Quantum Foods says FY profits to triple - shares jump

Quantum Foods have issued a profit notice indicating that profits are likely to be triple that of last year. As a result their share price has surged. The company claims this is a result of steady earnings from its egg business.

South Africa‘s Quantum Foods said on Wednesday it expects annual profits to triple on steady earnings from its eggs business as well as compensation for losses it incurred from an Avian flu outbreak in the previous financial year, sending its shares up 7%.

The animal feed and poultry company said headline earnings per share would increase by 219% to 156.3 cents per share for the year ending June 2018, compared with 49 cents per share in the corresponding period of the previous year.

The company said earnings were lifted by steady revenue in its eggs business, an insurance compensation of R22 million ($1.5 million) for losses incurred from the Avian flu outbreak last year and better performance by its units in other African countries such as Uganda and Zambia.

South Africa‘s poultry industry incurred losses and job cuts after an outbreak of avian flu in June last year.

This requires a degree of unpacking.

At no point did the company claim steady growth from its egg business. The claim was for steady earnings from its egg business. From this we can deduce that earnings from its egg business has been flat compared to the prior year. We also know that the egg division had a major earnings shrinkage in the prior year due to the Avian flu outbreak.

Therefore I would have expected egg division earnings to surge in the year following the Avian flu setback. This has not been reported. Therefore my guess would be a possible drop in market share that will take time to regain.

The true driver of earnings to the South African part of the operation was the R22 million insurance pay out. That is only likely to continue should there be more Avian flu outbreaks.

Outside of that there has been earnings growth in other African countries. Countries that have constant economic growth as opposed to the South African economy that is lurching on the brink of recession or as has been reported last week, in recession.

One question I have on the state of Quantum Foods going forward is how much of that insurance money will be used to expand the South African division within a flat economy and how much will be used to expand capacity in those African countries that are rapidly catching up to South Africa in terms of economic size and are likely to surpass South Africa in the years ahead.

For this reason I, personally, will hold off until November before making a buy decision. I want to study the audited financial statements as well as the directors’ forecast for where business focus will be in the year and years ahead.