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By Sisa Rafuza, 11 February 2013
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.
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.
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”.