Cash pile puts Astral in position to swoop on opportunities
Company wants to boost production, but poultry sector offers slim pickings for acquisitions and joint ventures
Astral Foods, the "big bird" of the JSE’s poultry sector, is cash flush and perched to swoop on new opportunities after a resurgent performance in the second half of the financial year ended-September 2017.
Results released on Monday show headline earnings almost doubled to R735m, or 1,899c per share, with the poultry segment’s margins fattened up to 6.4%.
More impressive was that cash generated from operations surged 172% to R1.36bn, allowing the company to repay its long-term structured debt in full and leaving a positive net cash balance of R553m.
Astral declared a bumper final dividend of 875c per share, bringing the full-year payout to 1,055c per share and at a 1.8 times earnings cover.
Astral CEO Chris Schutte said the company needed to grow volumes by looking to expand operations by acquisition, joint ventures or investing in increasing existing production capacity. But there is not a surfeit of acquisition opportunities for Astral to chase.
At an investor presentation, Schutte pointed to recent consolidation events in the poultry sector, most notably production cutbacks to balance supply and demand as well as recent corporate activity, with investment firm Capitalworks buying out Eastern Cape poultry producer Sovereign Foods and the Public Investment Corporation buying out unlisted Daybreak Farms
"There’s not a lot around for us to pick up, and buying small abattoirs does not really make sense. It might be better if we first look at taking out production bottle-necks and look at efficiency enhancements. Then maybe we can look at scaling up one or two of our abattoirs to grow volumes."
Looking ahead, Schutte believed Astral could hold its operating margins steady, with the benefit of a favourable input cost carry-over from the strong maize crop.
Chris Logan, CEO of Opportune Investments, said Astral’s strong results again demonstrated the soundness of its best cost philosophy and focus.
He said Astral was generating great profit in a sector with big challenges and was taking market share from the former poultry industry leader RCL Foods’s Rainbow Chickens.
"Indeed Rainbow’s loss of share to Astral is reminiscent of Pick n Pay losing share to Shoprite … except it appears to be happening a lot faster."
In a note to clients, FNB Securities was more cautious in its assessment, noting that high levels of imports, limited consumer discretionary spending power and weaker poultry consumption patterns could constrain performance in the new financial year.
"While this was a very strong result, the outlook statement was very downbeat, which may weigh on gains and limit earnings adjustments on the back of this result," said FNB Securities.
Schutte estimated that poultry imports, on average, amounted to 46,000 tonnes a month. "This is still extremely high, and is roughly equivalent to 44% of local production volumes," he said.