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SOVEREIGN FOOD INVESTMENTS LIMITED - Trading Statement, Sales and Operational Update and Balance Sheet Comment

Release Date: 26/09/2016 07:05
Code(s): SOV     PDF:  
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Trading Statement, Sales and Operational Update and Balance Sheet Comment

SOVEREIGN FOOD INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
Registration Number 1995/003990/06
JSE Code: SOV
lSlN Number: ZAE000009221
(“Sovereign” or the “Company” or the “Group”)

TRADING STATEMENT, SALES AND OPERATIONAL UPDATE AND BALANCE SHEET COMMENT

Capitalised words and terms contained in this announcement shall bear the same meanings ascribed
thereto in the circular to Sovereign shareholders dated Friday, 24 June 2016 (“Circular”).

1.    TRADING STATEMENT

      In terms of the Circular, Sovereign proposed that Shareholders approve the Repurchase, the
      BEE Transaction and the New Executive Remuneration Policy (collectively, the
      “Transactions”), by Shareholders passing the Resolutions pertaining to the Transactions, as
      set out in the Notice of General Meeting, at the General Meeting scheduled to take place on
      Monday, 25 July 2016.

      Subsequent to the Circular being posted, Shareholders were notified, in the announcement
      published by Sovereign on SENS on Thursday, 7 July 2016, of the firm intention by Country
      Bird Holdings Proprietary Limited (“Country Bird”) to make a conditional general offer to
      Shareholders, in terms of section 117(1)(c)(v) of the Companies Act, to acquire all the Shares,
      other than those Shares already held by Country Bird and its concert parties and Sovereign’s
      Subsidiaries (“Offer”). The Offer is subject to, inter alia, the suspensive condition that
      Sovereign and the Shareholders do not implement a transaction similar to the Transactions.

      In the circumstances, the Board proposed a motion to adjourn the General Meeting to 10h00 on
      Wednesday, 19 October 2016 (“Adjournment”), in order to enable Shareholders the unfettered
      opportunity to consider the Offer. The Adjournment was subsequently passed with the requisite
      majority of votes of Shareholders at the General Meeting.

      In light of the Offer and the Adjournment, there remains uncertainty regarding the
      implementation of the Transactions and therefore the accounting treatment of the costs
      associated with the Transactions (“Transaction Costs”) in the financial results for the six
      months ended 31 August 2016 are also uncertain.

      Accordingly, this trading statement provides Shareholders with guidance on the expected
      financial results of the Company for the six months ended 31 August 2016, on the basis of (i)
      the Transactions being implemented and the Transaction Costs being deducted from equity in
      terms of IAS 32: Financial Instruments – Presentation, and (ii) the Transactions not being
      implemented and the Transaction Costs being expensed, as follows:

      (i)   In the event that the Transactions are implemented, the Company’s earnings per share
            (“EPS”) and headline earnings per share (“HEPS”) for the six months ended 31 August
            2016 are expected to be a loss of between 38.5 cents and 47.5 cents (2015: EPS 89.6
            cents, HEPS 89.7 cents).
                                                                                                   
     (ii)   In the event that the Transactions are not implemented, the Company’s EPS and HEPS for
            the six months ended 31 August 2016 are expected to be a loss of between 47.5 cents
            and 56.5 cents (2015: EPS 89.6 cents, HEPS 89.7 cents).

     The expected EPS and HEPS of the Company for the six months ended 31 August 2016
     includes extra-ordinary, once-off costs (“Once-off Costs”) associated with the defense of the
     hostile action brought against Sovereign by Country Birds’ concert parties as well as the Offer.

2.   SALES AND OPERATIONAL UPDATE

     Sales

     Sales volume for the six months ended 31 August 2016 increased by 35% over the six months
     ended 31 August 2015 (“Prior Period”), with 10% of this increase coming from the Uitenhage
     operation and 25% coming from the Hartbeespoort abattoir.

