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africa|business|efficiency|environment|financial|industrial|infrastructure|power|project|water|infrastructure|operations

Water supply interruptions, higher costs dent Astral’s earnings

18th November 2019

By: Tasneem Bulbulia

Senior Contributing Editor Online

     

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JSE-listed poultry producer Astral Foods’ earnings for the financial year ended September 30 were considerably lower than the record profit of R1.43-billion achieved in the 2018 financial year, CEO Chris Schutte pointed out on Monday.

He noted in a presentation of the company’s results that substantially higher raw material costs had contributed to high feed prices that make up 66% of the total live cost of producing a broiler, which, together with lower poultry selling prices year-on-year, negatively impacted on poultry margins.

Further to a challenging market environment, Astral had to contend with other headwinds, with the financial results for the period impacted on by extraordinary costs totalling R223-million.

These included industrial action at its KwaZulu-Natal poultry operations, widespread load-shedding, the impact of newly implemented minimum wage legislation, as well as severe water supply interruptions at Goldi – Astral’s largest poultry processing facility, in Standerton, Mpumalanga.

Group revenue for the year increased by 4% year-on-year to R13.5-billion, but operating profit decreased by 55% year-on-year to R882-million from a record R1.94-billion, resulting in a sharp decline in the operating profit margin to 6.5%.

Net profit decreased to R647.54-million, compared with the profit of R1.43-billion reported for the prior financial year.

The poultry division’s revenue increased by 2.6% to R10.9-billion, the bulk of which was derived from improved sales of broiler day-old chicks and parent stock in the external market, augmented with higher broiler sales volumes.

Broiler slaughter volumes remained relatively flat despite production cutbacks as a result of the Standerton water crisis. Sales volumes increased by 2.6%, largely as a result of sales out of stock in the second half of the reporting period.

Trading conditions remained weak for most of the year, as poultry imports remained high and consumer buying power constrained.

Deep cut promotional activity by retailers resulted in higher sales volumes over the second half of the reporting period, reducing stock to more acceptable levels. Broiler feed prices increased by 7.7% owing to higher raw material costs.

On-farm bird performance during the period was in line with expectations, and an improvement in the feed conversion efficiency at a broiler level was achieved. This benefit slightly offset the higher feed prices.

The division’s operating profit increased by 7.2% to R489-million, with the operating profit margin remaining flat at 7.4%.

Rand per ton margins increased relative to the prior year.

Expense increases were contained to 5.9% year-on-year across all feed mills. Efficiencies from the Standerton feed mill again supported the group’s focused efforts towards continuous poultry live cost improvement.

Local maize prices increased considerably on the back of a below-average South African maize harvest with lower yields owing to late rainfall for the 2019 season.

Feed price increases were curbed to some extent, with imports of maize into the Western Cape at favourable pricing levels compared to local South African Futures Exchange (Safex) prices.

Meanwhile, the revenue contribution from the company’s Other Africa division increased by 16.8% to R480-million, owing to higher selling prices and sales volumes. Operating profit decreased to R22-million from R32-million in the prior year.

Profits were impacted on by a considerable increase in feed costs in Zambia on the back of a drought and crop failure in that country for the 2019 harvest season, resulting in a margin squeeze in a highly competitive market.  

A provision for the expected non-recovery of various taxes owing by the Mozambican government was provided for, negatively impacting on the division’s performance.

The results in Zambia and Mozambique were countered by a good performance from Swaziland.

Astral CFO Daan Ferreira said Astral’s capital expansion programme, announced last year, would increase poultry production capacity by an estimated 16% on current production levels, with an approved capital expenditure amount of R900-million.

The KZN project has been postponed owing to the country’s weak economic growth prospects and market conditions within the poultry sector.

“Astral continues to deliver strong cash flows, with reported surplus cash on hand of R555-million as at September 30.

The final dividend for the year is 425c a share, bringing the total dividend for the year to 900c a share,” said Ferreira.

OUTLOOK

Astral is expecting raw material prices to remain high over the first half of the 2020 financial year.

The outlook for the 2020 harvest season forecasts higher planting intentions for maize acreage, and this, together with improved prospects for seasonal rainfall, could result in an above-average crop, which will benefit feed input costs for the second half of the 2020 financial year.

External factors such as increasing levels of unemployment, poor economic growth and the weak purchasing power of the consumer will continue to place pressure on poultry selling prices.

Schutte indicated that this would be compounded by high levels of poultry imports from Brazil and the US, which was likely to continue should further tariff increases not be granted.

Schutte, meanwhile, highlighted that the municipal infrastructure deterioration in Standerton and its impact on Astral’s operations would add a cost burden to the business until a more permanent solution was implemented.  

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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