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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.

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