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Interim unaudited Group results, an update to the Transactions and cancellation of the adjourned general meeting
Sovereign Food Investments Limited
(Incorporated in the Republic of South Africa)
Registration Number 1995/003990/06
JSE Code: SOV
ISIN Number: ZAE000009221
(“Sovereign” or “Group” or “Company”)
Interim unaudited Group results
for the six months ended 31 August 2016
and an update regarding the Transactions
and cancellation of the adjourned general meeting
Revenue up 31% to R1.1 billion
Sales volume up 35%
EBITDA margin of 0.1% excluding once off costs
Headline loss per share 48.8 cents
Net gearing 5%
Consolidated Statement of Financial Position
Audited
Unaudited as at as at
31 August 29 February
2016 2015 2016
R’000 R’000 R’000
Assets
Non-current assets
Property, plant and equipment 910 668 806 302 924 716
Investment in Associate 2 706 – 1 641
Current assets 524 369 399 400 533 692
Inventory 92 146 81 737 105 856
Biological assets 116 277 111 915 121 549
Trade and other receivables 204 749 155 931 196 528
Cash and cash equivalents 111 197 49 817 109 759
Total assets 1 437 743 1 205 702 1 460 049
Equity and liabilities
Share capital and premium 242 408 244 596 244 596
Share-based payments 2 325 2 712 2 036
Retained earnings 477 089 499 836 513 555
Equity 721 822 747 144 760 187
Non-current liabilities
Interest bearing borrowings 99 864 42 830 122 515
Deferred taxation 200 092 204 069 212 688
Current liabilities 415 965 211 659 364 659
Current portion of interest
bearing borrowings 44 980 23 441 49 679
Trade, other payables and
provisions 370 985 188 218 314 980
Total equity and liabilities 1 437 743 1 205 702 1 460 049
Shares in issue (’000) 74 412 74 662 74 662
Net asset value (cents) 970 1 001 1 018
Statement of Comprehensive Income
Unaudited for the Audited
six months ended year ended
31 August 29 February
2016 2015 2016
R’000 R’000 R’000
Revenue 1 091 659 831 549 1 726 638
Operating profit/(loss) before
depreciation and impairments (19 873) 111 230 157 576
Depreciation and impairments 21 582 17 408 37 687
Profit/(loss) before finance costs (41 455) 93 822 119 889
Net finance costs 7 607 188 3 895
Profit/(loss) before taxation (49 062) 93 634 115 994
Deferred taxation (12 596) 26 217 34 836
Total comprehensive income/(loss)
for the period (36 466) 67 417 81 158
Other comprehensive income for the
period – – –
Total comprehensive income/(loss)
for the period (36 466) 67 417 81 158
Weighted average shares in issue
(‘000) 74 661 75 219 74 942
Earnings/(loss) per share (cents) (48.8) 89.6 108.3
Headline/(loss) earnings per share
(cents) (48.8) 89.7 108.4
Diluted earnings/(loss) per share
(cents) (48.8) 89.6 108.3
Diluted headline earnings/(loss)
per share (cents) (48.8) 89.7 108.4
Reconciliation between
earnings/(loss) and headline
earnings/(loss)
Earnings/(loss) after taxation (36 466) 67 417 81 158
Reconciling items:
Loss on disposal of property,
plant and equipment – 56 156
Taxation effect – (16) (44)
Headline earnings/(loss) after
taxation (36 466) 67 457 81 270
Statement of Cash Flows
Unaudited for the Audited
six months ended year ended
31 August 29 February
2016 2015 2016
R’000 R’000 R’000
Cash generated/(utilised) from
operations (19 759) 112 539 156 668
Changes in working capital 66 766 (16 833) 35 579
Net cash flows from operations 47 007 95 706 192 247
Interest paid (7 607) (188) (3 895)
Net cash flows from operating 39 400 95 518 188 352
activities
Net cash flows from investing in
property, plant and equipment (8 626) (69 902) (88 589)
Net cash flow from investing in
business combination – – (120 000)
Proceeds on the sale of property,
plant and equipment 202 272 166
Net cash flows from shares
repurchased (2 188) (4 945) (4 945)
Net cash flows from shares
purchased for Employee Share
Option Plan – (2 888) (2 888)
Dividends paid – (25 916) (25 938)
Proceeds from borrowings – – 120 000
Net cash flows from debt repaid (27 350) (13 175) (27 252)
Net movement in cash and cash
equivalents 1 438 (21 036) 38 906
Cash and cash equivalents at the
beginning of the period 109 759 70 853 70 853
Cash and cash equivalents at the
end of the period 111 197 49 817 109 759
Statement of Changes in Equity
Share capital Share-based Retained
and premium payments earnings Total
R’000 R’000 R’000 R’000
For the six months
ended 31 August 2016
Opening balance 244 596 2 036 513 555 760 187
Shares Repurchased
(held by Employee
Share Ownership
Plan "ESOP") (2 188) – – (2 188)
Total comprehensive
income/(loss) for
the period – – (36 466) (36 466)
Net value of
employee services – 289 – 289
Closing balance 242 408 2 325 477 089 721 822
For the six months
ended 31 August 2015
Opening balance 252 429 1 459 458 335 712 223
Shares Repurchased
(Treasury Shares) (4 945) – – (4 945)
Shares Repurchased
(held by ESOP) (2 888) – – (2 888)
Total comprehensive
income for the
period – – 67 417 67 417
Dividends paid – – (25 916) (25 916)
Net value of – 1 253 – 1 253
employee services
Closing balance 244 596 2 712 499 836 747 144
Commentary
Operational and financial results
The decrease in headline earnings per share for the period under review
to a loss of 48.8 cents is primarily as a result of a 15% increase in
the cost of feed per ton due to the drought, coupled with a 3% decline
in net selling prices following local oversupply conditions. However,
these adverse macro conditions were mitigated by increasing sales volume,
improving operational efficiencies and reducing costs where possible.
