Publications
Partners
I RECKON agri-business Afgri and poultry group Country Bird Holdings (CBH) were mighty relieved after Eastern Cape-based Sovereign Food Investments published its year to end-February numbers on Thursday.
Readers may remember that Afgri and CBH were both tilting to take over - or merge with - Sovereign last year. CBH went as far as accumulating a sizeable strategic stake in Sovereign - which was later (wisely, it seems) sold off.
Sovereign’s determination to go it alone hinged on a R144.5m rights issue - a significant development considering Sovereign’s market capitalisation of around R400m.
The company received some willing backers in the form of institutional shareholders Prudential and Old Mutual, which agreed to partially underwrite a rights issue pitched at 850 cents per share.
While Sovereign can claim a massive turnaround in the past financial year (swinging from a loss of 1.5c/share last year to earnings of 32.c/share), I can’t imagine that Old Mutual or Prudential will be too pleased at developments at Sovereign.
The market certainly did not like what it saw in Sovereign’s coop.
The share shed 6% of its value on Thursday to settle at 735c – about 13% down from the rights issue price.
I am feeling somewhat crestfallen because I recently punted Sovereign as a share with a potentially high dividend yield for the future.
While I still live in hope, there are a few things making me fretful.
My understanding – at the time of the rights issue – was that the bulk of the rights issue proceeds (roughly three-quarters) would be earmarked for debt redemption.
A little bit would be set aside for capital expenditure, reassuringly deemed - as far as I can recall - "minimal".
Sovereign’s cash flow statement, though, shows that a rather hefty R61m was spent on investing in property, plant and equipment.
Considering how much Sovereign had already spent in the previous year on production upgrades, I found this spending rather surprising, even if only R16m was spent in the second half of the financial year.
That meant that Sovereign’s cash-on-hand reduced from R83m in 2009 to R54m (noting that R11m of the net R120m raised in the rights issue was used to repay debt).
Margin issues
What really perturbed me was the admission that "Despite the investment and expansion over the past 36 months, the group remains challenged in various areas of its supply chain, most notably in the broiler operation and at the abattoir".
These comments are reflected in the income statement numbers, if we compare the first six months of trading in the financial year with the second half. In each half, Sovereign generated roughly the same amount of turnover (around R500m), but almost three-quarters of the operating profits were generated in the first half.
Sovereign’s interim operating profits of R78m were extended by just R26m in the second half, and this meant Sovereign finished the financial year with R104m in top-line profits. This is extremely disappointing in view of the substantial investment made in improving capacity throughout Sovereign’s businesses.
More worrying, though, is how the gross margin was butchered in the second half. By my calculations the margin at the interim period was over 14%, but had slipped to under 10% by the end of the financial year.
In other words, the trading margin during the second half dropped as low as 5%.
Holy cow, that’s a big beating on the margin! I am really keen to see what kind of margin Astral and Rainbow Chickens – which must all report results fairly soon – will achieve. For the record, CBH’s net operating margin was 6.5% in the half-year to end-December 2009.
While Sovereign’s debt has been brought back to more reasonable levels, there is still a chunk of debt (R360m in long-term loans and R77m in short-term loans) to service and pay off. In fact, finance costs lopped off more than half of operating profits in the latest trading period.
So, the last thing Sovereign can afford right now is a stalling in much-vaunted operational efficiencies - while its non-feed cost base (and electricity is quite a factor here) is at risk of increasing and imports are seemingly on the rise.
- Fin24.com
Readers may remember that Afgri and CBH were both tilting to take over - or merge with - Sovereign last year. CBH went as far as accumulating a sizeable strategic stake in Sovereign - which was later (wisely, it seems) sold off.
Sovereign’s determination to go it alone hinged on a R144.5m rights issue - a significant development considering Sovereign’s market capitalisation of around R400m.
The company received some willing backers in the form of institutional shareholders Prudential and Old Mutual, which agreed to partially underwrite a rights issue pitched at 850 cents per share.
While Sovereign can claim a massive turnaround in the past financial year (swinging from a loss of 1.5c/share last year to earnings of 32.c/share), I can’t imagine that Old Mutual or Prudential will be too pleased at developments at Sovereign.
The market certainly did not like what it saw in Sovereign’s coop.
The share shed 6% of its value on Thursday to settle at 735c – about 13% down from the rights issue price.
I am feeling somewhat crestfallen because I recently punted Sovereign as a share with a potentially high dividend yield for the future.
While I still live in hope, there are a few things making me fretful.
My understanding – at the time of the rights issue – was that the bulk of the rights issue proceeds (roughly three-quarters) would be earmarked for debt redemption.
A little bit would be set aside for capital expenditure, reassuringly deemed - as far as I can recall - "minimal".
Sovereign’s cash flow statement, though, shows that a rather hefty R61m was spent on investing in property, plant and equipment.
Considering how much Sovereign had already spent in the previous year on production upgrades, I found this spending rather surprising, even if only R16m was spent in the second half of the financial year.
That meant that Sovereign’s cash-on-hand reduced from R83m in 2009 to R54m (noting that R11m of the net R120m raised in the rights issue was used to repay debt).
Margin issues
What really perturbed me was the admission that "Despite the investment and expansion over the past 36 months, the group remains challenged in various areas of its supply chain, most notably in the broiler operation and at the abattoir".
These comments are reflected in the income statement numbers, if we compare the first six months of trading in the financial year with the second half. In each half, Sovereign generated roughly the same amount of turnover (around R500m), but almost three-quarters of the operating profits were generated in the first half.
Sovereign’s interim operating profits of R78m were extended by just R26m in the second half, and this meant Sovereign finished the financial year with R104m in top-line profits. This is extremely disappointing in view of the substantial investment made in improving capacity throughout Sovereign’s businesses.
More worrying, though, is how the gross margin was butchered in the second half. By my calculations the margin at the interim period was over 14%, but had slipped to under 10% by the end of the financial year.
In other words, the trading margin during the second half dropped as low as 5%.
Holy cow, that’s a big beating on the margin! I am really keen to see what kind of margin Astral and Rainbow Chickens – which must all report results fairly soon – will achieve. For the record, CBH’s net operating margin was 6.5% in the half-year to end-December 2009.
While Sovereign’s debt has been brought back to more reasonable levels, there is still a chunk of debt (R360m in long-term loans and R77m in short-term loans) to service and pay off. In fact, finance costs lopped off more than half of operating profits in the latest trading period.
So, the last thing Sovereign can afford right now is a stalling in much-vaunted operational efficiencies - while its non-feed cost base (and electricity is quite a factor here) is at risk of increasing and imports are seemingly on the rise.
- Fin24.com
