Astral Foods Limited, a leading South African poultry producer, is grappling with an array of challenges that are sending shockwaves through the industry. In a recent voluntary trading update and initial trading statement, the company revealed a bleak financial outlook for the year ending September 30, 2023, citing the combined impact of load shedding and a devastating bird flu outbreak.
Load shedding, a recurring issue in South Africa, has proven to be a significant financial burden for Astral Foods. The company had previously warned of the consequences, with the cost of load shedding soaring to a staggering R741 million for the first six months of 2023 alone. Astral had forecasted an additional R919 million in costs for the remainder of the financial year, highlighting the severity of the issue.
One of the major expenses incurred by Astral was the operation of standby generators using diesel, an embedded expense burdening the company with around R45 million each month. When factoring in capital costs, the total financial hit from load shedding for the year is estimated at approximately R1.9 billion. This has, in large part, contributed to a severe decline in Astral’s financial results for 2023.
Load shedding also led to a backlog in Astral’s poultry slaughter program. However, the company reported that by the end of June 2023, this backlog had been successfully cleared. Subsequently, broiler efficiencies returned to target levels in terms of broiler age, live weight, and feed consumption.
The challenges for Astral Foods extended beyond load shedding. Deep-cut promotional activity in the wholesale and retail sectors significantly impacted the selling prices of chicken products. Coupled with load shedding, this resulted in selling prices that failed to cover input costs, including the substantial costs associated with power outages. As a result, Astral was forced to subsidize these costs for an extended period, further eroding profitability.
Adding to the woes of Astral Foods is the ongoing outbreak of Highly Pathogenic Avian Influenza, commonly known as bird flu. The outbreak has had devastating consequences for both the table egg and broiler sectors of the South African poultry industry. A new strain of bird flu (H7N6) has spread rapidly across Gauteng and Mpumalanga, causing severe losses.
In response to the outbreak, Astral and other poultry producers have been compelled to cull broiler breeding stock in line with regulated disease control measures. The costs associated with this go beyond the biological cost of the culled birds and include expenses related to safe disposal and biosecurity measures aimed at containing the disease’s spread. To date, the total cost attributed to the bird flu outbreak stands at approximately R220 million.
In its initial trading statement, Astral Foods cautioned that earnings per share (EPS) and headline earnings per share (HEPS) for the fiscal year ending September 30, 2023, could plummet by as much as 165%. This translates to a potential loss of 1,808 cents for EPS and 1,802 cents for HEPS, a stark contrast to the previous year’s figures of 2,781 cents and 2,762 cents, respectively.
Despite the grim financial outlook, Astral Foods noted that its balance sheet was geared to approximately 25% to ensure sufficient liquidity and solvency, with no covenant requirements imposed by its banking facilities. The company pledged to provide a further trading statement with more specific EPS and HEPS ranges toward the end of October 2023, once it had a reasonable certainty of its financial position.
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