Our opinion on the current state of ARL

Astral Foods (ARL) is a leading poultry producer in South Africa. The company's activities include integrated broiler operations, where they have a processing capacity of 4,4 million broilers per week; Ross Poultry Breeders, which supplies breeding stock to the South African broiler industry; National Chicks, which is a day-old chick and hatching egg supplier; and Meadowfeeds, which has seven mills producing a wide range of specialised products for farm animals. Buying this share is a gamble on weather conditions and the cost of feed (maize). Since poultry imports into South Africa are about 30% of total consumption, it is also a gamble on the dumping of cheap chicken onto the South African market by Europe, Brazil, and the US - but at current levels the share looks reasonable. As an essential service, Astral has not been greatly impacted by COVID-19 except that it is expecting an over-supply of chicken as a result of higher unemployment in due course. Overall, we view this as a relatively risky commodity share, but one which is trading well below previous levels. In its results for the six months to 31st March 2023 the company reported revenue up 6% and headline earnings per share (HEPS) down 88%. The company said, "The Group’s operating profit declined by 88% to R98 million (March 2022: R785 million) including R741 million load shedding costs incurred during the reporting period, and which could not be recovered from the market". In a trading statement for the year to 30th September 2023 the company estimated that it will make a headline loss of 1802c per share compared to a profit of 2762c in the previous year. The company said, "...the South African poultry industry is currently being ravaged by an outbreak of Highly Pathogenic Avian Influenza (bird flu), with additional costs being incurred by Astral as well as other producers to cull broiler breeding stock". Technically, this share produced a classical rising head-and-shoulders formation - with the left shoulder peaking in mid-January 2018, the head in April 2018 and the right shoulder in July 2018. The neckline was broken, and the share fell sharply to around R144. It is now trading at around R161 and at this level, it is trading on a P:E of around 11,5 - which reflects the volatility of its earnings stream. The company has problems with rising feed costs and the unreliability and costs of electricity and water. Rising maize and fertiliser costs as a result of the war in Ukraine will impact margins. We find this company, although generally well-managed, to be risky.