I was rather taken by the wide-ranging trading statement issued by Uitenhage-based poultry business Sovereign last week.
It was not so much the span of the earnings numbers that interested me — though these are critical for shareholders, considering larger competitor Country Bird Holdings (CBH) already has its talons firmly in the shareholder register. What caught my eye was the rambling commentary dedicated to the Hartbeespoort abattoir, which Sovereign acquired from Quantum Foods for R120m last year.
Readers may remember that Chris Schutte, the CEO of Astral Foods (the big bird of the JSE’s poultry sector), spoke rather disparagingly about the Harties production facility in the context of a recent AGM where he was quizzed about possible consolidation in the poultry sector. Let me remind you that Schutte contended Sovereign would need to invest another R40m in the Harties facility, a drain on cash by an asset that might not offer an attractive payback for many years.
In what appeared to be an effort to plump up prospects for Harties (and dispel Schutte’s contentions), Sovereign’s trading statement pointed out the Harties facility now meant 81% of total sales volume was from outside the Eastern Cape. The broader strategy for Harties will dedicate a material proportion of the abattoir’s output to fresh portions, which are less affected by the high volume of frozen imports or amendments to brining regulations. The company is also working closely with major customers to start supplying fresh portions first into the Gauteng market and then on a national basis, which complements Harties’ existing presence in the "formal" quick service restaurant market.
Perhaps more critical for shareholders is the news that Sovereign has started to rationalise its production across both the Uitenhage plant and Harties, with some product lines already being transferred up north. This, Sovereign says, should allow for increased production of higher-margin products and better utilisation of the value-added facility at Uitenhage. It will also allow Harties to decrease its average distribution cost as the abattoir is close to its primary market. Sovereign adds that Harties will also decrease the overall costs in sales, marketing and group services as no significant additional costs are incurred in these divisions in the production of the additional volumes from the abattoir.
Sovereign will be hoping to bring these efforts to bear at bottom line sooner rather than later, since the trading statement showed a significant drop in profits in the second half of the year to end February. By my reckoning (and based on a wide-ranging earnings forecast) Sovereign has probably earned at best around 20c/share in the second half, and at worst traded at a small loss.
The dividend declaration will, I suspect, be very telling.
A generous dividend would keep shareholders well fed in case a hostile takeover from CBH transpired. But is it prudent to fork out a chunk of cash when the company is embarking on strategic expansion at a low point in the poultry cycle and amid waning consumer spending? All things considered, I’m not sure there will ever be a better time for CBH — which already owns a direct stake of around 10% — to pitch a general offer to shareholders.
Would 850c/share be enough to woo the bigger shareholders, I wonder?