Included in the results are once-off costs of R17 million that relate
to the defence of the hostile offer launched by Country Bird Holdings
Proprietary Limited, a direct competitor, and R4 million relating to
the Transactions (as defined in the circular to Sovereign shareholders
(“Shareholders”) dated Friday, 24 June 2016 (“Circular”)), which
includes the proposed Black Economic Empowerment (“BEE”) transaction
that was originally proposed on 12 October 2015. Excluding these
once-off costs, the Group reported positive earnings before interest,
taxation, depreciation and amortisation (“EBITDA”) margin for the
period of 0.1%.
Sales volume and operational efficiencies
Sales volume for the reporting period increased by 35% compared to the
six months ended 31 August 2015 (“Prior Period”), with 10% of this
increase resulting from the Uitenhage operation and 25% from the
Hartbeespoort abattoir.
The 10% increase in sales volume at the Uitenhage operation was
driven by good agricultural results with the Performance Efficiency
Factor improving by 9%. Birds processed increased by 4% with average
live mass per bird improving by 5%. Although abattoir yield and
throughput were flat compared to the Prior Period, this represents
an improvement of 5% and 9% respectively when compared to the six
months ended 29 February 2016.
Volume processed at the Hartbeespoort operation exceeded expectations
with the abattoir yield and throughput increasing by 3% and 8%
respectively compared to the 19 weeks (from date of acquisition)
to 29 February 2016.
Revenue, product mix and selling prices
Group revenue increased by 31% to R1.1 billion with average selling
prices declining by 3% as food deflation of 4.5% was mitigated by
product mix improvements of 1.5%.
The Group has had a consistent product mix strategy of diversifying
away from commodity type products into higher margin, niche products
such as fully cooked value added products, traditional quick service
restaurant products, fresh products and weight graded products. This
strategy is being successfully executed with these four product lines
now totalling 23% of the Group’s revenue and 14% of volume. The Group
anticipates that sales of fully cooked, value added products will
accelerate as The SPAR Group Limited rolls out its re-branded Chikka
Chicken concept. Whilst the percentage of export sales volume is
still small, the Group has had some success with exports of fully
cooked products to the Middle East and sales volume has increased
significantly compared to the Prior Period.
The local commodity market was dominated by an oversupply situation
in the second quarter of the current reporting period as local
producers significantly reduced inventory levels coupled with an
increase in the import volume of leg quarters from the European
Union. This supply imbalance caused the price of mixed portion
and other commodity line products to decline by 8% over the
Prior Period.
Feed costs
What has been called “the worst drought in 100 years” has had a
material impact on the price of maize and soya beans in South Africa.
Spot prices for these products on the South African Futures Exchange
(“SAFEX”) increased by 31% and 39% respectively compared to the Prior
Period. Coupled with the effects of the drought, the prices of maize
and soya beans have further been influenced as a result of the 20%
devaluation in the Rand:Dollar exchange rate when compared to the
Prior Period.
The Group was able to mitigate these large increases by switching
to imported maize and as a result the average cost of feed across
all the Group’s operations was limited to a 15% increase per ton.
It is however expected that the South African 2016/2017 maize and
soya bean crops will be significantly higher than the prior year
as can be seen in the forward prices on SAFEX, with July 2017 prices
currently trading approximately 32% and 5% lower than November 2016
prices.
In addition, the price of corn in the United States (“US”), 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.
