I predicated many of the top stocks I chose for 2017 on my early assumptions that the maize harvest would be materially larger than market estimates at the start of that year, leading to significant benefits to animal rearing, animal feeds and milling companies.
In the end, a 17Mt crop, the largest in history, was recorded following the devastating drought and a harvest of 7.7Mt in 2016.
The Safex price of maize, a key hindrance to food and poultry stocks, crashed on the record harvest to below R2,000/t as the maize price soared to R5,000/t. This aided input costs and thus led to margin expansion.
My top mover in 2017 was Astral Foods, which, from its selection to the year’s end, gained 124%. It reported record earnings due to lowered costs of feed for its giant poultry business, allied to firmer poultry prices due to localised structural issues.
I also selected SA’s second-largest food business, Pioneer Foods, which has a large staples operation that, like Astral, I believed would show significant margin gain as maize, its key input ingredient, would aid the business. Sadly, it was not to be.
Unlike Astral Foods, which hedged its input cost requirements judiciously, Pioneer was on the wrong end of the curve. It was saddled with high-cost product, which, alongside a low raisin harvest and weak African export markets, pushed its 2017 earnings down over 50%, whereas Astral’s doubled.
In 2018, with large carry-over stocks of white maize (used for human consumption) and the yellow variety (used for animal feeds) in silos, I expected the same stocks to perform well, as benign input costs would keep prices of maize low for longer.
For the start of 2018 that has been the case, with maize trading at below R2,000/t.
Dry conditions in the west of SA caused a scare for a while, as that is where most of the country’s white maize is grown. But with 3Mt in storage, even a weaker than expected harvest would have minimal impact on product availability and pricing.
Thus my top food stock for 2018 is Pioneer Foods. In late January, after its selection in this column in November 2017, when the price stood at R115.50, it rallied to R145, but at the time of writing global market contagion has pushed it down to R124.30.
I believe this gives investors a second bite at the cherry. Pioneer should in 2018-2019 benefit from operating margin recovery thanks to better and lower-priced maize procurement and because a lot of what caused its profit slump in 2017 were one-off events.
Astral Foods, which stood at R203.65 when selected in late November in the same article, has rallied by 12% to R240.54 at the time of writing. The stock has recently been as high as R277.25. Astral should again have a good year, with solid earnings growth and, more importantly, a healthy dividend. But Pioneer Foods is my top choice for 2018.
If you like the Pioneer Foods story you can get exposure through Zeder Investments, which owns a 26% stake in it and trades at a discount to its assets of 17.9%. Zeder’s share price at the moment is 628c and a sum-of-the-parts valuation of 765c. This is one of the widest discounts I have seen in recent years for what is a quality basket of food and agricultural assets.
I included Zeder in my 2018 basket in November 2017, at 606c, and it ran to 707c, a gain of 17%, as Pioneer Foods, in the same period of selection, rose 13%. Thus Zeder can be seen as a cheaper, geared play on Pioneer Foods. It has a market capitalisation of R11bn and is part of the prestigious PSG Group stable. Over half its assets are in Pioneer Foods.
Other material assets are fruit-exporting giant Capespan, agricultural business Kaap Agri, farms in Africa, a well-placed seeds business and a stake in JSE-listed egg-and animal-feeds company Quantum Foods.
I recommend Zeder as a great portfolio stock.
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