Our opinion on the current state of QFH

Quantum, a player in the chicken industry, operates through four divisions: Animal feeds, eggs and layers, broilers, and an African division focused on related products. The company has navigated through challenges including droughts in Southern Africa, labor intensity with union exposure, substantial working capital tied up in stock and debtors, disease threats like avian flu or Newcastle disease, and the impact of cheap chicken imports from Europe, Brazil, and America. Despite these obstacles, with exceptional management, the industry can yield sustainable profits, albeit perceived as high-risk by investors, reflected in its low price:earnings (P:E) multiple and high dividend yield (DY).

Quantum has faced several specific challenges recently, including an unprotected strike at Kaalfontein Farm, an outbreak of HPAI (Highly Pathogenic Avian Influenza) at its Lemoenkloof Farm, loadshedding, and labor unrest, highlighting the volatile nature of the industry. For the year ending September 30, 2023, Quantum reported a 15.5% increase in revenue but shifted from a profit to a headline loss of 17.4c per share, underlining the severe impact of HPAI, which is considered the company's most significant risk.

The first four months up to January 2024 showed some operational cost improvements due to reduced feed raw material costs and fewer loadshedding hours, contributing to margin improvement. However, the threat of HPAI remains significant and is expected to persist throughout the financial year ending September 30, 2024, emphasizing the unpredictable challenges the business may face.

Investors considering Quantum should be prepared for significant volatility given the industry's inherent challenges and the company's recent performance trends. The company's difficulty in passing higher raw materials costs onto consumers in the current economic climate further compounds its challenges. Technically, the share has been exhibiting a sideways and downward pattern since August 2020, suggesting this trend may continue.