Cracking the Quantum quandary

Eggs, poultry and animal feeds. Not exactly the recipe for an appetising food production company on the JSE — especially one that over 3½ years generated a collective net profit of just R140m. Most investors would deem that chicken feed. 

Yet, very few — if any — listed counters can boast a year-to-date share price gain like that achieved by lowly Quantum Foods Holdings, which quietly dabbles in all three of these challenging food production niches. In fact, Quantum’s share price gains at certain times this year are right up there with those of Nasdaq-listed technology stalwarts such as Nvidia and Netflix.

Intriguingly, Quantum’s astounding share price performance follows several years of iffy and uneven performance. But beyond the financial statements things are brooding, with a call — for the second time this year — for a shareholders’ meeting to consider replacing certain directors. At this juncture, there seems a good chance of a right royal boardroom dust-up — which might seem out of place at the group’s headquarters in sleepy Wellington.

Corporate shake-ups

Since listing on the JSE in 2014, Quantum — founded two years earlier as an offshoot from consumer brands giant Pioneer Foods — has largely kept a low profile. 

But unlisted poultry giant Country Bird Holdings (CBH) — which has a history of incursions at rival chicken groups and holds a nearly 18% stake in Quantum — is now airing its grievances publicly. CBH has called for a shareholders’ meeting to consider replacing current nonexecutive chair André Hanekom (formerly the CEO of Pioneer Foods) and lead independent nonexecutive director Geoff Fortuin. 

As a shareholder speaking for such a meaningful stake of Quantum, CBH is well within its rights to call for such a meeting. 

That said, CBH’s demand follows a similar call in March by another large shareholder, Braemar Trading, to hold a meeting to consider hoofing Hanekom as well as two other nonexecutives, Gary Vaughan-Smith and Larry Riddle, off the Quantum board. Braemar, though, was quickly fobbed off by Quantum’s board, which dismissed the call as “not legally compliant”. 

Back in mid-2020 CBH — then a 31% shareholder in Quantum — also called for a shareholders’ meeting to nominate a director. Then, Quantum also raised legal concerns about the eligibility of the nominated director as well as the obligation to convene a meeting. 

Whether Quantum will accede to shareholder demands this time remains to be seen. A Sens announcement was open ended — only stating that the group would publish an announcement in due course, “whereupon shareholders will be advised of, inter alia, the posting date of the notice convening the meeting and the date of the meeting”. 

But CBH is clearly out of patience with Quantum. Correspondence sent to Quantum’s board complains that: “Our requests to meet have been spurned. Our attempts to probe the company’s strategy and performance have been stonewalled. Our proposals to create growth and shareholder value lie ignored. Our governance concerns gather dust. And our patience is at an end.”

It’s plain why Hanekom and Fortuin have targets on their backs. CBH CEO Brendon de Boer tells the FM the group has repeatedly asked for a meeting with Quantum’s chair and lead independent director to discuss operational performance, strategy and governance issues as well as ways to unlock value. 

De Boer says meetings were either declined or cancelled. In correspondence sent to Quantum’s board last week, De Boer notes: “Instead of a constructive meeting aimed at unlocking value, you, or your advisers, gave us a series of defensive and curt responses — demanding our questions in writing. We obliged but found your answers vague and legalistic. This is a very ineffective way of pursuing a constructive dialogue.” 

De Boer believes it is outrageous for a board and management to refuse to meet a significant shareholder to engage about its performance — adding that Quantum consistently did not even earn its cost of capital and that its financial 2023 earnings before interest, tax, depreciation and amortisation margin was just 1%.

“Surely you should be at least willing to hear what we have to say? This would be in the best interests of Quantum Foods and all its stakeholders. We find this complete disregard for accountability and refusal to engage shareholders by Quantum Foods unacceptable.” 

De Boer stresses that Quantum’s revenue increased by just 18% from financial 2020 to financial 2024 — which lags key competitors that doubled their revenue over the same period.

He adds that Quantum’s return on capital employed declined from 10% in financial 2019 to negative 1% in financial 2023. Over the same period the weighted average cost of capital was estimated to be between 12% and 15%. 

