Our opinion on the current state of QFH

Quantum (QFH) is in the chicken business. It has four divisions - Animal feeds, eggs and layers, broilers and an African division where it sells related products. Quantum was obviously badly impacted by the drought in Southern Africa, but since that abated and the price of animal feeds came down, it has benefited from the much higher prices of eggs and the lower cost of feeds. In general, the chicken business is a tough business. It is labour intensive which creates exposure to union action, it involves large quantities of working capital tied up in stock and to a lesser extent debtors, it is subject to unexpected disease threats like avian flu or Newcastle disease and it has experienced the dumping of cheap chicken onto the South African market from Europe, Brazil and America. With top class management, a sustainable profit can be achieved, but the industry is regarded as relatively high risk by investors which accounts for its low price:earnings (P:E) multiple and its high dividend yield (DY). The unprotected strike at Kaalfontein Farm has restricted output and cost an estimated R10m. The company suffered an outbreak of HPAI at its Lemeonkloof Farm as well as loadshedding and labour unrest. In its results for the six months to 31st March 2023 the company reported revenue up by 22% and headline earnings per share (HEPS) fell by 82%. The company said, "The main reasons for the challenging conditions were, inter alia, (i) the record high feed raw material costs; (ii) the devastating effect of disrupted electricity supply; and (iii) the inability to recover increased production costs from customers (especially in the egg market, which was due to an imbalance in supply and demand for eggs, which in turn resulted from a relatively high layer flock being in production in South Africa during the current reporting period)". In a trading statement for the year to 30th September 2023 the company estimates that it will make a headline loss of between 16,7c and 18,1c compared to a profit of 14,1c in the previous year. This is due to the outbreak of avian flu in Gauteng and North-West Province. Nobody knows what difficulties the business may experience over the next 12-month period. So, if you plan to invest in this share be prepared for considerable volatility. This company has difficulty in passing on higher raw materials costs to consumers in the current economic environment. Technically, this share has been moving in a sideways and downwards pattern since August 2020. We see this continuing.