JSE-listed Sovereign Food Investments on Friday reported headline earnings a share of 103.3c, up 72%, and a 19% increase in revenue to R1.65-billion for the year ended February 28.

Sovereign, which was focused on continuing to execute its product mix strategy and reducing its cost base, advised that it achieved higher net sales owing to a strong improvement in overall market conditions and its strategy to move away from commodity, individually quick frozen-type products towards higher-margin value-added and fresh products.

This, together with a marginal increase in feed costs and continued strong operational results, has increased the group’s earnings before interest, taxes and amoritisation margin to 8.8% from 7.2%.

“The cost of broiler feed a unit sold increased by 5% owing to a 2% increase in the cost of raw materials a ton together with an increase in the feed conversion ratio on the broiler farms and a decreased abattoir yield owing to the change in the product mix. Nonfeed costs increased by 16% a unit driven mainly by increases in the costs of inputs into value-added products and other above inflation increases such as energy, plastics and labour,” Sovereign explained.

Strong operational cash flows and lower debt levels resulted in net finance costs declining to R2.8-million from the R4.8-million reported for the 2014 financial year.

Sovereign’s financial position remained strong with net asset value a share up 10.5% from the previous financial year’s R8.52 to R9.42.

Cash balances increased from R41.4-million in the 2014 financial year to R70.9-million, while net gearing at the end of the year was 1%, compared with 10% at the end of the previous year.

Working capital levels decreased from 8.9% of revenue in fiscal 2014 to 8.8%. The increase in trade and other receivables was as a result of increases in selling prices and volumes, combined with the year-end falling over a weekend, which resulted in some customers only paying after year-end.

Trade, other payables and provisions included an amount of R27-million in respect of a dispute with a local service provider.

Owing to the increased levels of profitability and despite the additional working capital requirements, cash flow from operating activities increased to R124.3-million compared to R62.8-million in fiscal 2014.

Capital expenditure of R53.8-million compared with R72.9-million in the prior comparable period, including the installation of a carton freezer and portioning equipment, was focused on plant and equipment, which would enable the group to increase the supply of high-margin products.

However, Sovereign noted that the South African consumer remained under financial pressure, despite the recent decrease in fuel costs owing to the collapse in the oil price.

Dividends of R 11.4-million were paid during the year compared with R14.7-million in the 2014 financial year.

INDUSTRY ISSUES
Industry selling prices were expected to continue to be dominated by the level of imports, which would, in turn, be affected by the outcome of the African Growth and Opportunity Act (Agoa) on negotiations and imports from European Union countries that were not affected by the antidumping tariffs.

The issue of imports and Agoa had received media coverage in April and the group supports the South African Poultry Association in its efforts to find a negotiated settlement with the US poultry industry as part of the package to renew Agoa for the benefit of all South African citizens.

Meanwhile, the antidumping duties provisionally imposed against imports of bone-in products from certain companies in the UK, Netherlands and Germany on July 4, 2014 were finalised on February 27.

Sovereign said although this move was welcomed, “the group notes, with concern, the recent trend to source an almost equivalent volume of bone-in product from Spain, Belgium and France, where no antidumping duties are applicable”.

As much as the proposed imposition of a maximum brining level continued to be unresolved, the group was confident that a solution would be reached that was in the best interests of all stakeholders.

Meanwhile, maize prices were expected to be higher in the coming year but this would, to some extent, be offset by lower soya prices.

Maize prices had experienced great volatility over the past several months, with a low being reached in September 2014 followed by a spike in February 2015, resulting from the drought experienced in various parts of South Africa. 

However, international corn prices had continued to decline over this period, therefore, local maize prices would be capped at import parity, especially as South Africa was now able to import maize from Brazil and Argentina.

CORPORATE ACTIVITY
On May 7, Quantum Foods accepted Sovereign’s binding offer for the R120-million acquisition of its Hartebeespoort Abattoir, in the North West. 

“This acquisition will enable the group to slaughter an additional 250 000 birds a week, giving Sovereign greater access to the Gauteng market and its largest customers. Broiler birds will be sourced from Quantum Foods in terms of a long-term supply agreement,” the group explained.