High Corn Prices And Cheap Imports Affect Margins
BMI View: Astral Foods' latest annual results confirm our view for a challenging environment for livestock producers in South Africa as a result of tight corn supply in the domestic market and increased competition with cheap imports from Latin America. In the medium term, we see Astral Foods' margins recovering strongly on the back of improved local grain supply in the coming seasons, which could aid a recovery in the company's share price, which reached a low at the end of October.
South African meat producer Astral Foods' latest annual results confirm our view of a challenging environment for livestock producers in South Africa owing to tight corn supply on the domestic market and increased competition from cheap Latin American imports. The company's net income declined from ZAR435mn in 2011 to ZAR332.5mn in 2012. This came mainly on the back of higher costs of goods sold, with operating profits tumbling 29.0% year-on-year (y-o-y) to ZAR477.1mn. On the other hand, we believe the company was able to minimally transfer cost increases to customers, and revenues increased 13.0% y-o-y thanks to higher volumes. This implies that increases in poultry product prices were not sufficient to result in demand destruction.
|At A Low|
|Astral Foods - Operating & Profit Margins (%)|
Most cost increases affected the poultry division and were a result of elevated corn prices on the domestic market. Yellow maize prices are currently 20.2% higher than their level in May 2012 and have not shown signs of moderation in recent months, in contrast with global prices, which have moderated 11.5% since July. This is because the recent surge in South African corn prices followed only partial increases in global prices and mirrored local tightness on the back of subdued production and stocks.
|South Africa - Yellow Maize Prices (ZAR/tonne) & RSI (Below)|
Moreover, cheap chicken imports from South America have continued to increase in recent months, especially as the country has not yet settled its dispute with Brazil regarding the dumping of meat products in the domestic market. In fact, the International Trade Administration Commission of South Africa imposed interim anti-dumping duties of 6% to 63% on frozen whole chickens and boneless cuts from Brazil in February after it found proof of 'injurious dumping' in the local market in 2010. The interim duties expired in August, and no decision has been taken since then on a possible extension of these duties. As a result, imports surged and were made cheaper to local consumers in the absence of duties. Cheap competition from Latin American producers is making it even more difficult for poultry producers in South Africa to maintain stable margins in a context of surging input costs.
In the medium term, we see Astral Foods' margins recovering strongly on the back of improved local grain supply in the coming seasons. We forecast the country's corn production to rebound 13.0% y-o-y in 2012/13, which is likely to help to replenish stocks and provide some relief to prices. Also, we forecast the global corn market to be in a surplus in the coming seasons, causing prices to average lower at USc650/bushel in 2013 and USc575/bushel in 2014. We do not expect a settlement of the dispute to favour local poultry producers, as prohibitive duties will most likely not be extended in the coming months and producers will have to adapt to increasing competition on the local market. However, we expect the projected moderation in local corn prices to be enough to enable companies such as Astral Foods to compete better with Brazilian exporters.
|Potential For A Rebound|
|Astral Foods - Share Price (ZAR, Weekly) & RSI (Below)|
As a result, we see potential for the company's share price to break above resistance at around ZAR10,435. The weekly relative strength index indicates that prices have more room to increase before they reach overbought territory.