Squeezed by a surge in input costs
Food processors are not appetising, at this point, due to surging costs in key soft commodity inputs.
Since mid-2020 the prices in soft commodities such as maize, wheat, sunflower and soya have exploded.
The soft commodity input cost squeeze — coupled with weak domestic consumer demand and an inability to recover rising costs — has led to margin contraction at poultry and egg producers.
Because the two biggest formulations in broiler feed is maize and soya, which make up 80% of the total feed cost, the surging price of maize and soya has placed a “vice-grip squeeze … of note” on Astral Foods, says CEO Chris Schutte.
He added, at the recent
AGM, that a “difficult six months were ahead”.
IM does not foresee any material improvement in sentiment this year, or any material ability to raise prices to rebuild margins. Interim results and full-year 2021 earnings will
be challenging.
Astral’s last results, for the year ended September 2020, were not as bad as expected.
The external animal feeds business softened some of the earnings blow as its operating profits rose 4%, whereas the poultry division saw a 21% drop in operating profit.
On revenues of R14.1bn (+5%), overall profit for the period declined 13% to R561m.
Headline earnings fell 14% to R14.41 a share and total dividend for the year was also 14% lower, at 775c a share.
The counter has fallen 30% in the past year — but the company is still in solid shape.
Capital expenditure of
R1.2bn to expand the efficiencies of the business and augment a rise in production of higher-margin fresh and valueadded products has been concluded. Astral will reap the benefits of this expansionary move over the coming years, aiding earnings.
The company’s balance sheet is strong; it generates vast amounts of cash and no material capital expenditure is planned for some years.
IM believes the time to consider Astral as an investment is not right now, and any decision will be related to input costs and the impact on profits.
In quarters three and four of 2020, Astral and the poultry sector continued to contend with soaring input costs.
Some poultry price increases were implemented in late 2020, but these were not enough to recover higher feed and general costs.
The normally buoyant festive period was a “nonevent”. There was no consumer pull in volumes, which Schutte said was presumably due to the pandemic’s effect on consumers.
At least some encouraging news came from the Astral AGM in the form of an observation that coming out of the festive period the poultry sector was well balanced, with no indications of any inventory build-up. Schutte said January and February had “fair trade”.
Ultimately, one needs to bear in mind Astral buys about 800,000t of maize and 240,000t of soya. At the time of writing, year to date yellow maize was R3,570 a ton and soya R9,800 a ton. More than R1bn in extra costs has been incurred on a year-on-year basis. Even a well-run business like Astral cannot go against the soft commodity market.
infrastructure solutions. With a normalised ebitda margin of just 2.5%, the margins are thin. The IP division to be sold was generating a normalised margin of 26.4%, so desperate steps are needed.
EOH discloses R932m normalised ebitda from continuing operations, but R105m of nonsustainable savings from Covid19, so that takes us down to R827m. The R827m assumes R496m worth of losses are removed through closing businesses. That will take time, but assume it happens immediately and the number really is
R827m. The IP division contributed R319m and will be sold, so EOH is actually a R508m sustainable ebitda business.
So if the asset sales plus net cash will take care of the R2bn debt, the current market cap of R1.5bn suggests an EV/ebitda of around 3. Many private companies in SA trade on 5 to 7, so it’s reasonable to expect a value unlock here so the share price could double. Once the unlock is achieved, the next phase starts. Will Van Coller be able to pull that off too?
The Finance Ghost
The writer holds shares in EOH