Is it time to fly the coop?

Have the juicy re­turns al­ready been made, and is now the time to start look­ing else­where?

Financial Mail - - MONEY&INVESTING - Marc Hasen­fuss hasen­

Poul­try stocks are once again start­ing to make flap­ping good re­turns.

Not so long ago the small flock of chicken com­pa­nies on the JSE were grounded by the pro­found ef­fects a pro­longed drought had on feed prices, as well as an in­creased level of cheap im­ports and weak con­sumer de­mand.

The score­board now shows the JSE’S big bird, As­tral Foods, is up more than 50% for the year to date, while Sov­er­eign — un­der­pinned by a pri­vate eq­uity buy­out — is up 43% and RCL Foods, which owns chicken pro­ducer Rain­bow, has moved up 24%. Even Quan­tum Foods, a com­mod­ity poul­try pro­ducer (with eggs and feed mixed in), is up 12%.

The big ques­tion now is whether the easy money has been made on poul­try stocks, and if it’s time to look else­where for more sump­tu­ous re­turns.

Re­cent poul­try sec­tor trad­ing has been char­ac­terised by a fat­ten­ing up of mar­gins thanks to markedly lower feed costs (due to a much im­proved maize crop) and firmer sell­ing prices (es­pe­cially dur­ing the win­ter months).

The out­break of avian flu has caused some con­ster­na­tion. But, to date, out­breaks among the listed poul­try play­ers have been mostly well con­tained.

As­tral’s most re­cent trad­ing up­date, for the year to end-septem­ber, bol­stered sen­ti­ment for the poul­try sec­tor even more. The com­pany in­di­cated that head­line earn­ings would jump 80%-100% to be­tween R17.37/share and R19.30/share. Head­line earn­ings in the pre­vi­ous fi­nan­cial year came in at just R9.65/share — with the share trad­ing at about R120 when the au­dited fig­ures were re­leased. At the height of the drought and im­port in­flows near the start of 2016, As­tral traded as low as R92.

An un­of­fi­cial rea­son for the strong run in As­tral’s share price — and prob­a­bly a fac­tor in Sov­er­eign’s vi­brant trad­ing up­date too — was the hefty cut­back in pro­duc­tion at Rain­bow in in­di­vid­ual quick-frozen (IQF) por­tions. Rain­bow opted to fo­cus on the higher-mar­gin busi­ness of ser­vic­ing quick-ser­vice restau­rants and on value-added chicken prod­ucts.

Other smaller play­ers — there are many in the un­listed space — prob­a­bly also cut back on pro­duc­tion. Some may even have closed up shop.

RCL Foods will no doubt ben­e­fit in the fi­nan­cial year ahead from Rain­bow’s cost cut­ting and the higher mar­gin thrust, but the share price lag does sug­gest the low mar­gin cull played into the hands of larger com­pa­nies

As­tral, Sov­er­eign and un­listed Coun­try Bird Hold­ings in the short term.

There are some mar­ket watch­ers, though, who ar­gue that the poul­try cy­cle may keep tick­ing up for a pro­longed pe­riod. Such sen­ti­ment would be sup­ported if As­tral were to move to a more gen­er­ous div­i­dend pol­icy when its re­sults are re­leased later this month.

If in­vestors fol­lowed the “smart money”, it is clear there re­mains some strong in­sti­tu­tional in­vestor back­ing for the poul­try sec­tor — par-

Leonard Krüger

As­tral Foods

tic­u­larly if As­tral is viewed as a proxy.

Since the re­lease of As­tral’s an­nual re­port in De­cem­ber 2016 there have been sub­tle changes to the top share­hold­ings.

Large fund man­ager Al­lan Gray has light­ened up on As­tral, but with a stake of 15% it re­mains the largest share­holder.

Al­lan Gray port­fo­lio man­ager Leonard Krüger says the fund man­ager still backs As­tral’s strong man­age­ment team, low­est-cost model and fully in­te­grated strat­egy. “We still have around R1bn in­vested in As­tral. Poul­try is not a glam­orous in­dus­try. But As­tral’s man­age­ment team [headed by Chris Schutte] is good at what it does — es­pe­cially its de­tailed pro­duc­tion cost anal­y­sis.”

The Pub­lic In­vest­ment Corp (PIC), which man­ages the huge state em­ploy­ees’ pen­sion fund and re­cently rode to the res­cue of un­listed poul­try player Day­break Farms, has in­creased its po­si­tion to 13.09% from the 12.94% re­flected in the last an­nual re­port. In­vestec As­set Man­age­ment has shifted its stake from 6.84% at the time of the an­nual re­port to about 10%. Both In­vestec and the PIC have also dis­posed of small parcels of shares in re­cent months.

Fun­da­men­tally, there seems to be a solid un­der­pin for poul­try pro­duc­ers to con­tinue feath­er­ing their profit nests. The lat­est FNB “Live­stock & Fi­bre Mar­kets” re­view notes that broiler prices are steady to firmer on the back of tight­en­ing sup­plies and im­proved up­take.

The re­view shows the whole-bird av­er­age sell­ing price reached R26.38/kg in mid-oc­to­ber, com­pared with R26.13 at Septem­ber 22. Medium whole-bird and IQF por­tions were both firmer at R26.29 (pre­vi­ously R25.93) and R24.01 (R23.82), re­spec­tively.

The FNB re­view con­tends that do­mes­tic prices will con­tinue to strengthen on in­creased sea­sonal de­mand and a tight­en­ing sup­ply out­look. How­ever, it also warns that the dif­fi­culty in con­tain­ing avian flu could re­duce the mar­ket share of lo­cal poul­try pro­duc­ers, with im­ports sup­ple­ment­ing pro­duc­tion short­ages. But feed mar­gins are likely to re­main favourable in the medium to long term, given the de­pressed grain prices.

The tone of the FNB re­view is cer­tainly sup­ported by As­tral’s lat­est trad­ing up­date, which in­di­cates ro­bust sec­ond-half trad­ing. Earn­ings at the in­terim stage came in at about 353c/share, mean­ing As­tral has earned more than R15/share in the sec­ond half. If that op­er­a­tional mo­men­tum — cou­pled with be­nign in­put costs — is car­ried over to the new fi­nan­cial year, 2018 could be a bumper year for As­tral.

It’s worth re­mem­ber­ing, too, that As­tral’s strong earn­ings per­for­mance was achieved out­side of its peak trad­ing pe­riod. The Christ­mas pe­riod — dur­ing which prices tend to plump up and sales perk up — is still to come . . .

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