Still slog­ging

Chicken group says pric­ing has been very weak

Finweek English Edition - - Insight - MARC HASEN­FUSS march@fin­week.co.za

EAST­ERN CAPE-BASED poul­try group Sov­er­eign Food In­vest­ments – which re­cently un­der­took a R126m rights of­fer – is strug­gling to plump up its prof­its. Di­rec­tors dis­closed in a re­cent in­vest­ment pre­sen­ta­tion that av­er­age chicken pric­ing “has been very weak”.

The pre­sen­ta­tion showed Sov­er­eign’s av­er­age na­tional sales vol­ume was down R1,48/kg (roughly 12%) for the first four months of its year to endFe­bru­ary 2010 com­pared with the prices seen in the first four months of its pre­vi­ous fi­nan­cial year. Sov­er­eign says that equated to a loss of rev­enue of R46,5m on vol­umes in the first four months of its new fi­nan­cial year – which doesn’t bode well for its ef­forts to re­store his­toric profit lev­els.

The pre­sen­ta­tion says price weak­ness had been felt through­out all cat­e­gories, with the in­di­vid­ual quick frozen cat­e­gory (which rep­re­sents 60% of pro­duc­tion) down 12% and fil­let (10% pro­duc­tion) down 9%.

Im­ports still ap­pear to be hav­ing a ma­jor ef­fect on Sov­er­eign – per­haps more so than its com­peti­tors. The com­pany says while to­tal poul­try im­ports be­tween Jan­uary and June this year were only up 6%, the chicken cat­e­gories Sov­er­eign com­peted against were up col­lec­tively by 50% to al­most 97 000 t. That will surely smack trad­ing mar­gins in its in­terim trad­ing pe­riod. Sov­er­eign’s trad­ing mar­gins had al­ready dropped be­low 10% in the sec­ond half of its fi­nan­cial year to end-Fe­bru­ary 2010.

Sov­er­eign be­lieved im­port vol­umes would re­main at cur­rent vol­ume lev­els due to the strong rand and im­porters’ growth ap­petite. How­ever, there is a glim­mer of hope about curb­ing ex­ports. The com­pany noted Brazil­ian ex­port prices were in­creas­ing due to his­toric losses in the poul­try in­dus­try in that coun­try. SA im­ports of chicken from Brazil com­prised a hefty 77% of SA’s poul­try im­ports in the six months to end-June this year. The large Rus­sian mar­ket has also been re­opened to chicken im­ports.

De­vel­op­ments are dis­ap­point­ing, since Sov­er­eign has spent heav­ily on im­prov­ing pro­duc­tion and ef­fi­cien­cies. In the in­terim, it will look to max­imise its net sales val­ues by 80c/kg over the short term. There are sev­eral ini­tia­tives in that re­gard: achiev­ing tar­geted prod­uct mix (30c/kg op­por­tu­nity), of­fer­ing cor­rect prod­uct bas­ket to the cus­tomer (30c op­por­tu­nity) and achiev­ing pric­ing par­ity or pre­mium with com­peti­tors (20c op­por­tu­nity).

All things con­sid­ered, share­hold­ers – most no­tably, in­sti­tu­tions such as Pru­den­tial and Old Mu­tual, which un­der­wrote the rights of­fer – may need to tem­per their ex­pec­ta­tions that ful­lyfledged turn­around will be hatched this fi­nan­cial year.

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