Earnings sink at Sovereign on input costs, poultry imports

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Nompumelelo Magwaza

Full-year earnings were down at Sovereign Foods, the chicken producer said on Friday, as a result of increased input costs, including labour and electricity, and cheap poultry imports, among other factors.

South Africa’s fourth-largest poultry producer reported a 21.8 percent decline in annual headline earnings to R46.2 million for the year to February. Headline earnings a share slumped by 19.2 percent to 60.2c.

With no increase in volumes, the group’s revenue rose by 10 percent to R1.39 billion, including 7 percent food inflation and 3 percent product mix changes. The cost of broiler feed per unit sold increased by 12 percent on a 16 percent rise in the cost of raw materials per ton. This was, however, mitigated by an improvement in broiler performances.

Sovereign Foods said imports were down 3 percent from the previous year. This followed an increase in tariffs on all poultry imports, except those from the EU.

Last year, South Africa raised tariffs on several imported chicken products from a number of countries by 8.75 percentage points on average, while it hiked tariffs on “whole birds” to 82 percent, to protect local producers.

However, Sovereign Foods believed importers changed the stated origin of their goods from countries outside the EU to EU members to avoid the new tariffs. It said poultry imports continued to represent about 20 percent of local production.

This had caused an oversupply of commodity products and had depressed price realisation to unrealistic levels.

The company also battled with the local prices of its largest input cost, white maize, in the reporting year. Maize prices reached a 17-year high of R3 483 a ton in January.

“This was as a result of the drought conditions experienced in some parts of the country, coupled with a weaker rand and was exacerbated by an inability to import lower-priced maize from South America due to concerns around genetic modification.”

Lastly, the group said administered prices set by regulatory bodies, which included minimum wage rates, electricity tariffs, municipal charges and diesel prices, had risen in the past several years.

“The company continued to mitigate the margin squeeze resulting from [these] adverse factors by executing its strategy of moving away from commodity- type IQF (individually quick frozen) products towards higher-margin value-added and fresh products.”

Its balance sheet remained strong, with net asset value a share up 5.5 percent from the previous year to R8.52, despite the company’s cash balance declining from R96.8m to R41.4m. Capital expenditure of R72.9m was mainly spent on increasing the supply of high margin products through the installation of an automated cut-up and weight grading system, a large convection oven and increased fresh handling capacity, which had cost R62m.

The group’s share price was unchanged at R5.70 on Friday.


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