Astral Foods, Verimark, ENX Group, Novus Holdings, Spear Reit
Astral Foods is a poultry and agricultural feeds producer with operations in four countries in Southern Africa. It benefits from vertical integration as it produces about 1.3Mt of maize annually and just under 60% of that maize is sold internally to its chicken production facilities.
So the chickens, or broilers, they raise (almost 1-million hatched per day), are fed maize Astral produces. The rest of the maize is sold as feedstock.
In total, the feed business generated about R3bn worth of revenue over the first half of this financial year (R6.bn in the previous financial year), and made a profit of R192m over the same six-month period.
Chicken is SA’s number one protein. Astral Foods sells more than 230,000t a year, and generated R9.8bn during the past financial year. So far this financial year it generated R5.48bn, resulting in a profit of R836m for the six-month period. Of that about 51% of total sales volume is mixed portions of chicken pieces, aimed at the lower LSM market.
Chicken brands owned by Astral include Supa Star, Festive, Goldi, Country Fair and Mountain Valley. Unlike other poultry producers, Astral sells only limited production to the fast food or restaurant industries, which positions it well for a potential VAT cut on chicken by government to provide aid to the poor.
One challenge is duty-free imports from the US of about 65,000t of chicken per year. This is being “dumped” at about half the price it costs to produce locally.
Initially SA agreed to allow the 65,000t of chicken to be imported without import duties in exchange for lower duties when exporting other products, including wine, to the US. Since this agreement was made in 2016, US President Donald Trump has imposed a higher tax on steel, which is against the terms set out in the African Growth & Opportunities Act. This has sparked debate and even a lawsuit from the SA poultry industry to impose import tariffs on US chicken.
The share price has come under pressure this year, along with the rest of the market, though the latest trading statement indicates full-year headline EPS will reflect an increase of 90%-100%. This is off a low base as they struggled the year before due to the SA drought. Now the drought is broken and input costs have dropped thanks to record high maize crop yields, they have managed to increase profits by leveraging off the vertically integrated supply chain.
The stock has a p:e of 5.57 and a dividend yield of 9.45%. The dividend growth rate is a staggering 33.84% and the company boasts an incredibly low debt to equity ratio of 1.03%. By these metrics, it offers tremendous value for long-term investors. It is also in a defensive, noncyclical industry. Food production is one of those industries generally not so influenced by macro financial market forces, so a turndown in global markets should not affect the business that much.
Weather does play an important part; probably the most important. There are conflicting reports as to whether an El Niño is expected for SA during this summer. Naturally, a longer, hotter summer could lead to drought and food producers could find themselves in trouble. As it stands, we simply don’t know if an El Niño is going to occur this year because different sources and authorities on weather are reporting different things. I guess we have to wait and see how this summer turns out.