South African Astral Foods issues profit warning

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South Africa’s Astral Foods has issued a profit warning, with the poultry processor blaming power cuts for exacerbating already high energy and feed costs.

The owner of the County Fair and Mountain Valley chicken brand said in a trade update today (January 25) that record energy and feed prices have been compounded by abnormal extra costs due to the disappearance of South Africa’s power and water infrastructure, resulting in so-called load shedding, a term used when demand for electricity exceeds supply, causing supply interruptions or blackouts.

In the case of Astral Foods, this has led to cuts in poultry production, while the company added that it has been unable to pass on price increases to consumers.

The company, which generated revenue of 19.3 billion rand ($1.1 billion) as of September 30, now has to subsidize rising production costs, which includes investment in generators diesel and additional water storage, said CEO Chris Schutte.

In light of the many headwinds, Astral Foods has warned that its earnings per share (EPS) and overall earnings per share (HEPS) for the first six months of the fiscal year to March 31 could fall by up to 90% .

This translates to impressions for each of these measures of 142 South African cents, up from 1,456 and 1,420 cents, respectively, a year ago.

Schutte drew attention to comments he made in November: We expect market conditions to deteriorate, with prolonged load shedding and general deterioration of municipal infrastructure continuing to negatively impact operational efficiency.

The group had to embark on many capital projects, which are real grudge purchases, having to install diesel generators and additional water tanks in our facilities.

As a result, chicken prices rose beyond the rate of inflation, he said in November.

Warning about jobs

Schutte added new comments in today’s trading update: the group’s underlying fundamentals remain unchanged, but following the demise of South Africa’s core infrastructure, in particular electricity and water supply, makes profitable trade almost impossible.

I don’t think the government understands the gravity of the situation and the massive impact of load shedding on ordinary citizens and businesses.

His comments were accompanied by other, more succinct warnings.

For the first time in South Africa, food security is now at risk due to agriculture’s dependence on failing basic infrastructure and services. The rising cost of the food basket, which includes poultry as a staple protein, will put the consumer under extreme stress due to financial hardship,” he said.

A few years ago, Astral was the first poultry producer to propose that chicken be categorized as a zero-VAT product, but this was refused by the government. Should this be reconsidered, Astral will again support such an initiative.

Schutte added: If prevailing market conditions and operations due to offloading continue, this could cause Astral to downsize its business in the near term, resulting in job losses throughout the supply chain.

After hitting a 13-year high of 7.8% in July, South Africa’s annualized inflation rate has since slowed. It fell to a seven-month low of 7.2% in December, from 7.4% the previous month, but still remains above the central banks’ target of 3-6%.

Fuel costs also fell in December, from 25.3% to 22.8%, while food and non-alcoholic beverage prices fell to 12.4% from 12.5%.

However, Astral Foods still faces high prices for poultry feed, which it says accounts for 70% of the cost of producing a live broiler. The price of yellow maize peaked at ZAR 5,300 per tonne during the first fiscal quarter of 2023, the company said.

Additional energy and water costs resulted in reductions of approximately 12 million broilers in the first quarter. Astral Foods estimates that the cost of offloading to the business would be around ZAR 400 million in the first half of the year.

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