Tastier chicken boosts Astral dividend, profits jump 420% after hard times

Astral Foods has had its run of bad luck during the last few years.

Problems with municipal water supply to its plant in Standerton knocked tens of millions off its profit in 2019 and made it necessary for Astral to take the local municipality to court to force it to do its job – and then Covid-19 hit operations as well as the demand for chicken.

While most industries have recovered from the worst of the effects of the pandemic, the chicken industry has had to contend with record levels of unemployment, rising inflation, and a steady increase in the dumping of chicken imports in SA – in addition to the usual problems of runaway feed prices and the risk of bird flu.

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Consumer impact

Izaak Breytenbach, general manager of the SA Poultry Association, says the reality is that a large part of SA’s population has been forced to “buy down”, cutting back on some foods.

“Lower income groups are under severe economic pressure in SA. We have seen a steady decline in chicken consumption over the last few years, falling from 38kg per capita per annum [by 1.7kg].

“Looking at different chicken products, we see a definite substitution from frozen chicken pieces to cheaper chicken products, such as giblets, necks and feet,” says Breytenbach, adding that 45% of sales of individual frozen pieces are to lower income groups.

It is the sale of those big bags of frozen chicken pieces that have been declining, the ones shoppers would see while walking through the local supermarket. You need to visit a shop on the outskirts of townships to find the cheaper chicken products – hard-frozen square blocks that look like the poor chicken was run over by a combine harvester.

“We look at 10 categories of chicken products, with the more expensive value-added product ranges usually doing better,” says Breytenbach.

“However, demand is very sensitive to price too, leaving producers little room to recoup increasing input costs.

“Sales of chicken portions to the restaurant and hospitality sector are improving, but part of that is the usual seasonal increase during the last months of the year.”

Challenges

Although Astral reported its best results in years for the year to end September 2022, it warns that conditions remain under pressure due to record high unemployment levels, weak economic growth, high input costs and electricity disruptions.

Management says in its review of the results that raw material costs are at record levels, notwithstanding the good South African maize crops of the past three years. It is well known that the war between Russia and Ukraine increased grain and other food prices worldwide.

“Broiler feed prices increased by 11.6% versus the prior year, due to higher raw material costs. Feed cost remains the key driver of profitability, representing approximately 70% of the live cost of a broiler,” it says.

“Consistently high unemployment levels and a soaring cost of living have led to pressure on consumer spending with lower disposable income levels.

“Collapsing municipal infrastructure and national load shedding continue to impact Astral’s operational efficiencies negatively, which adds a significant cost burden. Production cutbacks have been implemented to limit the negative impact of the current load shedding, with significant capital expenditure in diesel generator capacity,” it says.

Astral noted that load shedding resulted in direct additional costs of R138 million, while water supply interruptions cost the company at least another R9 million.

Product mix

The answer to the challenges was an increase in production volumes and a change in product mix to extend the focus on the more affluent sectors of the market.

“Promotional sales activity by the retailer sector resulted in higher sales volumes for Astral.

“The Quick Service Restaurant (QSR) and Fresh sales categories continued to grow in line with the strategic expansion of processing capacity in this area,” says management.

“This positively impacted product mix and led to a stable supply of chicken into the frozen categories.”

The numbers

The Poultry Division contributed 81% to revenue.

It increased revenues by R2.4 billion and was the main contributor of the 22% increase in revenue to R19.3 billion.

The operating profit margin increased to 7.4% in the financial year under review, compared to 4.6% in the year to end September 2021, also as a result of the improvement in the profitability of the poultry operations.

Operating profit in this division increased massively – by 420% – from R147 million to R763 million.

Broiler slaughter volumes increased by 7.7% following an expansion of operations, and sales volumes increased by 8.9% to 42 630 tons. Broiler sales realisations increased by 12.5%, reflecting an effort to recover the significant increase in feed prices on the back of higher maize and soya meal costs, as well as rapidly rising energy costs.

Dividend back on the up

Astral declared a final dividend of R5.90 per share for a total of R13.80 for the year, the highest annual dividend since 2018 when the dividend exceeded R20 per share.

Back in 2018, the share price was sitting close to R330 before the barrage of unexpected problems hatched.

The current price of R172 – not that much better than the R120 low during the Covid-19 market crash – puts the share on a price-earnings ratio of a low 6.2 times. The annual dividend is equal to a dividend yield of 8%.

Whether the relatively low share price is worth a second look will depend on the outlook for consumers’ taste for chicken, the economy and cost pressures.

A recent report by the Bureau for Food and Agricultural Policy, an independent research organisation, reiterated that chicken is still SA’s most popular and most affordable source of meat protein.

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It says chicken will probably increase its market share over the next decade because it is more affordable than pork or beef.

It expects per capita consumption of poultry to increase by 2.3kg by 2031, which will more than reverse the decline the SA Poultry Association has seen in chicken consumption in recent years.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.