Quantum solves chicken and egg riddle

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Quantum reported that revenue for the year to end-September was up just 2.4% to R3.5bn. But a strong turnaround in its poultry and egg business saw operating profit up more than fivefold at R162m. The feeds business pushed up operating profit 7.5% to R65m, but the African businesses reported lower profit of R25m (last year: R35m).

In an investment presentation, Quantum CEO Hennie Lourens said operating costs increased less than inflation due to focused cost control and efficiency improvements. He said the company also saw "good execution" of price volume management.

Headline earnings came in at 54c per share, covering the maiden dividend payout of 10c per share by a fairly conservative 5.4 times.

Poultry production strategy pays off

Vunani Securities analyst Anthony Clark said Quantum's decision to change its poultry production strategy paid off. "A loss of R101m became a R39m profit as Quantum became a contract grower for poultry giant Astral." Clark said Quantum was generating good cash flows and spending capital on revenue generating activities.

In his divisional review, Lourens noted that on the poultry side, a change in the business model in the Western Cape was successfully executed and yielded a return to profitability. The Gauteng business had improved, but remained loss-making. Broiler prices increased despite the continued growth in imports.

The Gauteng abattoir was sold to JSE-listed poultry group Sovereign Foods last month, which saw an aligned broiler business model and established the company as the biggest broiler contract grower in SA.

Eggs, livestock and feed volumes

Lourens said egg prices had improved because market supply and demand were balanced. The eggs and layer livestock business performance improved from a loss last year to showing an operating margin of 3.5% in the 2015 financial year, he said. "Layer livestock volumes increased satisfactorily, while egg volumes were slightly lower, with average selling prices improving by 4.7%."

Quantum's animal feeds business continued to grow, with external sales volumes increasing 7.7%, Lourens said. Margins in the feed division were fattened thanks to "judicious procurement practices and the continuous drive to reduce costs and increase efficiencies".

Operations in Africa

Quantum's poultry and eggs business in Zambia suffered with the rapid weakening of the kwacha against the rand. An oversupply of day-old broilers also hindered profit growth, but Lourens stressed the Zambian operation remained profitable.

A distribution centre in Zambia was closed during the financial year to allow the business to focus on core operations. But he pointed out that egg-production capacity had been increased with the rental of a farm in the Chipata region.

Quantum's Ugandan business saw a decline in profits due to a larger cost base required for expansion. The establishment of a commercial layer farm near Masindi was "slightly behind schedule", Lourens said. Quantum expected egg production to start in the second half of next year.

The local economy remained under pressure due to a weakening currency and muted consumer spending, he said. "We expect high input costs coupled with a weak economy to put pressure on the group's profitability in 2016."

Source: Business Day