The Finance Ghost: Eskom is leading the poultry industry to the slaughter

29 Jan 2023

Astral Foods, one of South Africa’s leading poultry producers, warned us in November already that the combination of high feed costs and rolling blackouts would put pressure on its operations.

The Eskom chickens are coming home to roost and shareholders are on the receiving end.

Power cuts are having a major impact on all aspects of Astral’s business. Margins in this industry are tighter than your pants on 2 January, so there simply isn’t room to absorb major cost pressures and operating pressures.

In what initially seemed like a glimmer of good news, the feed division will benefit from the poultry division requiring substantially higher internal feed volumes.

The drawback is that this is because the demand for feed is higher due to delays in the slaughter programme, caused by — you guessed it — power cuts.

So, chickens are being slaughtered later, which means that they are getting bigger and hungrier. There’s an optimal point at which the chickens need to be slaughtered and sent off to your friendly local retailer, with any growth beyond that point causing problems for Astral’s margins.

With browbeaten South Africans already stretched thin, there simply isn’t an ability to pass this full cost on to customers. Astral is in the unsavoury position of making a loss of at least R2/kg per chicken, which clearly isn’t sustainable.

As a core protein for millions of South Africans and a vegetable option at many braais in Bloemfontein, chicken is critical in our country and the knock-on impact of Eskom is clearly visible.

At this stage, Astral’s headline earnings per share (HEPS) for the six months ending March will be as much as 90% lower, which means earnings should be at least 142c a share.

The bigger issue is that the current monthly run-rate must be terrible in the business, so the next six months will be the bigger concern if there isn’t a drastic change in the operating environment.

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AVI maintains flat earnings as volumes come under pressure

Although Eskom is also causing headaches for food and beverage company AVI (with alternative power solutions adding R22-million to operating costs for the six months ended December), the major pain point at the moment is consumer spending.

As consumers look to save money, they are cutting back on luxuries, which is putting pressure on volumes in some categories.

Group revenue increased by 7.2% as a result of pricing, with category-level performance varying drastically. For example, I&J fell by 2.3% because of lower catch rates and other issues, whereas fashion brands grew by 17.4%.

It is important to note that the gross margin increased slightly in the most recent update. This is a very positive sign, particularly in an environment where margins are typically under a lot of pressure. The mix effect will be one of the main drivers of this improvement.

Still, with costs under pressure across the board, HEPS for the six months ended December is only expected to be between 0% and 1% higher.

Eskom helps Sasol find its second wind

Out of the darkness, a faint flicker of light and the unmistakable silhouette of wind turbines.

Sasol has announced three power purchase agreements, including 69MW of wind power for Sasolburg and 220MW of wind power for Secunda under two separate agreements.

Though this progress is encouraging, there’s a long way to go for Sasol before the reliance on Eskom is materially reduced. This is why Sasol is aiming to procure 1,200MW of renewable energy by 2030, something that will do some favours for the ESG (environmental, social, and governance) section of the report.

With many environmentalists having Sasol-themed voodoo dolls on their desks, this is good news for both the accountants and the environment.

The update dealing with the renewable energy investment was accompanied by a production update, in which Sasol reported a drop in production across the board.

Gas, Fuels and Chemicals experienced production drops of between 2% and 5%. It seems that the market was expecting worse, as the share price jumped 4.7% immediately after the update.

A tale of three fashion retailers

It’s not really the best of times anywhere, but it’s the worst of times at Mr Price.

Like your luddite uncle who believed that load shedding was a temporary problem, Mr Price appears to have been caught napping when it comes to energy backup solutions.

When customers are leaving their homes with rechargeable lights, surge-proof plugs and UPS backups for fibre, they aren’t impressed by the need to get their smartphones out to see what they are buying at the shops.

Was Mr Price simply distracted by the significant recent acquisition spree? Is the fashion at Mr Price the problem, with power cuts a convenient excuse? Only time will tell. In the meantime, Mr Price shareholders are nervous based on the numbers we’ve seen from competitors.

With rolling blackouts here for a long time rather than a good time, competitors Truworths and Foschini have done a fabulous job of proving that business can continue even when Eskom can’t.

I wouldn’t be surprised to see ad campaigns about backup power capacities and the ability for customers to keep shopping even when the lights go out.

It’s amazing what happens when your customers can see what they are buying. Truworths grew retail sales by 13% on a comparable basis for the 26 weeks to 1 January 2023, with 77% of their turnover covered by energy backups.

Over at The Foschini Group, where 70% of turnover is covered by energy backups, like-for-like growth in TFG Africa came in at 5.7% for the quarter.

Note that there are differences in timing here, with the quarterly update from The Foschini Group suffering a greater impact from rolling blackouts than the interim update from Truworths.

As for the red caps, their shareholders have been left out in the dark. Ignoring the Studio 88 acquisition that skews the numbers, the rest of the business grew by just 1.2% and cash sales were up by a negligible 0.6% in the latest quarter.

Mr Price’s share price is down nearly 18% over the past 12 months and is flat year-to-date. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

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