I thought it is good to provide some analysis on the poultry industry of Sri Lanka due to several reasons.
- Stellar performance of companies have not reflected in the respective market valuations
- Investors who were previously positive on these stocks are now recommending to exit
- Investors invested on this industry stocks are now worrying because of stagnation of the stock prices
- Some are highlighting the risk of bird flue on the industry.
Well I will start my analysis from the per capita chicken consumption trend of Sri Lanka as shown below.
|Per capita chicken consumption (kg)||5.6||6.8||7.1||7.2|
As you can clearly see it has been a remarkable growth and I estimate the per capita consumption to be 7.5 kg in 2015. Is this growth sustainable in the years to come, and I would say yes. Why is because the prices of substitutes such as fish, pork and beef are well ahead of a kilo of chicken and also the ethical issues associated with beef and pork consumption will restrict shifting the demand from chicken to other meet.
Then what if bird flue comes? Historically bird flue was a risk we have discussed from world risk analysis but never been hit by the Sri Lanka to date. If the world risk scenario is active again then as a precaution consumers in Sri Lanka might tend to reduce the consumption but how long it will prevail. Maximum would be few months so the impact for companies in this industry is for one quarter. This can not hurt the long term growth charts.
Ok now I'll talk a little bit on our three main poultry companies focusing on their balance sheets. You can refer for details in below table.
|Revenue mn|| 2,089 || 1,288 || 13,741 || 10,480 || 3,890 || 2,792 |
|Total assets mn|| 2,140 || 2,209 || 6,976 || 5,396 || 3,674 || 2,042 |
|Equity mn|| 1,634 || 760 || 4,493 || 2,888 || 2,645 || 1,574 |
|Debt mn|| 14 || 1,278 || 1,455 || 1,961 ||595||130|
|Net Operating cashflow mn|| 692 || 584 || 2,805 || 715 || 606 || 350 |
|Asset turnover|| 1.0 || 0.6 || 2.0 || 1.9 || 1.1 || 1.4 |
|Debt/Equity|| 0.0 || 1.7 || 0.3 || 0.7 || 0.2 || 0.1 |
|Cashflow/share Rs|| 29 || 25 || 47 || 12 || 38 || 22 |
I attempted to compare how these 3 companies were doing in 2011 where we saw a major poultry stock rally and now where we saw a weakened rally. Look at how these 3 companies grew their equity base. Look at how these three companies grew their cashflow per share which is remarkable. And look at how these companies have increased the asset utilization efficiencies over the period. Except for BFL both GRAN & TAFL has reduced the gearing substantially. Out of these three TAFL seems to me the top company. All three companies are much stronger now than they were before in 2011.
Ok the next question is why the share prices are so depressed then. I explain this is a result of purposeful act of some group of people to depress the sentiment and grab as much quantity as possible at lowest possible price spreading all the negative news such as what happened in 2010/11 period, bird flue impact, selling pressure of major shareholders etc. They know in very short period of time these stocks can produce extra ordinary profits so the amount they collect at lower price will going to earn them the huge wealth. I assume they have used the selling intention of GRAN major shareholder here as a weapon to depress the market sentiment. I guess they have already got a buyer for this quantity but they purposefully delaying the transaction till they have collected the desired quantity at low prices. They know when the retailors feel that a huge seller is awaiting to sell in the market and so any time he will dump onto their heads. This fear monger has been managed very effectively by the group behind in this strategy.
So in the final analysis they will try their best to keep these stocks depressed as long as they can and collect them at very low and then they will let happen the quantity of GRAN deal and then everybody will be surprised the stock prices of these three within one month period.
I have written this for the investors who hold them as well as for the investors who are scared of establishing positions in these stocks.