Shares in Astral Foods jumped as much as 10% on Wednesday, the most in just more than three years, in reaction to an upbeat trading update, with the company expecting its first-half profits to double after managing to increase selling prices to obviate cost pressures that ate into its profit margins in the prior comparable period.
The share’s rally suggests that investors were overly bearish on one of SA’s biggest poultry producers after its market value nearly halved since peaking in November 2018.
The share price eased back slightly by midday to trade 8.41% higher at R184.42, giving Astral a market valuation of R7.95bn. The stock price peaked at R329.11, according to Bloomberg data.
The rally in the shares followed a preliminary trading update in which the company expects its profits to rebound strongly in the six months to end-March, from a prior comparable period marred by lockdown restrictions, which had a marked effect on its key markets, including restaurants.
Astral said first-half headline earnings per share are likely to double to R11.94 from R5.97, after the company managed to increase selling prices in the first quarter of its financial year to obviate costs pressures. Poultry sales volumes improved.
Soft prices
“The level of earnings experienced during the first quarter of 2022 is likely to continue through the second quarter of Astral’s 2022 financial year,” the company said in a statement.
Astral and other poultry producers are sensitive to soft commodity prices, which are largely driven by international and local factors of the supply and demand dynamics.
Feed costs remain the key driver of profitability, representing about 68% of the live cost of a broiler, Astral said. Maize and soya are primary ingredients.
The trading update comes against the backdrop of heavy rains that may have damaged the summer crops, which could keep grain prices at high levels.
Last week, the crop estimates committee, an agency within the agriculture department, cut its preliminary estimate for the hectares planted to maize by 5% to 2.61-million year on year, after some farmers could not get to fields due to excessive rains.
The first production estimate, which will give a snapshot of the extent to which incessant rains may have washed away summer crops, will be released later in February.
Judicious hedge
“Yes, the results are excellent. I expected them,” said Anthony Clark, small-to-medium cap analyst at Smalltalkdaily Research.
“They had a judicious hedge in early September of their key input cost of maize, which meant that they went into a key festive reporting period with very good production costs,” said Clark.
“In a rising demand environment, with the realisation price of poultry per kg also rising, it meant that all stars aligned for them to have an exceptionally good festive trading period.
“However, I have been warning the market and institutional investors since late November that Astral’s half-year results will be at [the] zenith. We have seen in the last three months significant elevations and price increases from the key input costs, which is maize and soya, leading to margin erosion in the second half.”
In 2021, higher input costs eroded profit margins of poultry producers and food manufacturers alike as prices of soft commodities rose exponentially on international markets after dry weather in key planting areas of South and North America raised the prospect of low harvests at the time.
Update: February 2 2022
This story has been updated with new information.
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