Senwes hits a fertile furrow
German expansion and weak rand insulate agri company from SA gloom
It was a windy Saturday evening in Cape Town as I wrote this column. The city was busy as the rugby match between the Stormers and the Irish team Connacht was a sellout. The fan walk was awash with people and as I drove home from gym the queue at KFC in Green Point was out of the door.
That gave me the inspiration for this article. Not rugby, but chicken.
I’m often asked why I spend an inordinate amount of time on seemingly uninteresting informationgathering and research.
I monitor monthly sales of tractors and combine harvesters in South Africa. I also track diverse aspects of the US corn price, weather patterns in Serafina Corrêa in Brazil and the price differential between white and yellow maize on the South African Futures Exchange (Safex).
This granularity has a specific purpose and can be the determining factor in recommendations about whether to sell, hold or buy a stock. Seemingly disparate data points can have a material effect on earnings and therefore share prices.
Agricultural equipment is a significant part of Senwes, a R2.8bn market cap grain and retail giant which has had bumper sales in the past two years.
This year has been slower as higher interest rates, a weak rand, load-shedding and a decline in prices of key field crops have hit farm revenues and sentiment. That could mean a slowdown in farmers’ purchases, which would affect Senwes’s revenue and profit.
Luckily, Senwes has somewhat insulated itself by expanding its mechanisation interests into eastern Germany. That and the weak rand should shield the counter from a domestic equipment slowdown.
Even though soft commodity prices on Safex have fallen by a third since November, Senwes, trading at R16.50, is on a lowly p:e of 4.1 and I expect a bumper revised trading update for its April 2023 year-end.
Senwes is a value trap as its holding company, Agribel, is the dominant shareholder. I expect Agribel to restructure and unlock that value at some point, and I’d wager Senwes’s valuation could then double. The stock has been the bestperforming counter in the agricultural sector in 2023, ahead by 25%.
Moving on to chicken, the only listed player is Astral Foods, which has a market capitalisation of R7.3bn and is trading at R169.53.
Astral has been range bound between R160 and
R170 since November, the market not expecting it to repeat its September year-end earnings. But is that perception about to change?
Astral’s first half was slammed by soaring soft commodity input costs. (Now you see why I track global softs so closely.) The poultry stock will have an awful interim results period, with earnings forecast to slide 90% as higher costs, load-shedding and specific poultry production issues hit margin. But the tide has turned.
Since the late-October Safex peaks, the white maize price has fallen 35%, yellow 30% and soya 28%. This is material as these softs are 60% of the cost of rearing a chicken, with energy the second-largest item.
Astral buys more than 800,000t of maize and 240,000t of soya, so these input cost savings will see margin recovery.
Despite higher energy costs and a tough economic environment making price increases to consumers difficult, the softs’ decline, I believe, will see the poultry sector start to recover.
By the time this hits the newsstands, Astral’s anticipated awful interim results will be out. I see the second half, especially the fourth quarter, as the start of its earnings recovery, mainly due to lower softs costs and an easing of production difficulties.
I make a bold statement that Astral Foods will turn the earnings corner in September 2023 and its slump will end.
Catch Astral at the right time and gains can be material. The last cost upswing benefit saw the share rise 60% between March and September 2022.
I’d watch this well-run bird closely as its time to fly is near. I place an accumulate on the stock with a target of
R215.