well as traditional quick-service restaurant products are likely to have played a role in the stronger performance in the first half of financial 2018. Sovereign CEO Chris Coombes says the company’s vision is to be the leader in the processing of chicken portions.
In addition, last year’s comparative figures were hit by the R17m in legal fees the Sovereign board incurred in its efforts to defend itself from CBH’s hostile takeover bid.
Despite the strong recovery alluded to in the trading update, the Sovereign share price remained unchanged at R11, just R1 off the buyout price. The share price moved to a high of R13 in early September, when shareholders expected CBH to make a counteroffer. When CBH said recently that it would not renew its R9 a share offer the share eased back.
CBH CEO Marthinus Stander said reports that Sovereign’s Uitenhage farm had been hit by avian flu was a “game changer” that precluded his firm from renewing or increasing its offer.
SOVEREIGN’S EFFORTS TO DEVELOP NICHE PRODUCTS ... PLAYED A ROLE IN THE STRONGER PERFORMANCE