Chick­ens come home to roost

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS

SOV­ER­EIGN RE­CENT RE­SULTS FROM listed poul­try pro­duc­ers have not been great. How­ever, the half-year to end-Au­gust re­sults from Uitenhage-based Sov­er­eign Foods were a pluck­ing mess. A 27% hike in turnover to R365m was un­cer­e­mo­ni­ously mashed down to an op­er­at­ing loss of nearly R12m af­ter a 52% hike in costs left Sov­er­eign with no trad­ing mar­gin. To add to Sov­er­eign’s woes, sales value per kilo­gram (re­mem­ber the com­pany is a com­mod­ity pro­ducer) shifted down 3% on the back of an in­dus­try over­sup­ply and re­duced con­sumer spending.

If that weren’t bad enough, Sov­er­eign also had to fork out R22m in in­ter­est, ser­vic­ing the net debt of more than R300m re­quired ex­pand­ing its pro­duc­tion fa­cil­i­ties.

At the time of writ­ing the rather illiq­uid Sov­er­eign was trad­ing at around 500c on the JSE, with bid­ders do­ing their level best to buy in at 350c/share. Con­sid­er­ing Sov­er­eign was trad­ing at 2100c at the beginning of the year, some pun­ters may well be tempted to bot­tom feed. In­deed, in the year to end-Fe­bru­ary 2008 Sov­er­eign pro­duced earn­ings of 150c/share and 200c/share in the pre­vi­ous year. So if Sov­er­eign can shift back to its his­toric earn­ings pat­tern in its 2010 fi­nan­cial year, the share might be con­sid­ered ap­petis­ing longer-term value. But pro­duc­ing earn­ings of 200c/share – or even 150c/share – won’t be easy, es­pe­cially since Sov­er­eign is lum­bered with a con­sid­er­able debt load.

En­cour­ag­ingly, Sov­er­eign ex­pects higher vol­umes for the sec­ond half of the year. More im­por­tantly, it’s con­fi­dent of in­creas­ing vol­umes 60% for the full year to end-Fe­bru­ary 2009. If that’s the case – and if poul­try prices con­tinue to in­crease (thanks to lower im­ports and higher red meat prices – Sov­er­eign may see a strong come­back in its sec­ond half. Nat­u­rally, with gear­ing sit­ting at 170% strong cash flows are im­per­a­tive.

Quite pos­si­bly pre­vail­ing mar­ket volatil­ity will shake out the illiq­uid Sov­er­eign, cre­at­ing an op­por­tu­nity to buy stock at lev­els well be­low fair value.

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