A poultry factory. Picture: REUTERS
A poultry factory. Picture: REUTERS

Poultry producer Astral Foods has opted to hold on to its interim dividend as it braces for the economic fallout from the Covid-19 pandemic. That has already led to oversupply of fresh chicken in the market and should dampen demand for higher-margin products.

The group, which is an essential service as a food producer, said it was facing the prospect of higher input costs as global supply chains were disrupted, while problems in SA, such as load-shedding, increased costs in its six months to end-March.

The group is also bracing for an “unprecedented unemployment rate” that is expected following SA’s lockdown, CEO Chris Schutte said.

“ I don't think we exactly comprehend what is waiting for the SA economy after this hard lockdown, and seemingly indefinite lockdown," he said. Schutte said the government had to do a great deal in a short timeframe in terms of managing Covid-19, but now could do a lot more in terms of opening the economy.

“We already had one foot in the grave ahead of the lockdown — we are now solidly halfway into the coffin,” said Schutte. The cry from business is that they should be able to get back to work and impose their own discipline in terms of preventing the pandemic, he said.

The lockdown had a limited effect on the group’s results to end-March, but had since seen a collapse in demand for SA's quick-service-restaurant sector, which accounts for about a fifth of poultry demand, said Schutte. As a result, the fresh market, which has higher margins, had been flooded overnight, decreasing prices.

“In the medium to long term, the poultry industry will not escape the impact of an even-weaker economy brought about by the lockdown, and the subsequent impact this has had on the ability of South Africans to earn a living wage,” the group said.

Astral said profit in its six months to end-March was largely flat at R371m, with headline earnings up marginally to R369m.

Headline earnings is a widely used profit measure in SA, stripping out one-off items to give a better indication of the underlying performance of a business.

The group said higher sales prices in its broiler operation were partially offset by higher feed costs, as well as other hard-to-control costs.

“The legislated minimum wage, the impact of load-shedding nationally, ongoing additional water supply costs in Standerton, and costs associated with Covid-19 all contributed to a higher base cost of production during the period under review,” Astral said.

The group has been forced to transport its own water to Standerton poultry processing plant, which is the biggest in Southern Africa, due to a failure by Lekwa municipality to provide water — something Astral put down to deteriorating infrastructure.

The group had managed to reduce the amount of water it needed to transport, and had spent about R1.6m a month during the first half, Astral's commercial division MD, Andy Crocker, said. The company had previously been spending about R2m a month.

Astral had surplus cash of R470m at the end of March, said CFO Daan Ferreira, and had opted to hold on to its dividend citing the uncertain outlook. The company would have a full discussion on its liquidity and on a dividend payout for the full year, Schutte said.

The results were commendable in a tough consumer environment, and were in spite of a weak December trading period, when most retailers had reported pressure, said Small Talk Daily’s Anthony Clark.

“There is a backlog of stock building up in the system, where product that would go in to the quick-service market is now going into the fresh market,” he said. “The second half, in terms of the industry, could be quite dire,” he said.

Astral could see a boost from decreased input costs, including feed, said Clark, and the company had a strong cash position, and was also efficient in terms of its operations.

“Astral, as it stands, is a resilient bird, but even a resilient bird has difficulty flying in a tornado of consumer weakness,” said Clark.

The group had paid an interim dividend of R4.75 per share previously, and had 43-million shares in issue, implying an interim payout of about R200m if it kept its dividend unchanged.

In afternoon trade on Monday, Astral’s share price was up 1.08% to R182.95, having fallen 15.75% so far in 2020.

Update: May 18 2020
This article had been updated with information throughout.

gernetzkyk@businesslive.co.za