Chicken group says pricing has been very weak
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.