Sovereign Foods bounces back to profit

Sovereign Foods announced revenues of ZAR1.056 billion (US$136.09 million) for the year, up from ZAR909 million (US$117.15 million), according to its annual report.

 

The company reports a profit before tax of just over ZAR15 million (US$1.93 million), which compares with s loss of ZAR5.5 million (US$708,748) the previous year.

 

For the financial year to the end of February 2010, Sovereign Foods International reports turnover up by 16%. Headline earnings per share increase to 32.3 cents per share. Net gearing has been reduced to 92%, and EBITDA margin increased from 7.8% to 9.9%. Cash flow per share from operations has risen from ZAR2.15 (US$0.277) to ZAR2.92 (US$0.376).

 

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 February 28, 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% over the 2009 financial year (FY09) and have increased by 81% 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%. 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, Sovereign Foods 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 production costs, have resulted in an increase in non-feed costs of 4% 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 5%. Although the decline in the spot corn price for the period was 24%, 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 ZAR125.9 million (US$16.2 million) 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.

 

Also, 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 (US$7.86 million) with ZAR45 million (US$5.79 million) of this being spent in the first half of FY10.

 

Meanwhile, poultry prices are expected to remain the dominant factor in the coming year. National supply and demand remain tightly balanced and the level of low priced imports will have a material impact on poultry prices going forward.

 

The company'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.