Is it time to fly the coop?

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

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 . . .