Chickens come home to roost
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.