Sovereign to ditch BEE plans

Chris Coombes.

Picture: Financial Mail

The announcement was included in the interim results, which were released on Wednesday. They showed the devastating effect of the drought and increased imports on the local poultry industry with the group reporting a headline loss of 48.8c per share.

The decision to abandon the BEE scheme was inevitable given that a hostile shareholder, Country Bird Holdings (CBH), had built up a 34.1% stake that would block the implementation of any corporate action needing a special resolution. A special resolution requires the support of at least 75% of shareholders.

CBH has been forced by the Takeover Regulation Panel to suspend any further moves on Sovereign for 10 months.

The proposed scheme, which would have seen key members of management participate in a controlling block of shares, sparked a backlash by activist shareholders as well as a hostile bid for control by CBH.

The Sovereign board spent R17m defending itself against the hostile bid and an additional R4m in its attempts to implement the BEE scheme. These costs were written off during the six months to August.

The ebitda (earnings before interest, tax, depreciation and amortisation) margin, which was in negative territory, would have been a minuscule 0.1% if these one-off costs were excluded. A 15% increase in the cost of feed per tonne due to the drought coupled with a 3% decline in net selling prices due to poultry oversupply were the main operational factors behind the grim results. Increased sales volume and improved operational efficiencies helped to cushion it against the worst of the difficult trading conditions.

The good news for shareholders who are resigned to the current control situation is that the worst may be behind the industry. In addition, the current management has made some progress in improving product mix and increasing its margins.

In the statement released with the results, CEO Chris Coombes said indications were the 2016-17 local maize and soya bean crops would be higher than the previous year.

The worst drought in 100 years saw the spot price for maize increasing 31% and soya 39%. Forward prices for July 2017 are currently 32% and 5% lower than spot prices.

Coombes is expecting feed costs to start falling in the three months to February 2017.

Local players, including Sovereign, have also been hit by an oversupply as imports poured into the market. While the US has attracted most of the headlines it seems that the bulk of the volumes have come from the EU, in particular Holland. Coombes said the oversupply caused prices of mixed portion and other commodity line products to decline more than 8%.

Sovereign is continuing to diversify away from commodity type products into higher-margin, niche products such as fully cooked value-added products to Spar, traditional quick service restaurant products, fresh products and weighted products.

Sovereign has had some success with exports of cooked products to the Middle East. Overall value-added products account for 23% of the group’s revenue and 14% of volume.