Today's highlights

Sovereign Food (SOV): Don’t count your chickens

Talking point: Crunch time for interest rates  

It is just over two weeks to go until the next meeting of the SARB’s Monetary Policy Committee meeting, on 14 August. Not so long ago, the expectation was pretty clear that another 50bps hike was on the cards, but the picture is much less clear now.

The new CPI weightings that are due to kick-off next year would seem to indicate that CPIX could be two percentage points lower than it currently is; this argues against the case for high interest rates. At the same time, further shocks on the upside for inflation and credit will strengthen the resolve of the hawks.

Yesterday’s higher-than-expected credit numbers for June will have been a concern, but the real crunch will be today, with the release of CPIX for June later this morning. Any number significantly above 11.4% will be fodder for the hawks. A lower number than that, and a continuation in the current strength of the rand, will argue in favour of leaving rates as they are.

Early morning markets

Lower oil prices helped US shares to rebound overnight, with many financial and consumer counters gaining after Monday’s sharp losses.

The JSE was lower overnight as a firm rand and lower commodity prices hit gold and platinum shares. Industrials and banks were also weaker.

The rand continued its climb yesterday, gaining against most currencies, including the US dollar, despite the latter’s strength on the back of firmer US stocks and lower oil prices.

Commodities were lower almost across the board, as a firmer US dollar pushed oil, precious metals and base metals lower.

Key indicators in a nutshell – Tuesday 29 July 2008 

Company results and updates

Mondi reported an increase in HEPS of 6%, to 18.3 euro cents, for the six months to June. An interim dividend of 7.7 euro cents was declared, up 6% on the similar period in 2007.

Arcelor Mittal reported diluted HEPS for the six months to June of 1023c, an increase of 44.9%. An interim dividend of 342c was declared.

Business Connexion says it expects HEPS for the year to May to be 15%-25% higher than previously. The results are due for release on 26 August.

Kelly Group says its revenue for the June quarter rose 13.9%.

Oando Oil reported EPS for the six months to June of 3.44 US cents, up from 2.59 US cents previously. 

Morning ideas

Sovereign Food (SOV): Don’t count your chickens 

Sovereign Food (600c; market cap: R198m) If anyone needed any persuading of just how tricky the poultry industry can be, yesterday’s trading update by Sovereign Food will have provided some convincing material. Sovereign said it expects to report HEPS for the six months to August that will be 160% to 180% lower than previously. 

In normal English this translates into a headline loss per share of between 63c and 84c. In a nutshell, Sovereign was hit by the double whammy of increasing feed prices but lower poultry prices, in a classic case of margin squeeze.  

Although volumes are expected to be 40% higher, poultry prices are expected to be 5% lower. However maize and soya prices, which are critical to poultry producers because they make up 90% of feed, are expected to be 50% higher.  

Sovereign does offer some hope for the full year to February 2009. It says poultry prices rose in June and July, following sharp declines in the first three months of the financial year. It also says it expects to see stronger consumer demand over the next few months, while reduced imports and higher red meat prices will lead to higher poultry prices. It furthermore says it has hedged its maize prices for the rest of the year. 

It remains to be seen whether these developments will turn out as hoped and potential investors may choose to wait for more guidance once the results are released on 25 September. Patrick Lawlor

 Key market indicators – Tuesday 29 July 2008