Financial Mail - Investors Monthly - - Contents - Petri Redel­inghuys

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 ( 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.

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