Astral Foods, SA’s largest poultry producer, on Tuesday flagged how collapsing municipalities were hurting business and the economy, saying a water-supply problem in one town had cost the company at least R85m in profit and could threaten jobs.
In an update to shareholders on Tuesday, Astral, which has a market capitalisation of R7bn and owns the County Fair and Goldi brands, blamed the Lekwa Municipality in Standerton, Mpumalanga, for failing to render reliable water services, saying this was threatening its poultry operations.
Astral shares traded 10.7% lower on Tuesday morning — the biggest fall in more than 18 years — before they recovered to close 4.33% lower at R163.97.
Andy Crocker, MD of Astral’s poultry commercial business, said the water-supply problem had significant cost implications for the group.
The company said the total effect on profits had been at least R85m. In the year to September 30, Astral’s net profit was R1.43bn.
Astral blamed the water interruptions on deteriorating municipal infrastructure. "This deterioration in municipal infrastructure is not supportive of the economic growth so desperately needed and sought after in this country, especially in the more rural areas."
Astral said it was the largest employer in Standerton, with 2,425 people employed at the processing plant and a further 900 employees in the agriculture supply chain.
Court order
"These employees are currently only working half of the normal hours due to a reduction from two shifts to the single shift allowed by the restricted water supply." It said that if the water crisis persisted many of the jobs could be in jeopardy.
The inability to provide services reflects the shabby financial state of SA’s municipalities, which came under scrutiny in the auditor-general’s report in 2018, which showed that out of 257 municipalities only 16 improved their audit outcomes.
Astral said the municipality had continued to undersupply water, despite a permanent order of the high court in Middelburg requiring it to provide a necessary minimum amount to enable the company to run its operations.
Astral was awarded an urgent order on April 4 2019 requiring the municipality to provide the company with water at the level of pressure and at the quantity that it had done for the period prior to the interruption.
"Following further interaction with the municipality it was agreed to replace this order with a mutually agreed order ensuring Astral a minimum supply of four megalitres of water supply a day — Astral requires at least five megalitres — pending repairs to the municipal infrastructure. This order has unfortunately not been adhered to," the company said.
Vaal River
Astral said it was considering alternative water supply to mitigate any further cost effects of the water interruptions. It said the Vaal River, from which the municipality drew water, had adequate supply for the town’s requirements.
"Unfortunately, the municipality is unable to extract, treat and transfer this water currently, due to deteriorating infrastructure. Astral is pursuing both short-term and long-term options to directly access this water that the municipality is unable to deliver, directly from various alternative sources,
and transfer this to a private filtration plant at the company’s processing plant."
This would give the municipality some room to fix its system and re-establish supply, the company said.
It said that the alternative options were costlier than the municipal supply, "but these increased costs are significantly lower than the current impact on Astral’s integrated poultry production business".
The company said it was also considering pursuing legal action against the municipality.
Such legal action would seek to enforce the April 4 court order, to reduce the harm to the company’s processing operation in Standerton and to recover costs that had stemmed from the municipality’s failure to supply water.
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