Our opinion on the current state of ARL

Astral Foods (ARL) stands as a prominent poultry producer in South Africa, with a comprehensive range of operations within the poultry industry. Their activities include integrated broiler operations, where they possess the capacity to process approximately 4.4 million broilers each week. Additionally, they operate Ross Poultry Breeders, which supplies breeding stock to the South African broiler industry, National Chicks, a supplier of day-old chicks and hatching eggs, and Meadowfeeds, a division comprising seven mills that produce specialized products for various farm animals.

Investing in Astral Foods involves considering several factors, including the influence of weather conditions and the cost of feed, particularly maize. Furthermore, the company's performance can be affected by the dumping of low-cost chicken onto the South African market by major poultry exporters such as Europe, Brazil, and the United States. However, the current valuation of the company's shares appears reasonable, considering these factors.

Astral Foods, classified as an essential service, has not experienced significant disruptions due to COVID-19. Nevertheless, the company anticipates a potential oversupply of chicken in the market due to higher unemployment levels in the foreseeable future.

Overall, Astral Foods is considered a relatively risky commodity share, but it is trading well below its previous levels. In its financial results for the year ending on September 30, 2023, the company reported a 0.4% decrease in revenue and a headline loss of 1324c per share, a stark contrast to the 2762c profit reported in the prior year. This decline was attributed to factors such as load shedding costs and the outbreak of Highly Pathogenic Avian Influenza (bird flu), resulting in an operating loss of R621 million.

In a trading statement for the three months ending on December 31, 2023, Astral Foods estimated a substantial increase in headline earnings per share (HEPS), projecting at least a 300% rise to 654c. This improved performance is attributed to lower load shedding costs and reduced feed costs.

From a technical perspective, Astral Foods displayed a classic rising head-and-shoulders formation six years ago, with the left shoulder peaking in mid-January 2018, the head in April 2018, and the right shoulder in July 2018. The neckline was eventually broken, leading to a significant decline in the share price to approximately R144, where it has since moved sideways and currently trades around R158.

The company has encountered challenges related to rising feed costs, the unreliability and high expenses associated with electricity and water, as well as increased maize and fertilizer costs due to the Ukraine conflict. The recent outbreak of avian flu has also negatively impacted the company. While Astral Foods is generally well-managed, it is perceived as a risky investment due to these factors.