Astral Foods has had its bad luck in recent years.
Issues with the municipal water supply at its Standerton plant cost tens of millions of dollars to its 2019 profit and required Astral to take the local community to court to force them to do their job – and then Covid-19 hit too the farm’s demand for chicken.
While most industries have recovered from the worst of the pandemic, the chicken industry has had to contend with record high unemployment, soaring inflation and a steady increase in dumping of chicken imports into SA, along with the usual problems of soaring feed prices and the threat of bird flu.
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Impact on consumers
Izaak Breytenbach, general manager of the SA Poultry Association, says the reality is that a large proportion of South Africa’s population is being forced to “shopping” and restricting some foods.
“Lower income groups in South Africa are under severe economic pressure. We have seen a steady decline in chicken consumption of 38kg per capita per year in recent years [by 1.7kg].
“If we look at different chicken products, we see a clear substitution of frozen chicken pieces with cheaper chicken products like giblets, necks and feet,” says Breytenbach, adding that 45% of frozen individual piece sales go to lower-income groups.
It’s sales of those big bags of frozen chicken cuts that have declined that shoppers would see walking through the local supermarket. You’ll have to visit a suburban shop to find the cheaper chicken products – hard-frozen square blocks that look like the poor chicken got hit by a combine harvester.
“We look at 10 categories of chicken products, with the more expensive, value-added ranges tending to do better,” says Breytenbach.
“However, demand is also very price-sensitive, leaving manufacturers little leeway to recoup rising input costs.
“Sales of chicken portions to the catering and hospitality industry are improving, but part of that is the usual seasonal increase in the latter months of the year.”
Although Astral reported its best results in years for the year to the end of September 2022, it warns that conditions remain under pressure due to record high unemployment, weak economic growth, high input costs and power disruptions.
In its earnings analysis, management says that raw material costs are at record levels despite the good South African corn harvest over the past three years. It is well known that the war between Russia and Ukraine has pushed up the prices of grain and other foodstuffs worldwide.
“Broiler feed prices are up 11.6% year-on-year due to higher raw material costs. Feed costs remain the most important factor in profitability, accounting for approximately 70% of a broiler’s cost of living,” it says.
“Consistently high unemployment rates and rising cost of living have put pressure on consumer spending with lower disposable income levels.
“The collapse of municipal infrastructure and national load shedding continue to negatively impact Astral’s operational efficiencies, resulting in a significant cost burden. Production cuts have been implemented to limit the negative impact of current load shedding, with significant investment in diesel generator set capacity.
Astral found that load shedding resulted in an additional direct cost of R138 million, while water supply disruptions cost the company at least a further R9 million.
The answer to the challenges was an increase in production volume and a change in product mix to broaden the focus on the more affluent market segments.
“Retail sector promotions resulted in higher sales volumes for Astral.
“The Quick Service Restaurant (QSR) and Fresh sales categories have continued to grow in line with the strategic expansion of processing capabilities in this area,” says management.
“This had a positive impact on the product mix and resulted in a stable supply of broilers in the frozen categories.”
The poultry division contributed 81% to sales.
It boosted sales by R2.4 billion and was the main reason behind the 22% increase in sales to R19.3 billion.
The operating profit margin increased to 7.4% for the fiscal year, compared to 4.6% for the year ended September 2021, also due to improving profitability of the poultry operations.
The operating profit in this division increased massively – by 420% – from R147 million to R763 million.
Broiler slaughter volumes increased by 7.7% following a farm expansion and sales volumes increased by 8.9% to 42,630 tonnes. Sales realizations for broilers increased 12.5%, reflecting efforts to offset the significant increase in feed prices due to higher corn and soybean meal costs, as well as rapidly increasing energy costs.
Dividend on the up again
Astral declared a final dividend of R5.90 per share for a total of R13.80 for the year, the highest annual dividend since 2018, when the dividend topped R20 per share.
In 2018, the share price was close to R330 before a spate of unexpected troubles erupted.
The current price of R172 – not much better than the R120 low during the Covid-19 market crash – puts the stock at a price-to-earnings multiple of a low 6.2x. The annual dividend corresponds to a dividend yield of 8%.
Whether the relatively low stock price is worth a second look depends on the outlook for consumer taste for chicken, the economy, and cost pressures.
A recent report by the Bureau for Food and Agricultural Policy, an independent research organization, confirmed that chicken remains the most popular and cheapest source of meat protein in South Africa.
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It says chicken is likely to increase its market share over the next decade because it’s more affordable than pork or beef.
Per capita consumption of poultry is expected to increase by 2.3kg by 2031, more than reversing the decline the SA Poultry Association has recorded in chicken consumption in recent years.
This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.