Afgri's poultry operations under pressure

Afgri reported its annual audited results yesterday with headline earnings per share decreasing by 32.9% to 38c and earnings per share down by 50.3% to 29c.

Management attributed the poor results to the group’s protein division (contributing to 45% of the group’s revenue) and poor returns from its Australian operations.

Within the protein division, Afgri has experienced a myriad of challenges within its poultry business. The sector has been severely affected by a rise in ‘cheaper’ imports of poultry products from Europe and Latin America and has also been contending with escalating feed costs, in part due to the weakening rand. We have seen the rand make new lows this year, currently down around 24% against the dollar since January. Compounding these problems are recent droughts in Argentina and the US that have seen a surge in global maize and soya prices, with very low stock levels in the US heightening price volatility and constraining supply.

Local competitors in the poultry business are feeling the effect with poor financial results being released. Rainbow Chicken, (now known as RCL Foods following a name change announced last month) posted disappointing first-half earnings in February, down 75%, attributing poor performance to the rising level of cheap imports, high input costs and oversupply in the domestic market. In November 2012, the group bought a 64% stake Foodcorp and increased its stake to the 100% in July this year which investors are hoping will provide the diversification needed for respectable full year results.

Local competitor Country Bird CBH has also felt the effects of the difficult operating environment, reporting gloomy figures with 55% of revenue closely linked to its local poultry operations. The South African poultry division reported an operating loss of R24.7m (2012: R57m profit), but the effect was somewhat softened with the group’s African operations performing well (operating profit up 61% to R34m).

When one looks at the current challenges, the issue around imports is clearly the area of contention at the moment. Afgri CEO, Chris Venter was quoted yesterday as saying that “decisive and effective government tariff protection against poultry dumping is imperative if the sector is to avoid a calamity”.

Many other countries have a protection against “dumping”, but this is not the case in South Africa. If we look at our African counterparts, there is strict control of meat imports by countries such as Swaziland, Botswana and Mozambique. Nigeria has even gone a step further, decreasing the allowed import tonnage from 3000 to 2500 and introducing a limit of 600 tonnes a month. Currently 50% of the 400,000 tonnes of total poultry imports now originate from Brazil, while the European Union has infiltrated the "bone-in" or chicken pieces market, where it has already taken a 70% share away from local competitors. South African poultry players continue to liaise with government for protection from imports but there are concerns that our inclusion within BRICS is hampering any signs of resolution.

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