The merger between the retail businesses of agricultural services companies Afgri and Senwes would become effective on June 1, subject to approval by the Competition Tribunal, Afgri CEO Chris Venter said this month.

Speaking at the presentation of the company’s results for the six months ended December 31, he noted that, although finalisation of the transaction was in sight, he could not provide a date for the tribunal approving the merger.

In July last year, Afgri and Senwes announced the merger, which would also see Afgri’s wholesale subsidiary, Partrite, form a new joint venture (JV) in which Afgri and Senwes would each hold a 50% interest.

The JV would exclude the mechanisation businesses in the form of John Deere agencies. Shares in the JV would be issued to both parties in exchange for the respective agri-retail businesses. Afgri would also pay a further cash contribution of R93.7-million to the JV in return for a portion of the shares.

Venter noted that the merger was expected to increase Afgri’s retail volumes through its expanded exposure to new markets.

Meanwhile, lower margins in its food segment as a result of a higher maize price, coupled with its struggling poultry business, were the main drivers behind the JSE-listed company’s headline earnings a share for the six months falling by 15.2% to 31.3c, compared with 36.9c in the prior comparable period.

High commodity prices, together with a strong rand, fuelled record levels of imports, resulting in a heavily oversupplied local poultry market. This, together with high feed prices, resulted in lost margin and Afgri Poultry reported a pre-tax loss of R35.7-million, up from a pre-tax loss of R24.7-million in the six months ended December 2011.

The group said it was working with industry bodies and the Department of Trade and Industry (DTI) to find a solution to the industry problem.

However, higher commodity prices and the increase in the group’s equipment business unit’s market share domestically, as well as in the rest of Africa, were the main contributors to the 17.5% increase in revenue from all operations.

Profit from continuing operations was 7.8% higher than the prior period at R124-million. However, Afgri had to reflect its retail business as a discounted operation, owing to the Senwes merger.

Pressures in the poultry environment, as well as the downturn in the retail environment, resulted in the group’s profit from all operations falling by 13.4% on the prior period.

A focus on working capital management led to an increase in inventories being well contained, despite the impact of high commodity prices on inventory values.

Afgri indicated that its board was continuously monitoring the valuation of its poultry business unit. “Our half-year impairment testing indicated that, considering the current capital expansions in progress, no impairment is currently needed,” it said.

However, the group pointed out that, should the proposed additional tariffs and antidumping initiatives by government not materialise in the near future, such impairment was inevitable.

The company generated cash of R270-million from its operating activities, which was mainly applied toward capital expenditure, the acquisition of a 15% stake in Nigerian services and inputs provider to the poultry industry Bnot Harel Nigeria and dividend distributions.

Afgri’s net cash inflow for the period was R25-million, compared with an outflow of R103-million in the prior comparative period.

The group’s interim dividend decreased by 15.2% to 15.65c apiece, down from 18.45c a share in the corresponding period in the previous financial year.

Operational Review

The equipment business unit, within the equipment and international division, delivered a 7.7% increase in pre-tax profit for the period under review, with steady growth in market share and a growing contribution from its recently established Zimbabwean operations.

In the grain management division, average storage days per ton remained constant and closing stock was 23% higher on a comparative basis.

Afgri’s financial services business, Unigro managed to increase its debtor’s book under management by R1.5-billion, allowing an increase in fee income to compensate for lost margin.

A more volatile commodity market fuelled volumes in the broking business of GroCapital, which increased its market share in the trade finance space. The business reported a 41% increase in related fee income. The nonfarmer portion of its insurance business unit was sold, resulting in a capital profit of R5-million.

Meanwhile, the new preparation and extraction plants at the Nedan oilseed crushing, extraction and refining facility were progressing well and expected to be commissioned on July 1.

Venter said the negotiations regarding Afgri’s refinancing of its black economic-empowerment (BEE) ownership structure were ongoing, adding that the finalisation of this would be the company’s focus in the next six months.

Development finance institution, the Land Bank, had, in the interim, extended the maturity date of the R554-million loan in terms of the agreements previously approved by shareholders as part of the BEE transaction.

Outlook

Afgri anticipated that higher closing stock, together with an increase of 4% in crop size for 2013, would provide its grain management division with a strong foundation for the next six months. Continued sales growth was expected on farming mechanisation with the group’s growing footprint into the rest of the continent.

The company pointed out that the current environment in the poultry industry was of major concern and that Afgri Poultry’s profitability would remain under pressure.

“Early indications from industry bodies are that the DTI will impose import tariffs, which will bring some relief to the industry,” it noted.

However, the extent and timing of the import tariffs remained unclear and were not expected to provide relief for the remainder of the financial year. Given this, Afgri indicated that it expected the current environment to have a significant negative impact on the group’s performance in the months ahead.