VAT chance for poul­try

The key to As­tral’s ex­pan­sion, I be­lieve, is that the list of ze­rorated items may be changed

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

It was only a few years ago that the do­mes­tic poul­try sec­tor was call­ing “fowl”, say­ing that its busi­ness was be­ing se­verely dam­aged by ex­ter­nal fac­tors.

SA was be­ing flooded by cheap, tar­iff-free chicken from the EU, with Brazil also hap­pily “dump­ing” ex­cess prod­uct.

And to roast the lo­cal poul­try sec­tor fur­ther, the re­newal of the US free trade agree­ment Agoa al­lowed US poul­try pro­duc­ers to land 65,000 t of chicken in do­mes­tic mar­kets.

With a se­vere drought hit­ting the agri­cul­tural sec­tor in 2016, the price of maize — the key in­put feed cost to rear­ing poul­try — soared to R5,000/t, and do­mes­tic poul­try com­pa­nies were hit by sharply higher costs.

In this “fowl” en­vi­ron­ment some small- to mid-sized poul­try stocks fell off their perches and closed down, or were ac­quired.

Sov­er­eign Foods was taken over by pri­vate eq­uity, Rain­bow Chick­ens cut back pro­duc­tion and closed some op­er­a­tions.

As­tral took some key busi­nesses and be­came the largest sec­tor player.

In 2016, the com­pany’s poul­try profit dived to R59m. The div­i­dend was slashed and over­all group profit dropped 52%. The hang­over from the drought and on­go­ing im­ports made 2017 in­terim prof­its wither to just R22m. As­tral’s share price was un­der se­vere pres­sure.

But the com­pany, al­ready an ef­fi­cient, low-cost pro­ducer of poul­try, started to fight back.

As­tral and the poul­try sec­tor sought govern­ment help; lit­tle came. Also in 2017, govern­ment en­forced a new low-brin­ing rule, lim­it­ing the amount of mois­ture that could be in­jected into a slaugh­tered bird to im­prove its flavour, suc­cu­lence and, ul­ti­mately, con­sumer weight. The poul­try sec­tor had to move quickly to re-in­vent its busi­ness model. This it did, aided by some timely ex­tra­ne­ous fac­tors.

A strong rand started to mod­er­ate im­ports, and avian flu swept across Europe, cut­ting off im­ports. Some avian flu also hit do­mes­tic farms, caus­ing flock to be slaugh­tered, thus tight­en­ing the sup­ply-de­mand bal­ance.

There was a re­bound in the 2017 maize har­vest to a record 17 Mt, and in­put costs plunged.

As­tral pared costs, im­proved its al­ready for­mi­da­ble poul­try rear­ing skills and ge­net­ics, and started to ad­just its mix to con­tend with in­dus­try de­mands and mar­ket changes. It was the only re­main­ing poul­try stock; the stage was set for a “pluck­ing good reporting pe­riod” in 2017-2018.

At the start of 2017, I se­lected As­tral as a po­ten­tial top- per­form­ing stock for the year at R124. By the end of 2017 the stock was at R270, a gain of 117%. Poul­try prof­its ral­lied sharply; but more was to come in 2018. With As­tral’s share price fly­ing high, the mar­ket seemed to be dis­count­ing any on­go­ing per­for­mance. I re­mained bullish.

In­terim re­sults were suc­cu­lent; HEPS rose 455% to 1974c/share and poul­try prof­its rock­eted to R836m. A R10 div­i­dend was de­clared.

Then As­tral an­nounced a R1.3bn ex­pan­sion drive. Its share price fell to R275, where it is at the time of writ­ing, with some fur­ther weak­ness ex­pected.

But sell­ing off As­tral, I be­lieve, is a mis­take. They key to the ex­pan­sion, I be­lieve, is the pos­si­bil­ity of the items that are zero-rated be­ing changed. Canned fish is the only pro­tein in the con­sumer bas­ket of ze­rorated food. As­tral Foods and the poul­try sec­tor are lob­by­ing for chicken to be in­cluded.

As­tral’s share price may be rid­ing high, and some may be tak­ing prof­its. But with in­put costs of feed be­ing be­nign, a good har­vest ex­pected in 2018 and the sup­ply-de­mand bal­ance re­main­ing in its favour, the poul­try sec­tor re­mains suc­cu­lent.

Could the ex­tra gravy be zero-rated Vat on chicken? If so, there may still be wings in the As­tral share price as the only pure listed poul­try stock.

Even if Vat is not ex­empted, there is enough flavour in the sec­tor fun­da­men­tals to sup­port the stock, and any weak­ness may not last that long.

A strong rand started to mod­er­ate im­ports, and avian flu swept across Europe, cut­ting off im­ports

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