MENU
 Registered users can save articles to their personal articles list. Login here or sign up here
  Author profile
In this story
 Registered users can save articles to their personal articles list. Login here or sign up here

Sovereign Foods looks to exports as home market bites

The small cap has big plans in the Middle East.

SA’s poultry producer Sovereign Foods is on the prowl for export opportunities as it continues to be whacked in its home market, along with its counterparts, by cheap chicken imports and drought-related higher maize prices.

Sovereign, SA’s fourth largest poultry producer in terms of bird production capacity, is looking to entrench its position in the Middle East as its sees more export opportunities beyond Dubai, where it currently supplies the market with its fully cooked and raw chicken products.

Speaking after the release of its results for the year to end-February, CEO Chris Coombes says the company is keen to grow its exports while the industry has been relatively slow in diversifying to regions beyond SA. “Exports are part of the solution for the [struggling] poultry industry… If most companies [globally] have viable export businesses, we should as well,” says Coombes.

Sovereign will use its current export market of Dubai to grow its footprint in the Middle East. It currently supplies food service companies in Dubai with chicken, which they later repackage into their own brands.

The company grew its full-year revenue by 25% to R2.2 billion, with group sales volumes of chicken products increasing by 18%.  However, it recorded a loss of R35.5 million compared with profits of R81.1 million in the previous period, as a result of once off costs including legal costs relating to the unsuccessful takeover bid by its rival Country Bird Holdings.

Poultry companies have been vocal in their opposition to the sheer quantity of cheap bone-in chicken imports from the US and Europe and new regulations that limit the controversial practice of injecting salt water into individually quick frozen chicken (IQF) to make it plumper, known as brining. 

On the latter, the brine regulations were made effective in October last year by the Department of Agriculture, Forestry and Fisheries, which imposed a cap of 15% brine from 30% on IQF portions and 10% on whole chickens. In simple terms, 30% of the frozen chicken that consumers bought was simply water.

Chicken producers have been criticised for failing to boost their exports to ride out difficult local market conditions, even when the rand exchange rate became favourable.

Coombes admits that the industry has been lax, but adds that in some cases, export legislation and regulation makes it difficult to play in global leagues. “South Africa is precluded from exporting raw material products as there are certain rules and other barriers to entry that are in place. However, we can export fully-cooked products as they don’t have barriers that raw products have.”

Once the regulatory market is clear of any barriers, Coombes sees the company exporting to large poultry markets including the US and even the European Union.

The small-cap company (R727 million at the time of writing) won’t be looking at neighbouring African countries due to protectionist measures governments have on imports to protect local producers.

During the period under review, Sovereign’s exporting business represented 25% of group turnover, but Coombes didn’t comment on the preferred level of revenue to be generated from exports in the coming years.

The company and its peers will remain vulnerable to volatile maize and soya prices. In the case of Sovereign, maize and soya accounts for about 60% and 25% of the cost of feeding a chicken respectively.

Damon Buss, an equity analyst at Electus Fund Managers, says although input prices (such as white and yellow maize) have declined as drought conditions have eased, a number of weather agencies globally are warning of a 50% chance of El Niño drought conditions.  “Hence low soft commodity prices may be more temporary than initially thought,” he says.

The new brining regulations, which have resulted in chicken being sold at higher prices for less product, might continue to impact the demand and volume sales of chicken, says Buss.

Looking for a financial education solution for your staff?

  • This field is for validation purposes and should be left unchanged.
More stories from Moneyweb
Charl Botha

Charl Botha

Futurewealth
Moneyweb Click an Advisor
   No comments so far

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up here

Latest Currencies

ZAR / USD
ZAR / GBP
ZAR / Euro

MONEYWEB NEWSLETTERS

Subscribe to our mailing list

* indicates required
Moneyweb newsletters

Podcasts

Moneyweb Investor Issue 25

If the world's best investment managers, who came together at a recent CFA conference, cannot figure whether a crash or correction is looming, ordinary investors can be forgiven for their hesitation. Thus the June issue of The Moneyweb Investor does its best to fill the gaps. With 17 stories and a podcast, you wouldn't want to miss it.

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2