An­thony Clark

No more hard (c)luck sto­ries

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

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.

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