Before the unusual share spike in March, Quantum’s 10-year share price compound annual growth rate was just 2.6%. Perhaps the only thing in favour of Quantum is that the recently released interim results to end-March showed some resilience (see accompanying story). 

De Boer, however, says CBH is also “extremely concerned” about governance at Quantum.

The FM last week reported that Quantum nonexecutive director Tanya Golden has challenged her “resignation” — which was announced on Sens at the end of May. Golden argues she was removed from the board at the behest of certain directors — and not given due notice or reasons. 

Her removal has ominous undertones. In court documents, Golden indicates she had asked to review the legal opinion the board relied on for dismissing Braemar’s call for a shareholders’ meeting in March. 

Golden’s request to peruse the legal opinion sparked protracted and heated discussions at a Quantum board meeting on May 23. “I can’t recall, in all my time on the board, that the board was so deeply divided on an issue”.

Golden stresses in the court papers that the Braemar issue needed to be addressed in an independent, objective, fair and legally defensible way. She argues: “The manner and timing of my summary removal from the board is not at all a coincidence. I believe, as the facts will show, that [I] was summarily removed by a decision taken by certain directors of the board to ensure that my removal is quick, seamless and decisive in order to avoid disclosure of the legal opinion to me and stifle my dissent on the approach adopted in relation to Braemar.” 

De Boer asks why legal advice given to certain Quantum board members would be concealed from the only lawyer on the board. In correspondence addressed to Quantum’s board, De Boer points out: “Her [Golden’s] overriding concern? That the board and certain shareholders on it, were not fulfilling their fiduciary duty to treat all shareholders equally (including CBH). You are well aware of the case. In fact, you have had the legal papers for weeks. But you have not yet alerted the market. Why? What else are you hiding?” 

Hanekom tells the FM: “I am unfortunately not in a position to make any comment at this stage.” 

It seems plausible that the airing of the Golden affair might well inform a more receptive response to CBH’s call for a shareholders’ meeting. 

The meeting, it’s abundantly clear, will not be pretty.

Causing a flap

Another issue irking CBH is why there has been such erratic buying of stock at elevated prices — mainly by board members and/or associated parties. 

“Demand” for the company’s shares went crazy in March and April this year after a shake-up in the holdings of the larger shareholders. Briefly, poultry giant Astral Foods — which had taken a nearly 10% stake in Quantum in 2020 — sold its entire shareholding to CBH for 775c a share. 

That might not have been viewed as a “regime changing” moment — but it’s worth remembering that Astral initially stepped in as a supportive shareholder when CBH had acquired agribusiness Zeder Investments’ 31% stake in Quantum in 2020. At roughly the same time private equity investor SilverStreet Capital had also bought up roughly 34% of Quantum. 

Seemingly outflanked at this point CBH retreated, and sold most of its shareholding to Braemar Trading — which, it turns out, is a vehicle associated with Zimbabwean tobacco magnates the Rudlands. With CBH retaining a stake of about 6.5%, most investors might have thought the chicken group may be relegated to morbidly observing developments at Quantum from the fringes. 

Understandably, the unexpected acquisition of Astral’s 10% stake in March caused a flap — even though CBH indicated it wasn’t intending to pitch a takeover offer for Quantum. 

By April Quantum’s shares had briefly touched a record high of R18.50, giving the business a market value of R3.7bn. That valuation, albeit brief, would have been considered excessively rich even based on a heady 20 times multiple of Quantum’s best earnings number for the past five years — R189m in 2019.

There was some telling “insider” buying disclosed on Sens after CBH’s re-emergence at Quantum. Vaughan-Smith, a prime mover at SilverStreet and nonexecutive director at Quantum, spent R11.5m buying shares at 775c. Then chair Hanekom made a flurry of large open-market purchases on Quantum stock at prices between 900c and R10.

CBH has posed some contentious theories in its correspondence to Quantum’s board. “You know, we know, and the market knows, that the recent share price spike from a 10-year average of 483c, to R16 within a few weeks was caused entirely by ‘corporate action’ — in particular our purchase of Astral’s 9.8% stake.” 