It is therefore expected that feed costs will start to decline in
the fourth quarter of the 2017 financial year.
Operational costs
Including the 15% increase per ton in the cost of feed, agricultural
costs across the group increased by 13% per kilogram (“kg”) live mass.
Excluding the electricity rebate received in the Prior Period,
abattoir costs across the Group were down 3% per kg sold due to
the cost reduction measures implemented in the Prior Period and
the additional volume from the Hartbeespoort operation. Distribution
costs were up 6% per kg sold.
The strategy of the Group to reduce Group overheads with the acquisition
of the Hartbeespoort abattoir is yielding positive results as overhead
costs associated with administration, sales and marketing (excluding
once-off costs referred to above) decreased by 32% per kg sold.
Balance sheet and cash flow
Through strong working capital management, the Group generated net
cash from operations of R47 million. Of this, R8 million was used
to pay finance costs, R9 million was utilised for capital expenditure,
R2 million was used to purchase shares for the ESOP and R27 million
was used to repay debt, leaving a net cash inflow of R1 million
for the period.
The balance sheet of the Group 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 4.7% and the Group
ended the period with R111 million cash on hand.
Update regarding the Transactions and cancellation of the adjourned
general meeting
The date for fulfilment or waiver by Sovereign (to the extent
legally possible) of the conditions precedent to the Transaction
Agreements (as defined in the Circular) (“Conditions Precedent”)
was extended to 17h00 on 1 December 2016 (“CP Fulfilment Date”).
Sovereign does not intend to extend the CP Fulfilment Date further.
Consequently, not all of the Conditions Precedent will be fulfilled,
or waived (to the extent legally possible), by the CP Fulfilment
Date and the Transaction Agreements and the Transactions will lapse
on 1 December 2016. Due to the fact that the Transactions will not
be implemented, the costs associated with the Transactions have been
expensed during the period under review.
Furthermore, Shareholders are hereby notified that, as a result
of the lapsing of the Transaction Agreements, the resolutions required
to approve the Transactions are hereby withdrawn and the further
adjourned general meeting (which was to be held at 10h00 on Friday,
6 January 2017 at the Sun International Boardwalk Hotel, Beach Road,
Summerstrand, Port Elizabeth), is hereby cancelled.
Industry matters
Brining and local supply
The amended regulations reflecting the 85:15 brining cap were
implemented on 23 October 2016 and these could have the effect
of materially increasing the retail price of those products
affected by the brining cap. Brining will also result in the
reduction of the national supply volume of poultry.
Imports
The volume of US bone-in products imported under the African Growth
and Opportunity Act agreement has been muted and, in the eight
months to August 2016, approximately 15 500 tons was imported.
Imports of bone-in products, from countries other than the US,
has increased and in the eight months to August 2016 there was
a 23% increase compared to the same period last year.
The international price of poultry has started to increase due to
a reduction in world-wide poultry supply and this could result
in the import parity price of imported poultry increasing in
the near term.
Results presentation
A presentation on these interim unaudited Group results for the six
months ended 31 August 2016 (“Interim Unaudited Results”) will be
available on the Group’s website at www.sovereignfoods.co.za.
Basis of preparation and accounting policies
These Interim Unaudited Results are prepared in accordance with
the JSE Limited Listings Requirements (“Listings Requirements”)
and the requirements of the Companies Act No. 71 of 2008 of South
Africa. The Listings Requirements require that the Interim Unaudited
Results are prepared in accordance with and containing the
information required by IAS 34: Interim Financial Reporting,
as well as the SAICA Financial Reporting Guides as issued by
the Accounting Practices Committee and Financial Reporting
Pronouncements as issued by the Financial Reporting Standards
Council. The accounting policies applied in the preparation of
these Interim Unaudited Results are consistent with those applied
in the previous annual financial statements. This report was
compiled under the supervision of GL Coley CA (SA), Chief
Financial Officer.
Interim dividend
It is the policy of the Company to only declare a final dividend
and therefore no interim dividend is considered for the period
under review.
By order of the Board
T Pritchard C Coombes
Non-Executive Chairman Chief Executive Officer
23 November 2016
E-mail: info@sovfoods.co.za
Transfer secretaries: Computershare Investor Services Proprietary
Limited, PO Box 61051, Marshalltown 2107, Gauteng
Company Secretary: ME Hoppe
Sponsor: One Capital
Directorate: T Pritchard (Non-Executive Chairman), C Coombes (CEO),
JA Bester*, GL Coley, CP Davies*
* Non-Executive
These Interim Unaudited Results may be viewed on the Company’s
website at www.sovereignfoods.co.za
Date: 23/11/2016 05:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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