VAT chance for poultry

The key to Astral’s expansion, I believe, is that the list of zerorated items may be changed

It was only a few years ago that the domestic poultry sector was calling “fowl”, saying that its business was being severely damaged by external factors.

SA was being flooded by cheap, tariff-free chicken from the EU, with Brazil also happily “dumping” excess product.

And to roast the local poultry sector further, the renewal of the US free trade agreement Agoa allowed US poultry producers to land 65,000 t of chicken in domestic markets.

With a severe drought hitting the agricultural sector in 2016, the price of maize — the key input feed cost to rearing poultry — soared to R5,000/t, and domestic poultry companies were hit by sharply higher costs.

In this “fowl” environment some small- to mid-sized poultry stocks fell off their perches and closed down, or were acquired.

Sovereign Foods was taken over by private equity, Rainbow Chickens cut back production and closed some operations.

Astral took some key businesses and became the largest sector player.

In 2016, the company’s poultry profit dived to R59m. The dividend was slashed and overall group profit dropped 52%. The hangover from the drought and ongoing imports made 2017 interim profits wither to just R22m. Astral’s share price was under severe pressure.

But the company, already an efficient, low-cost producer of poultry, started to fight back.

Astral and the poultry sector sought government help; little came. Also in 2017, government enforced a new low-brining rule, limiting the amount of moisture that could be injected into a slaughtered bird to improve its flavour, succulence and, ultimately, consumer weight. The poultry sector had to move quickly to re-invent its business model. This it did, aided by some timely extraneous factors.

A strong rand started to moderate imports, and avian flu swept across Europe, cutting off imports. Some avian flu also hit domestic farms, causing flock to be slaughtered, thus tightening the supply-demand balance.

There was a rebound in the 2017 maize harvest to a record 17 Mt, and input costs plunged.

Astral pared costs, improved its already formidable poultry rearing skills and genetics, and started to adjust its mix to contend with industry demands and market changes. It was the only remaining poultry stock; the stage was set for a “plucking good reporting period” in 2017-2018.

At the start of 2017, I selected Astral as a potential top- performing stock for the year at R124. By the end of 2017 the stock was at R270, a gain of 117%. Poultry profits rallied sharply; but more was to come in 2018. With Astral’s share price flying high, the market seemed to be discounting any ongoing performance. I remained bullish.

Interim results were succulent; HEPS rose 455% to 1974c/share and poultry profits rocketed to R836m. A R10 dividend was declared.

Then Astral announced a R1.3bn expansion drive. Its share price fell to R275, where it is at the time of writing, with some further weakness expected.

But selling off Astral, I believe, is a mistake. They key to the expansion, I believe, is the possibility of the items that are zero-rated being changed. Canned fish is the only protein in the consumer basket of zerorated food. Astral Foods and the poultry sector are lobbying for chicken to be included.

Astral’s share price may be riding high, and some may be taking profits. But with input costs of feed being benign, a good harvest expected in 2018 and the supply-demand balance remaining in its favour, the poultry sector remains succulent.

Could the extra gravy be zero-rated Vat on chicken? If so, there may still be wings in the Astral share price as the only pure listed poultry stock.

Even if Vat is not exempted, there is enough flavour in the sector fundamentals to support the stock, and any weakness may not last that long.

A strong rand started to moderate imports, and avian flu swept across Europe, cutting off imports