Astral is a shining JSE star
READERS will no doubt be aware of the woes the South African poultry industry has experienced in recent years, as illustrated by the decline in operating margins of the largest JSElisted poultry firms — Astral, Rainbow Chicken and Country Bird. But in this environment there is also opportunity.
For some time now we have been of the opinion that the average profitability of JSE-listed companies is above their long-term growth trend. Quality companies, with current profits below our estimate of normal, at decent prices, are almost as scarce as hen’s teeth.
Astral Foods, however, fits this description, which is why it is a holding in our clients’ portfolios, together with the following reasons:
Astral has scale and efficiency. With well over four million chickens produced every week, it is one of South Africa’s largest poultry producers. Having three production hubs results in significant benefits of scale;
It is the lowest-cost producer. Astral manages the full life cycle — from the laying of eggs to getting fresh chicken on supermarket shelves. This not only adds to efficiency and lowers overall costs, but also allows Astral to make a profit by, for example, selling feed to its broiler operations;
A strong free cash flow and financial position. Astral has a track record as a great generator of free cash flow — the cash remaining in a business after paying all interest, tax and investments in working capital and capital expenditure. Since listing on the JSE in 2001, almost two-thirds of Astral’s declared accounting profits have translated into free cash flow. At the same time, sufficient investments have been made into the business to grow revenue per share by a compound 9% a year; and
Astral’s focused and stable leadership team has been instrumental in the group’s ability to navigate the difficulties faced by the industry. Management has resisted the temptation to diversify away from the core business and, thanks to its healthy financial position, Astral has been investing in its operations at a time when its competitors are struggling to stay afloat. These investments will enhance Astral’s long-term competitive position. We like management’s rational approach to return-focused capital allocation, cost control and opportunistic expansion.
In recent years, competition from imports, a weak local consumer environment and increasing input costs have materially impacted on Astral’s profitability (and profits of the industry as a whole).
However, there are reasons to be optimistic. Recent declines in the price of inputs such as maize and soya beans bode well, because these typically constitute 60% of Astral’s total costs. Meanwhile, Astral has invested in a project at its Standerton hub which will result in new efficiency savings, in-sourcing of previously procured chicken feed and additional capacity at the lower-end of the cost curve.
The government has imposed tariffs on imported poultry products, deemed to constitute “dumping”. While we have a strong preference for free markets wherever possible, this does seem to be a true case of unfair competition. Levelling the playing fields would allow the industry to return to health.
We don’t believe that Astral’s peak profits of 2005-2007 will be repeated soon in real terms, but we think current profits are below normal for a business that is the leader in its industry.
Krüger is an analyst at Allan Gray