CBH argues the share price had been sustained at elevated levels — between R10 and R16 — by subsequent and inexplicable directors’ and related company share purchases. 

“It certainly is not the company’s profits, performance or prospects that have kept the price at this level. Credible market commentators have written extensively about why the price is artificial and unsustainable ... and yet there are members of management, the board, and your own corporate customers furiously buying up shares at between R10 and R16 — well over double the price that just days, weeks, and months before they had not found attractive.” 

If the Quantum share purchases weren’t informed by profit or prospects, CBH asks: “Is it to control the company and information about intercompany contracts? Has there been in-concert action between shareholders? We hope not, but we would certainly like to know. We have skin in the game. Like all other shareholders we hope there is not a corporate scandal brewing. South African business cannot afford that. Not again.”

Keeping the foxes at bay

Smalltalkdaily analyst Anthony Clark — a long-time Quantum watcher — believes the latest tilt towards Quantum and the attempt to remove Hanekom might be linked to the recent retirement of CEO Hennie Lourens at the end of May.

“Lourens capably kept the foxes at bay with Stalingrad tactics for years. The new CEO, Adel van der Merwe, has zero experience in handling and fending off hostile intents,” he tells the FM. “I would speculate that the latest attempts by Braemar and CBH to kick Hanekom off the board is a means to distance Van der Merwe from experienced corporate advice and perhaps allowing the Stalingrad defence to weaken ...” 

Clark says not too many investors are aware of another silent player emerging as a possible “kingmaker” in the form of Eastern Cape-based poultry player Sovereign Foods — which is now owned by private equity group Capitalworks. Clark thinks Sovereign might have already scraped a 3% stake in Quantum.

There is no love lost between CBH and Sovereign. During Sovereign’s tenure as a listed company CBH twice tilted at taking over Sovereign in two acrimonious tussles — the second eventually leading to the group’s delisting from the JSE.

Clark asks whether Sovereign has any strategic intentions at Quantum or is it just a proxy for Quantum’s management? 

The shareholding blocks are now delicately stacked. There are two “critical shareholders” in Braemar and CBH with stakes of 18% and 31% respectively. Then there is SilverStreet with 34% as well as significant minority positions held by Quantum management and Sovereign. 

How could the impasse, which has been in place for the best part of four years, resolve? 

Clark points to market whispers that the tasty profit SilverStreet has made on its original investment may see it exit Quantum. “That stake would be keenly coveted by the other big shareholders,” he says.

Otherwise, there might be a carve-up option. Certainly, there are obvious synergies between CBH and Quantum’s African businesses and the animal feeds businesses. Clark suggests the highly cyclical eggs business might be palmed off to another entity. 

The big question, though, is whether all the hustling and bustling of the past four years will be worth it. The well-cooked share price means Quantum is hardly a dripping roast ... 

Fowl business for investors

Quantum Foods Holdings, over the past dozen years, has done everything that could reasonably be expected of  an agribusiness vulnerable to some vicious trading cycles. If anything, there has been a decent dividend trail to show for management’s efforts. 

But there is very little that could currently justify a rich share price premium on a hybrid food production agribusiness that is too small to be considered a poultry rival to the listed “big birds” such as Astral Foods and Rainbow Chicken. The Novo feeds business is a niche player, and the egg segment, while a dominant player in South Africa with the Nulaid and Tydstroom brands, is essentially a commodity play vulnerable to some crushing cycles. 

Country Bird Holdings (CBH) — now an influential 18% shareholder — reckons Quantum has underperformed for many years, that it is badly managed and that it does not have a coherent growth strategy. 

Smalltalkdaily analyst Anthony Clark says it’s clear that at a share price of R10.58, the many parties who were frenetically bidding high prices to gain a stake in Quantum will never make a return on their investment.

“Quantum’s earnings have recovered from the hefty losses from the 2023 avian influenza cull, but I cannot see how the price can sustain [current] levels based on earnings,” he says. “Only the corporate machinations are propping up the share price.”

After a few lean years, Quantum’s interim showing to end-March might raise some hopes of a more robust performance in the year to end-September. 

