Poultry group takes steps to defend its coop

But Sovereign's shares declined 2.11% to close at R6.95 after the release of the trading statement on Friday, with market watchers pointing out that the firm appeared to have endured torrid trading in the second half.

The company - rumoured to be firmly in the sights of rival poultry group Country Bird Holdings (CBH) - issued a wide-ranging earnings forecast, pencilling in a bottom-line number of between 88c per share and 114c per share. This would mean that earnings could be 15% lower or 10% higher on the year to end-February 2015 earnings of 103c per share.

The trading update follows Sovereign's unsuccessful attempt in the High Court in Port Elizabeth last month to stymie efforts by dissenting shareholders to delay a controversial empowerment scheme. The trading update also coincides with rumours that CBH has approached Sovereign's board with proposals around a possible transaction. CBH already owns about 10% of Sovereign and is widely expected to pitch a takeover offer for the business.

Vunani Securities small- to mid-cap analyst Anthony Clark commended Sovereign for the trading update, saying the company seemed to have risen above the travails besetting the local poultry industry. "In the past, good hedging policies played out for them as well as mix changes away from low-margin IQF (individually quick frozen) portions."

Sovereign paid a 34c a share dividend last year. Given the current attention of CBH possibly towards Sovereign, it is probably no surprise that CEO Chris Coombes and his feisty board would pull out all the stops and stuff earnings with a better-than-expected result to keep suitors on the hop and curry favour with its big shareholders," Clark said.

Minority shareholder slams trading update

However, Opportune Investments' Chris Logan - a minority shareholder in Sovereign - slammed the trading update as "shocking". He said it appeared Sovereign, after earning 90c a share in the interim period to end August, would earn only about 10c per share in the second half compared with 75c in the second half of last year.

"What's more, Sovereign's return on equity for 2016 will only be around 10% - way below their published target of between 14% and 16% of their annual report." Logan said it was baffling that Sovereign offered an earnings range rather than an actual number since it was well past the end-February financial year. "Sovereign need to spend more time on the business and less time losing court cases."

Increased national sales footprint

In the trading update, Coombes said the company continued to execute on its product mix strategy - noting that in the second half of the year, sales of value-added portions (mainly to supermarket chain Spar) increased to 11% (last year 7%) of sales volume.

Coombes said the recently acquired Hartbeespoort abattoir had increased Sovereign's national sales footprint - adding that 81% of the company's total sales volume was from outside the Eastern Cape in the last quarter of the financial year.

Sovereign took operational control of Hartbeespoort from Quantum Foods in mid-October last year. The abattoir processes 280,000 birds a week and is expected, on an annualised basis, to increase the number of birds processed by Sovereign by 31% to about 1.2-million birds per week. He said the strategy for Hartbeespoort would ensure a material proportion of the abattoir's output was fresh portions. "These to a large extent are not affected by the high volume of frozen imports or by any amendments to the brining regulations."

Source: Business Day