Sea Harvest, which produces hake and cheese locally, battled to recover operating costs that surged 20% in the six months to end-June, as load-shedding and high spend fuel hit it hard — another example of the pressures facing food producers in the prevailing climate.
The company also had to contend with a rise in debt costs which nearly doubled to R87m due to a 47% rise in interest rates in Australia and SA, where it owns fishing businesses.
The company also booked about R100m of its R248m profit before tax as an accounting gain reflecting, mostly, that it bought out a minority firm’s stake in its unprofitable Viking Aquaculture business at below market value.
The accounting gain does not depict cash coming into the business, but is a way to reflect that it bought more of its abalone farming business at a discount.
“If it wasn’t for that gain, the results would look particularly shabby,” said Smalltalkdaily analyst Anthony Clark, who said Sea Harvest’s results were mostly due to “accounting wizardry”.
It grew revenue 18% to R3.2bn on rising global and local demand for seafood. Its headline earnings per share grew 19% to 77c. But its operating profit dropped 9% to R251m due the increase in costs.
Without the accounting gain, the profit before tax would have dropped to about R148m from the R234m in the matching 2022 first half.
Fuel, which is used by fishing boats, and load-shedding which affected its cheese and butter division were the main drivers of costs. While it put up prices in SA and abroad, it could not recover all the costs as consumers will buy less if prices rise too high.
CEO Felix Ratheb said products’ gross margin contracted 5% as it absorbed some costs.
Last week, SA’s cabinet said it was looking at ways to keep food prices down as consumers needed affordable food. The cabinet pointed to a Competition Commission statement that suggested food and retailers were profiteering from soaring prices.
However, results of Sea Harvest, Libstar and RCL Foods show that profit among food producers is dropping due to the rising costs they have had to absorb.
Locally, the hake business grew revenue 10% to R1.5bn as it put up prices and demand grew. In SA demand for seafood is high due to its healthy and organic nature.
Ratheb said since the Covid-19 lockdown, SA consumers stopped going to restaurants but increased eating fish at home. This trend has continued even as restaurants, which it also services, have got busier. “In the local market, we’ve seen large volume growth and nice price growth.”
While demand is high, it caught less hake due to stormy conditions in the Cape forcing smaller boats to come onshore and leaving bigger boats unable to catch fish in heavy swells.
Its dairy business was affected by a load-shedding related fire at the Ladismith cheese factory that limited production for a month.
The business faced other challenges including a shortage of milk in the country making imported cheese cheaper than what is produced locally. It also faced “significant cost inflation, including a double-digit increase in the milk price”.
“Despite these challenges and a constrained consumer, higher selling prices resulted in a 9% increase in revenue. However, the disruptions in the period weighed heavily on profitability, particularly at BM Foods, our convenience foods business, which was unable to fully recover the significant cost inflation,” Ratheb said.
The company makes half its money abroad, benefiting from a weak rand, and is seeing its newer abalone farms become a pathway to growth due to Chinese demand for the highly prized mollusc.
The farms are new, sustainable and the products will grow in size and thus value with time. The aquaculture products increased revenue 11% to R62m.
Ratheb said Cape abalone is more popular than Chinese abalone as it is bigger and tastes better and is served at exclusive restaurants.
Sea Harvest faces another challenge with a debt pile of about R2.2bn from expanding into Australia where it bought a fishing and prawn business. It is as Clark puts it “stuffed full of debt” and the acquisitions are yet to show in better results.
The group said in a statement: “With central banks both in SA and Australia hiking rates, average interest rates have doubled the interest burden of the group.”
Its Australian prawn business is expected to do much better in the second half as it is seasonal, with the prawn fishing done in winter. However, it expects lower prices for prawns due to excess supply in Australia but still expects a revenue boost.
The share price dropped 4.11% to R10.02, a far cry from the record high of R16.90 it reached in early 2022.
Correction: September 5, 2023
An earlier version of this story reflected that accounting gains boosted the operating profit by R100m. In fact, it boosted profit before tax by about R100m.
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