Though group revenue slipped 13% to R3bn, there was a seven-fold increase in bottom-line profits to R43m. The operating margin, though, remained just a sliver at 2%. 

The outlook remains tricky. CEO Adel van der Merwe has cautioned that the bird flu risk is expected to remain high for the remainder of financial 2024. 

She noted vaccines are now available for the H5 strain — which predominantly affected birds in the coastal provinces — but that vaccines are not yet available for the H7 strain, which affected birds in the northern provinces. 

Then there are higher feed costs, which hurt the egg business earnings but have less impact on the group’s farming businesses. Overall, Van der Merwe expected total egg production in South Africa to remain muted during the second half of financial 2024. After that, it should increase as the national flock recovers. 

But there will be lower margins from the egg business during H2, though these might be offset by an increase in the volume of eggs in the period as Quantum continues to implement its flock rebuilding plan. 

Van der Merwe said feed business volumes are expected to be higher during H2, supported by the expected recovery in the poultry flocks of internal farms and external customers. 

She added that broiler day-old chick volumes should rise with the increased supply of hatching eggs following placement of the Hartbeespoort breeder farm. “These factors should support earnings from the feeds and broiler farming businesses in the second half of financial 2024.” 

Should the recovery continue in H2, all eyes will be on Quantum restoring its dividend at financial year-end. The last payout was for the six months to end-March 2022. 

At the end of the March this year Quantum’s cash pile had risen markedly to R186m (2023: R71m) — but the company still had long-term debt of R99m on its books.

Country Bird Holdings (CBH) delisted from the JSE in 2014 after a relatively short tenure on the market. But its presence on the JSE is still felt.

First there was a tilt at a then listed Sovereign Food Investments, and after that successive attempts to gain influence at Quantum Foods Holdings. In 2020 CBH acquired the Enterprise processed meat business from food brands conglomerate Tiger Brands for R311m. 

Not long after the Enterprise deal was clinched, several top CBH executives — including well-respected CEO Marthinus Stander — were poached by rival poultry business Rainbow Chicken. 

There has been sporadic speculation about CBH returning to the JSE in an enlarged and more diversified form. Whether the lumping on of selected Quantum operational assets would form part of such a process remains to be seen. 

The group has a long history of successful merger & acquisition activity that predates its forays into Sovereign Food Investments. 

It was way back in 2003 that Synapp International purchased Country Bird — then a small operation based in Tigane and Botshabelo — from agribusiness giant Senwes. 

Over the next few years more operational assets were collected in the form of Agri Chicks, as well as feed milling business Senwes Voere. All the assets — including breeding operations in Zambia and Botswana — were consolidated into a single entity, which was listed on the JSE in 2007 under the CBH banner. In 2009 CBH bought out its milling partner, giving it full ownership of Nutri Feeds. That same year CBH also acquired an animal feed milling operation in Gaborone, along with a small broiler farm and abattoir in Francistown. 

In 2010 CBH moved into the animal feed business in Zambia, and a Nutri Feeds mill was built just outside Lusaka. 

A commercial hatchery was built just outside Lusaka in 2015 and CBH launched Africa Chicks, a hatchery operation in Swaziland. That same year CBH acquired a local flour and maize mill and then snapped up a majority stake in Valentine Chickens in Nigeria. 

CBH has made clear that its future vision is centred on expansion into the rest of Africa. Certainly, there would be a lot to peck at in terms of Quantum’s African operations, which span a variety of businesses across Zambia, Uganda and Mozambique. 

Quantum’s African operations outside South Africa generated revenue of R222m in the interim period ended March. While this was only slightly higher than the R215m recorded in the corresponding period in 2023, segment profits swung R24m into the black, compared with a R5m loss locally. 

If CBH has ambitions to be an African agribusiness champion, Quantum’s African operations would be a useful land grab. For that matter, private equity business SilverStreet Capital — the largest shareholder in Quantum — might offer CBH other opportunities too. SilverStreet holds a significant integrated farming, processing and poultry business in Iringa, Tanzania. 

Food for thought, indeed. 

—  Birds of a feather flocking together?