Pioneer Foods’ share price fell more than 4% on Monday as an unfavourable maize procurement contract came back to bite the group.
Although CEO Phil Roux moved quickly to reassure investors that the company was expecting a better second-half performance, this did not stop the share price dropping 4.38% to close at R153.
“I have taken great pride in our achievements over the past four years. Unfortunately the same can’t be said about the first-half 2017,” said Roux.
“While the company has had to contend with extraordinary circumstances, it is important not to fully externalise our predicament. We made well-considered strategic choices which have regrettably weighed heavily on our financial performance,” he said.
Roux said an unfavourable procurement position in maize taken in 2016 had been the most significant detractor.
“We secured over 4-million tonnes of maize as we are the brand leader. We would do exactly the same thing again. It was a good strategic decision that coincided with bad outcomes. But we are a fantastic organisation and will ensure that 2018 sees us return to a profit trajectory,” he said.
The expected bumper harvest has already led to a significant decline in grain prices, with white maize for July delivery now fetching R1,792 a tonne, from more than R5,000 in the first half of 2016.
In the six months to end March 2017, Pioneer reported a 47% drop in first-half adjusted headline earnings to R470m. Adjusted operating profit declined from 12% to 7%.
Arqaam Capital analyst Victor Dima said the muted figures were of concern.
The South African business, which accounts for 85% of the group’s sales, increased by 4% while the international business – with 15% of group sales – declined by 11%.
“The lower maize price will impact numbers only from June 2017, hence the third quarter will likely also see some margin pressure. Overall, the weakness in the period was in line with earlier released guidance but muted sales growth is likely to be viewed negative by the market.”
Kagiso Asset Management associate portfolio manager Dirk van Vlaanderen said a positive in the results had been the company’s good cost control “in what was a very tough half”. He said the 3% rise in nonproduction operating costs was well below inflation.
“Several factors outside of the company’s control contributed to a perfect storm for its results. These included much higher maize prices, currency headwinds, poor end-demand in African markets and a small raisin crop,” he said.
“These will begin to ease into the second half. However, while the maize division should bounce back fairly quickly in the next 12 months, the other headwinds may take longer to return to normal levels.”
Van Vlaanderen said a key concern was the weaker consumer environment, particularly in SA, “which is resulting in fierce price competition in some of Pioneer’s core categories, suggesting a tougher road ahead for its grocery division”.
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