South Africa’s Astral Foods has issued a profit warning as the poultry processor blamed power disruptions for exacerbating already high energy and feed costs.
The County Fair and Mountain Valley chicken brand owner said in a trading update today (25 January) that “record high” energy and feed prices had been made worse by “abnormal additional costs” due to a demise in South Africa’s power and water infrastructure, leading to so-called load-shedding, a term used when demand for electricity exceeds supply, causing interruptions to supply or blackouts.
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In Astral Foods’ case, that has led to production cutbacks in poultry, while the company added it had not been able to pass through price increases to consumers.
The business, which generated group revenue of ZAR19.3bn (US$1.1bn) in the year to 30 September, is now having to “subsidise” the increased cost of production, which includes investing in diesel generators and additional water storage, CEO Chris Schutte said.
In light of the “numerous headwinds”, Astral Foods cautioned its earnings per share (EPS) and headline earnings per share (HEPS) for the first six months of the fiscal year to 31 March, could decrease by as much as 90% at the utmost.
That translates to prints for each of those metrics of 142 South African cents, compared to 1,456 and 1,420 cents, respectively, in the year-ago period.
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By GlobalDataSchutte drew attention to the comments he made in November: “We are expecting market conditions to deteriorate, with prolonged load-shedding and the general decay of municipal infrastructure continuing to impact operational efficiencies negatively.
“The group has had to embark on numerous capital projects, which are truly grudge purchases, having to install diesel generators and additional water storage at our facilities.”
As a consequence, chicken prices have increased beyond the rate of inflation, he said in November.
Warning on jobs
Schutte added fresh comments in today’s trading update: “The underlying fundamentals in the group remain unchanged, but as a result of the demise of South Africa’s basic infrastructure, specifically electricity and water supply, makes trading profitably almost impossible.
“I don’t think that government grasps the severity of the situation and the massive impact load-shedding has on ordinary citizens and businesses alike.”
His comments came with other more succinct warnings.
“For the first time in South Africa, food security is now under threat due to agriculture’s reliance on basic infrastructure and services, which are failing. The increasing cost of the food basket, which includes poultry as a staple protein, will place the consumer under extreme stress due to financial hardship,” he said.
“A couple of years ago, Astral was the first poultry producer to propose that chicken be categorised as a zero-rated VAT product, however this was declined by government. Should this be revisited, Astral will once again support such an initiative.”
Schutte added: “If prevailing market and operational conditions due to load-shedding continue, it could lead to Astral resizing its business in the short term, resulting in job losses throughout the supply chain.”
Having reached a 13-year high of 7.8% in July, South Africa’s annualised rate of inflation has since slowed. It eased to a seven-month low of 7.2% in December from 7.4% the previous month but still remains above the central bank’s target of 3-6%.
Fuel costs also cooled in December to 22.8% from 25.3%, while prices for food and non-alcoholic beverages dipped to 12.4% from 12.5%.
However, Astral Foods is still facing elevated prices for poultry feed, which it said accounts for 70% of the cost to produce a “live broiler”. The price of yellow maize “peaked” at ZAR5,300 per tonne in the fiscal first quarter of 2023, the company said.
The additional energy and water costs led to cutbacks of around 12 million broilers in the first quarter. Astral Foods estimates the cost of load-shedding on the business would be around ZAR400m in the first half.
