Poultry group Quantum Foods declared no dividend as it delivered grim annual results after it faced a variety of challenges in its 2022 year, some of which will continue in the new financial year.
The company, valued at R1bn on the JSE, declared a dividend of 30c in its 2021 year to end-September.
However, its operating profit fell 78% year on year to R32.5m and headline earnings 72.5% to R28.1m, despite the 11.5% increase in revenue to R6.02bn.
There was a drop in performance as raw material feed costs rose, fewer people bought eggs because of tough economic conditions, Quantum Foods had to deal with bird flu outbreaks and input costs rose as the price of electricity, gas and fuel shot up, worsened by ongoing load-shedding.
Raw-materials costs is expected to remain high in the new financial year, while customers and consumers are likely to face tough economic conditions, because of global uncertainty, high inflation and interest rate hikes in particular, for some time, weighing on the company’s ability to recover cost increases.
“The continued decline of the SA economy remains a concern. High levels of unemployment and poverty have the potential to lead to increased social unrest, with a concomitant risk to business,” Quantum Foods said.
This was evident in the selling prices of eggs jumping 8.4% on average in the financial year while volumes edged up 0.7%.
“The relatively large SA layer flock, together with the current depressed consumer environment, have created an imbalance in the supply and demand of eggs,” the company said.
“The resultant pressure on egg selling prices as well as higher production costs resulted in significant margin pressures and losses incurred in the egg business,” it added.
However, Quantum Foods expects egg selling prices to be supported by lower supply resulting from a reduced SA flock size “as producers place fewer hens in response to challenging egg industry conditions”.
The tough economic consumer environment looks set to continue with annual consumer inflation for October came in above market expectations earlier this week as it quickened to 7.6%, marking the sixth consecutive month in which annual inflation has been above the higher end of the Bank’s 3%-6% target range.
Meanwhile, the SA Reserve Bank hiked interest rates on Thursday and warned that more was to come.
“The higher interest rates obviously mean increased debt serving costs for farmers in an environment of elevated input costs in the form [of] fuel, fertiliser, pesticides and herbicides prices. The overall impact is for margin compression in the agriculture sector with industries such as citrus and livestock severely affected,” FNB Agri-Business senior agricultural economist Paul Makube said in a note on Friday.
The outbreak of the highly pathogenic avian influenza (HPAI), or bird flu, at Quantum’s Lemoenkloof layer farm near Malmesbury in the Western Cape led to the culling of 40,000 layer hens. The repopulation of the farm, responsible for about 13% of the total production of eggs, only started in July.
False positive tests for HPAI on two of the farms in Gauteng and the North West resulted in the quarantine of layer hens “which still had to be fed, at a higher cost, beyond their normal age of depopulation”, the company said.
“The disruption of the normal flow of birds from layer-rearing farms to layer farms contributed to a higher cost of rearing,” it added.
Another challenge was an unprotected strike in October 2021 at its Kaalfontein layer farm, which delivers about 15% of its egg production, in Gauteng, which hit its production and added to operational costs.
The strike broke out after a disciplinary process was launched against an employee suspected of sabotage.
“This labour action unfortunately resulted in 40 employees being dismissed, and the company had to contract additional security and employ temporary labour at short notice while starting a process to fill these positions,” Quantum Foods said.
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