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Operating environment

The chicken industry has been faced with some headwinds, with the three main ones being the proliferation of imports, protracted low selling prices and high feed cost. Imports have increased significantly over the past five years from being about 20% of the market to more than 50% in some instances. The proportion of the market that is imported varies due to the strength or weakness of the rand. However, during the past few years imports have been sustained at much higher levels.

The South African Poultry Association believes that Brazil is dumping their chicken and they have been trying to persuade government to impose tariffs on the Brazilian chicken. Dumping effectively means that the Brazilians are selling chicken for less than competitive market prices, which has kept South African poultry prices at lower levels for longer (see below).

To compound matters, feed prices – a major cost driver for poultry producers – has remained at elevated levels (see next graph). Feed comprises about 50% of the operating costs for broiler producers.

 

What we like

  • Based on our estimation of fair value, Astral is cheap and all the bad news is reflected in the current share price. While the business is at its nadir, it still generates healthy cash flows, which is a big plus.
  • The business is a good dividend payer, with a current dividend yield of 6.3%.
  • Astral has a strong balance sheet; they are virtually ungeared, with debt to equity a mere 7%.
  • Astral is a dominant player in the market, with more than 20% market share. This implies that its scale provides some level of advantage and opportunity to lead consolidation in the industry.
  • They are a relatively low cost producer, which puts them at an advantage to other small operators.
  • Astral is a fully integrated broiler business and thus also benefits from high feed prices, which they produce and sell to their chicken farms and third parties.

Risk to our valuation

The biggest risk to SIM’s outlook for Astral is if the surge in imports doesn’t subside and the industry experiences a permanent structural change, such that our expectation of a normalisation in the operating conditions is not attained.

 

sim.sense’s bottom line

Astral offers attractive value, has a strong balance sheet, is a good cash generator and is a consistent dividend payer - all the qualities of a good investment opportunity.

Most investors tend to ‘chicken out’ when things get tough, forgetting the most important aspect of the psychology of investing. As Warren Buffet, the doyen of the industry put it so eloquently: “Be fearful when everyone is greedy and be greedy when everyone is fearful”.

Broiler prices; lower for longer and Feed prices elevated  
 
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