Astral Foods | Praying for rain

High maize prices and a decline of selling prices reduced Astral Foods' (ARL) poultry margins to 3% from a record of 14% last year. FY '19 diluted HEPS fell y/y by 55%. The impact of high maize prices will linger into H1 '20 given ARL's forward procurement. However, there will be some support to margins from improving selling prices. A return of seasonal rains over the summer should boost crop prospects and lead to a drop of input costs for ARL from H2 ‘20. A public/private chicken masterplan (see appendix to the report) to increase consumption of domestically produced chicken could support industry prices and volume growth over the next few years. ARL poultry margins could be set for another boom after the bust.

We estimate poultry margins will stagnate in FY '20 before rebounding strongly from FY '21, with a positive widening of poultry price-cost jaws. We normalise ARL poultry EBIT margins at c.7% from FY '21. We estimate FY '20 diluted HEPS will remain largely flat y/y at c.1 682cps. We forecast a 26% three-year diluted HEPS CAGR to c.3 356cps in FY '23. We note that ARL has a ten-year historical average poultry margin, through cycles, of c.4%. ARL has delivered c.R340m (300bps margin) from poultry feeding efficiency, given improving genetics of the Ross bird. We therefore set normal poultry EBIT margins at c.7%.

We caution that lack of rainfall in SA will prolong poultry margin pressure and lead to a stagnation of the ARL share price. We calculate a 12m forward target price of R221/share and upgrade to an OUTPERFORM rating.