     The Group continues to execute strongly on its fully cooked, value added and fresh strategy.
     Sales of value added products increased by 28% and as The SPAR Group Limited continues to
     re-brand and roll out its Chikka Chicken concept, value added sales are expected to increase
     further. The acquisition of the Hartbeespoort abattoir has allowed the Group to successfully
     penetrate the national fresh sales market with sales of fresh products increasing by 449% and
     the Group expects these volumes to continue to increase.

     As reported in the 2016 Integrated Report, the Hartbeespoort abattoir has increased the
     Group’s national sales footprint and in the six months ended 31 August 2016, 79% of the
     Group’s total sales volumes were from outside the Eastern Cape with 42% coming from
     Gauteng.

     Operations

     Agricultural results at the Uitenhage operation have been very good, with the Performance
     Efficiency Factor improving by 9% for the six months ended 31 August 2016, when compared
     to the Prior Period.

     Abattoir yield and throughput at the Uitenhage abattoir have also improved considerably,
     increasing by 5% and 9% respectively over the six months ended 29 February 2016.

     Abattoir yield and throughput at the Hartbeespoort abattoir are in line with management’s
     expectations and have increased by 3% and 8% respectively for the six months ended
     31 August 2016 compared to the 19 weeks ended 29 February 2016.

     Costs

     The strategy of the Group to reduce Group overheads with the acquisition of the Hartbeespoort
     abattoir is yielding positive results, with Group overhead costs associated with administration,
     sales and marketing (excluding Once-off Costs) expected to decrease by approximately 32%
     per kilogram sold.

     Feed

     The effect of the drought in South Africa has been well documented and this can be seen in the
     increase in South African maize and soya bean prices, with spot prices for maize and soya
     beans on SAFEX increasing by 31% and 39% respectively for the six months ended 
     31 August 2016 compared to the Prior Period. Coupled with the effects of the drought, the
     prices of maize and soya have further been influenced as a result of the 20% devaluation in the
     Rand:Dollar exchange rate when compared to the Prior Period. This increase in maize and
     soya prices was the major contributor to the decline in profitability for the six months ended
     31 August 2016.

     It is however expected that the South African 2016/2017 maize and soya crops will be
     significantly higher than the 2015/2016 crops and this can be seen in the forward prices for
     maize and soya on SAFEX, with July 2017 yellow maize prices on SAFEX currently trading
     approximately 17% lower than September 2016 yellow maize prices.

     In addition, the price of corn in the United States, which sets worldwide prices and ultimately
     South African maize import parity prices, has also fallen, with corn prices for the three months
     ended 31 August 2016 falling by 6%, compared to the three months ended 31 May 2016.

     The strong agricultural and abattoir operational results, together with the expectation that feed
     prices will decrease in the fourth quarter of the current financial year, indicates more favorable
     trading conditions going forward.

3.   BALANCE SHEET COMMENT

     Notwithstanding the tough trading conditions experienced over the six months to
     31 August 2016, the balance sheet of the Company remains strong and net gearing (calculated
     as long term interest bearing debt less cash on hand divided by total equity) as at
     31 August 2016 is expected to be approximately 4.6% in the event that the Transactions are
     implemented and approximately 4.7% in the event that the Transactions are not implemented.

     This strong net gearing position has been made possible through good working capital
     management together with a material reduction in capital expenditure in the six months ended
     31 August 2016.

4.   BRINING UPDATE

     Shareholders may be aware that the legal challenge brought by the South African Poultry
     Association (“SAPA”) against the proposed brining regulations was dismissed by the courts on
     21 September 2016. SAPA is in the process of reviewing the judgment and Shareholders will
     be updated in due course.

The Company’s auditors have not reported on or reviewed the financial information on which this
trading statement, and the sales and operational and balance sheet commentary, is based.

Port Elizabeth
26 September 2016

Sponsor
One Capital




                                                                                                     

Date: 26/09/2016 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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