No more hard (c)luck stories
Poultry sector results — having been tarred and feathered in the past year with material slumps in poultry profitability and earnings — may be about to fly high again as the benefits of a large maize crop and firmer pricing assist earnings recovery.
Astral Foods is the sector’s biggest player in the sector. It houses 35m birds in sheds and produces 5m a week for domestic consumption. Its poultry division alone is a R9.5bn annual revenue business.
Domestic conditions in the poultry sector are horrific, but Astral is one of the topperforming food shares so far in 2017. I selected the stock in my top stocks portfolio at the start of the year and at the time of writing it is ahead by 22%.
But there is more to this story than the recent interim results portray. The market is looking past the short-term problems at the significant earnings recovery that could be ahead in 2018 and 2019. For that reason I continue to recommend Astral as a “buy”.
The recently released interim results to March showed headline earnings down 54% to 356c/share and a dividend cut to 180c/share following an 88% plunge in poultry profitability to just R22m. With these numbers in mind, you’d think I had avian flu to continue to recommend Astral. So why do I do it, and why is the market seemingly rosy towards the stock?
The answer relates to chicken feed. The biggest cost in rearing a chicken is its nutrition, a complex balance of principally yellow maize and soya as well as other nutrients. This comprises about 74% of the cost of raising a chicken from hatchling to a bird of slaughter weight at around 33 days. That’s right, the period between cradle (or egg) and grave (or abattoir) is 33 days. Optimising the feed to the weight gain ratio of a bird in terms of its genetics is key to cost and profitability. So lower input costs of commodities, together with slightly faster fattening of a bird (by an average of one day in Astral’s case), leads to a material swing in profitability.
In 2016 and 2017, Astral and the entire poultry sector was hit because of a ravaging drought. The maize crop plunged to 7.7m t in 2016 and the price doubled on the local Safex futures exchange due to a shortage of supply.
On average SA needs about 10m t of maize a year for its human and animal needs.
So the country had to import, and prices spiked. Industry, specifically poultry companies, could not pass this surge in the cost of feed on to the consumers, who were already straining
A further plus is that government seems sympathetic to the needs of the industry
under harsh domestic economic conditions. Thus volumes and profits slumped in poultry companies, which were already hit by surging imports from the EU and the US and a change in the regulation that halved the injectable rate of brine to 15%.
So what’s changed in 2017 to make the poultry sector look plump and juicy again? Again, it’s simply feed. Following the severe drought the domestic maize crop has rebounded, a crop of 14.5Mt is expected and the yellow maize price on Safex has fallen by 45% year on year.
The soya price also dropped due to the expectation of a bumper crop.
As Astral buys 800,000 t of maize a year for its feed needs and animal feeds division, a huge annualised cost saving is expected. Also, many sector players have either gone bankrupt or removed production from the system, which has firmed poultry prices. A further plus is that government seems sympathetic to the needs of the industry in the face of surging imports, which can make up 40% of domestic consumption.
So it is understandable that Astral’s share price appears perky. As the sector’s strongest and best capitalised and managed player, the company is well positioned to make the most of difficult industry situations. The market expects a big earnings and dividend recovery in 2018.
Astral is set to continue feathering shareholders’ nests, and I can see R200 as a viable target price within a year.