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Sovereign Foods Back in Profit

by 5m Editor
6 May 2010, at 9:55am

SOUTH AFRICA - In its Annual Report, Sovereign Foods announces revenues of 1.056 billion rand (ZAR) for the year, up from ZAR909 million. The company reports a profit before tax of just over ZAR15 million, which compares with s loss of ZAR5.5 million the previous year.

For the financial year to the end of February 2010, Sovereign Foods International reports turnover up by 16 per cent. Headline earnings per share increase to 32.3 cents per share. Net gearing has been reduced to 92 per cent, and EBITDA margin increased from 7.8 per cent to 9.9 per cent. Cash flow per share from operations has risen from ZAR2.15 to ZAR2.92.

Results for the review period

The Group has been successful in reversing the 1.5 cents headline loss per share incurred last year to a 32.3 cents headline earnings per share for the financial year ended 28 February 2010 (FY10). Despite the business experiencing a very positive first six months, the second half of the year was disappointing with difficult trading conditions being experienced.

Volumes increased by 14 per cent over the 2009 financial year (FY09) and have increased by 81 per cent in the three-year period from the 2007 financial year. Poultry prices were up marginally from FY09 to FY10 and as a result turnover increased by 16 per cent. Poultry prices continue to be negatively impacted by higher import volumes, lower prices of imported poultry and softer consumer demand.

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. This has resulted in the Group not realising the full effect of the improved efficiencies expected from the expansion and has also impacted on farming performance.

These constraints, together with increases in the costs of items such as electricity, fossil fuels and statutory wage rates, has resulted in an increase in non-feed costs of four per cent per kilo sold in FY10 compared to FY09. Management is pro-actively addressing these challenges and is committed to reducing the Group’s non-feed costs to appropriate levels.

Raw material costs for the year under review have declined by five per cent. Although the decline in the spot maize price for the period was 24 per cent, the Group's policy of acquiring commodities in advance meant that the full benefit of the price reduction is not seen in these results. The benefit of the reduced raw material costs will only be felt in the next financial year as a result of the lower cost of feed.

The Rights Offer undertaken in December 2009, which raised 125.9 million rand (ZAR; before costs) of new equity for the Group, has strengthened the statement of financial position considerably and gearing is now within the target range set by management prior to the Rights Offer. Gross bank funding has decreased by ZAR112 million from ZAR549 million at the end of FY09 to ZAR437 million at the end of FY10. The full impact of the Rights Offer on the statement of comprehensive income is only expected to be seen during the next financial year.

As a result of gearing concerns and the global financial crisis, capital expenditure (Capex) was limited to what was needed to complete projects in progress and other necessary expenditure. Capex for the year was ZAR61 million with ZAR45 million of this being spent in the first half of FY10.

The Group continues to monitor working capital very closely and net working capital as a percentage of turnover remained consistent with that of FY09 at eight per cent.

Sovereign's positive financial performance coupled with the Rights Offer has significantly strengthened the Group's statement of financial position allowing the Group the opportunity to consider further strategic growth initiatives to enhance the efficiency and performance of the various business units.

Cash generated from operations increased by ZAR34 million compared to the prior period and after careful working capital management, cash generated from operating activities increased by ZAR61 million compared to the prior period.

Industry conditions and prospects

Poultry prices are expected to remain the dominant factor in the coming year and the effect of the 2010 Soccer World Cup on poultry prices is not yet clear. National supply and demand remain tightly balanced and the level of low priced imports will have a material impact on poultry prices going forward.

Management's focus in the coming year will be to optimise product mix and resolve the cost issues at both the feed and non-feed levels by addressing internal inefficiencies and minimising the impact of external cost input increases. In this context, the Group has out-sourced the bulk of its distribution operation since the end of the financial period under review.

Further Reading

- You can view the full report by clicking here.