I have bemoaned before how little interest institutional shareholders or analysts take in corporate annual general meetings (AGMs).
I attend many every year. Yes, they are often in odd locations and the times are not really meant to encourage the normal office-bound slave to attend.
But shareholders or analysts can sit in a room with the entire executive and question, listen and pick the brains of the people managing a company.
I remain staggered as to how few attend AGMs. I find them worthwhile in formulating opinions on companies and their prospects. But maybe I just know what to ask the executives.
This was the case at poultry giant Astral Foods’ recent AGM.
I’ve been attending the Astral Foods AGMs for years. It is my company highlight of the year in terms of setting the scene for the coming financial years. For me, it has always paid dividends in gaining a direct sense (given Astral is a March interim and September year-end) how the key festive period has traded.
I also gain a view on the state of the poultry market, the key industry drivers and concerns and the company’s view on input costs. I track the three key raw ingredients that affect the poultry sector: maize, soya and feed oils.
What did I learn from the latest Astral AGM?
I turned positive on Astral in late September 2019, at R151 and again at R161.25, in a feature article on the chicken sector in the FM in late October entitled "Counting Chickens". The stock ran to a high of R220 in late December 2019.
My premise for my BUY recommendations was that my forecasts of a materially larger 2020 maize harvest of 14.5Mt against the high-priced 2019 harvest of 11.3Mt would lead to a dramatic fall in input costs. This would reverse the slump in earnings that Astral had encountered in 2019.
That premise has played out. There are now bullish farm reports of better planting and fair weather. This has painted a scene of a maize harvest, despite late planting, of 14Mt to 15Mt.
The Safex July price of maize is about R500 a ton lower this year than the average input cost of 2019, leading to material savings for large input users. As a simplistic example, Astral Foods buys 800,000t of maize a year. If it saves R400 a ton on input costs year on year that R320m saving equates to near an R8 a share uplift benefit to earnings. It’s certainly not chicken feed.
Astral did not have a great 2019 as rising input costs, increased imports and domestic issues (such as poor service delivery) impeded its results.
In financial 2019, Astral Foods reported a 55% drop in headline earnings to R16.74 a share from a record R37.08 in the last low maize price window in 2017/2018.
The biggest cost to raising a chicken is feed, at roughly 60% of the cost. This is why I track inputs so closely when it comes to primary food stocks. They can have dramatic consequences.
From the Astral AGM I learnt the company had a tough festive trading period. Weak pricing for chicken, a constrained consumer environment and higher input costs all had an impact on sales. So March 2020 interim results will not be succulent.
I also learnt that Astral is forecasting a bumper maize harvest of 15Mt, better than my own forecast. If that holds true and the resultant price declines manifest, Astral will crow all the way to the market.
So Astral’s second half looks more promising as the benefits of lower input costs start to feed into production costs.
Taking a slightly longer view, it’s worth noting Astral has started to buy maize judiciously at a materially lower cost than 2019. But due to late planting and the late harvest the ultimate benefit to corporate earnings will start only in the last quarter of 2020 (July to September). It does set Astral up for a bumper run to festive 2020 and into 2021.
On my revised AGM feedback I can easily shift Astral’s ultimate price target to nearer R300.
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