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IN MAY this year (see: All Cooped up), I raised a few questions around the operating performance of Eastern Cape-based poultry group Sovereign Food Investments [JSE:SOV] after R145m was raised in a rights offer in late 2009.
Sovereign, which has shown it can generate big earnings, is a share I have long contemplated having on my plate (maybe it’s my Eastern Cape roots that makes me partial to this kind of fare).
In that regard, I was hoping to glean something positive out of Sovereign’s newly published annual report – especially since the company’s shares have taken a serious pounding of late.
At the time of writing my previous column, Sovereign was trading at 735c on the JSE – about 13% down on the rights offer price of 850 cents per share.
At the close of trading on Thursday, Sovereign was trading at 580c – more than 30% down on the rights offer price. That’s a helluva lot of value being plucked off this little birdy.
What struck me immediately in the annual report was a comment by chairperson Charles Davies. He noted: "I have been supported by a committed board of directors that was called upon on two occasions to deliberate on potential strategic alliances with role players in the poultry industry.
"Whilst these exercises were unsuccessful, they did lead to the successful rights offer referred to earlier."
While I don’t for a minute doubt the commitment of Sovereign’s board, I’m not so sure that crowing about past strategic developments is terribly tactful at this delicate juncture.
The chairperson’s comments really reopen the debate around whether Sovereign perhaps should have sought out strategic alliances with other role players (being, as readers will no doubt recall, Country Bird Holdings [JSE:CBH] and Afgri’s chicken division) instead of going it alone.
While Davies refers to a "successful" rights offer, there may be a few shareholders – possibly even the two institutions that underwrote the fund raising exercise – that might beg to differ.
Things may well have been different if Sovereign was now busy merging its operations into either that of Afgri [JSE:AFR] and CBH, contemplating cost-cutting exercises and new strategic ventures. On the other hand, Afgri and CBH may be relieved – at this point - to be watching developments at Sovereign from a safe distance.
With so much spent on bolstering capacity in Sovereign’s key areas, the share price – and here we have to assume the market is always right – anticipates a modest profit performance in the financial year ahead.
Ducks in a row?
Writing in the annual report, CEO Mike Davis believes Sovereign will reap the benefits of the expansion over the last four years – even though he later admits the company had "struggled to adjust to the scope of the expansion plan".
The thing is, Davis – even though he expects improvements - does not seem awfully convincing in his forward-looking comments.
Thankfully, for those fretting about Sovereign’s trading margins (which did not look plump in the second half of the year to end- February 2010), Davis at least did not hold back in stressing the company’s determination to become the "most competitive poultry integrator on earth".
Tangible developments for the year ahead will include an increased cold storage capacity and the upgrading of the processing plant. After four years of capacity expansion, it’s difficult to believe Sovereign is still forking out sizeable capex.
Thankfully, Davis suggests these projects will be cash flow positive in less than 12 months, a key forecast considering the company’s gearing still sits at over 90%.
The six-month period ending August 2010 will be critical in offering clues as to whether Sovereign – hopefully aided by an ability to increase prices – can start eking out a decent return from its strenuous expansion effort. I’d say it’s imperative to push the interim trading margin (which fell to around 5% in the second half of the last financial year) back over 10%.
Come October, when the interim results are due for release, I’d imagine Old Mutual [JSE:OML] (which speaks for 37.4%) and Prudential (which holds a stake of 18.7%) will be desperately hoping Sovereign finally has its ducks in a row.
Who knows what disappointed institutional investors might do. Heck, they may even put a call out to Afgri or CBH, both of which must have taken notice of Sovereign’s flagging shares.
- Fin24.com
Sovereign, which has shown it can generate big earnings, is a share I have long contemplated having on my plate (maybe it’s my Eastern Cape roots that makes me partial to this kind of fare).
In that regard, I was hoping to glean something positive out of Sovereign’s newly published annual report – especially since the company’s shares have taken a serious pounding of late.
At the time of writing my previous column, Sovereign was trading at 735c on the JSE – about 13% down on the rights offer price of 850 cents per share.
At the close of trading on Thursday, Sovereign was trading at 580c – more than 30% down on the rights offer price. That’s a helluva lot of value being plucked off this little birdy.
What struck me immediately in the annual report was a comment by chairperson Charles Davies. He noted: "I have been supported by a committed board of directors that was called upon on two occasions to deliberate on potential strategic alliances with role players in the poultry industry.
"Whilst these exercises were unsuccessful, they did lead to the successful rights offer referred to earlier."
While I don’t for a minute doubt the commitment of Sovereign’s board, I’m not so sure that crowing about past strategic developments is terribly tactful at this delicate juncture.
The chairperson’s comments really reopen the debate around whether Sovereign perhaps should have sought out strategic alliances with other role players (being, as readers will no doubt recall, Country Bird Holdings [JSE:CBH] and Afgri’s chicken division) instead of going it alone.
While Davies refers to a "successful" rights offer, there may be a few shareholders – possibly even the two institutions that underwrote the fund raising exercise – that might beg to differ.
Things may well have been different if Sovereign was now busy merging its operations into either that of Afgri [JSE:AFR] and CBH, contemplating cost-cutting exercises and new strategic ventures. On the other hand, Afgri and CBH may be relieved – at this point - to be watching developments at Sovereign from a safe distance.
With so much spent on bolstering capacity in Sovereign’s key areas, the share price – and here we have to assume the market is always right – anticipates a modest profit performance in the financial year ahead.
Ducks in a row?
Writing in the annual report, CEO Mike Davis believes Sovereign will reap the benefits of the expansion over the last four years – even though he later admits the company had "struggled to adjust to the scope of the expansion plan".
The thing is, Davis – even though he expects improvements - does not seem awfully convincing in his forward-looking comments.
Thankfully, for those fretting about Sovereign’s trading margins (which did not look plump in the second half of the year to end- February 2010), Davis at least did not hold back in stressing the company’s determination to become the "most competitive poultry integrator on earth".
Tangible developments for the year ahead will include an increased cold storage capacity and the upgrading of the processing plant. After four years of capacity expansion, it’s difficult to believe Sovereign is still forking out sizeable capex.
Thankfully, Davis suggests these projects will be cash flow positive in less than 12 months, a key forecast considering the company’s gearing still sits at over 90%.
The six-month period ending August 2010 will be critical in offering clues as to whether Sovereign – hopefully aided by an ability to increase prices – can start eking out a decent return from its strenuous expansion effort. I’d say it’s imperative to push the interim trading margin (which fell to around 5% in the second half of the last financial year) back over 10%.
Come October, when the interim results are due for release, I’d imagine Old Mutual [JSE:OML] (which speaks for 37.4%) and Prudential (which holds a stake of 18.7%) will be desperately hoping Sovereign finally has its ducks in a row.
Who knows what disappointed institutional investors might do. Heck, they may even put a call out to Afgri or CBH, both of which must have taken notice of Sovereign’s flagging shares.
- Fin24.com
