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Agriterra Limited / Ticker: AGTA / Index: AIM / Sector: Agriculture

Agriterra Limited ('Agriterra' or the 'Company')

Interim Results

Agriterra Limited, the AIM listed African agricultural company, announces its unaudited results for the six months ended 30 September 2022.

Chair's Statement

I am pleased to provide an update on our performance in the first half of the 2023 financial year ('HY-2023'). These results will be made available on the Company's website.

Operational update

Grain division

The Grain division commenced the period with more than 7,000 tons of maize in silos valued at MZN 87.5 million (US$ 1.4 million) which was not milled in the prior year due to low sales volumes caused by cheap raw maize imports flooding the informal market. 

Grain strategy was revised with the main objective being to reduce the level of debt, thus allowing grain division to break even by:

·      Reducing finance costs,

·      Further cost reductions amounting to MZN 3m (US$ 47,000) per month.

·      Building on prior year operating initiatives such as:

o  Buying cheap maize during the harvest period.

o  Ensuring maize meal extraction rates remain above 78%.

o  Milling from Compagri which has access to cheaper maize.

In August 2022, Grain division bank debt was refinanced with a shareholder loan amounting US$ 6.1 million which reduced finance costs by MZN 6 million (US$ 90 000) per month. In addition, the Grain division managed to cut MZN 2 million (US$ 31,000) operational costs of the targeted MZN 3 million (US$ 47,000) by September 2022.

Grain division sales volumes were in line with the prior year at 7,947 tons (HY-2022: 7,981 tonnes) generating revenue of US$ 3.6 million (HY-2022: US$ 3.6 million). Meal sales volume were ahead of the budget of 7,563 tons (HY-2022: 12,530 tons). Budgeted volumes have been reduced, as compared to prior period, to avoid unnecessary interest and stock holding expenses.

An additional US$ 1.5m shareholder loan was secured, to fund maize working capital for the season. The business, as at 30 September 2022, has in silo a total stock of 7,444 tons of maize (HY-2022: 18,942 tons), which will be rolled over continuously to fund maize requirements through to April 2023. This will necessitate the purchase of a further 5,000 tons to meet the milling requirements until the next harvest.

Operating costs decreased by US$ 0.2m to US$ 0.5m following a further aggressive cost cutting exercise. EBITDA decreased to US$ 0.1m (HY-2022: EBITDA of US$ 0.2m) due to a higher cost of maize as compared to the prior year. Average cost of maize is 19% higher than prior year at US$ 227 per ton (HY-2022: US$ 191 per ton). Finance costs increased to US$ 0.8m (HY-2022: US$ 0.7m) and depreciation cost remained constant at US$ 0.25m. Grain incurred a loss of US$ 0.87m for the 6 months period ending 30 September 2022 (HY-2022: Loss US$ 0.75m).

In response to the shrinking margins, Grain division is evaluating alternative ways of sourcing maize and increasing other milling revenues. The following mitigating actions have been implemented:

·      Reduce finance costs and stock holding costs by borrowing less and rolling over maize inventories equivalent to US$ 1.5 million;

·      Sourcing milling services from non-governmental organisations. As at 30 September, Grain division won a contract to mill 600 tons of maize for World Food Programme (WFP); and

·      Further extend the service milling to commercial customers.

Beef division

Improvement in the performance of the Beef division has been limited by a shortage of animals in the feedlot due to a lack of working capital. At the beginning of the period, the feedlot had 1,334 animals operating at 44% of the feedlot capacity.

The number of animals dropped to 961 by July 2022 in response to stronger customer demand. In August 2022, Beef division received an advance amounting to US$ 300,000 as working capital funding for the purchase of animals. The advance enabled Beef division to purchase 1,000 animals and sales volumes are expected to increase within 90 days, and this will enable Beef division to be profitable thereafter.

As at 30 September 2022, Beef division had 1,513 animals and cash resources which can buy an additional 400 animals. With the additional funding, Beef division will be able to operate at 64% of the feedlot capacity.

Beef division generated US$ 1.7m revenue resulting in an increase of US$ 0.2m as compared to same period last year. 455 tons of beef were sold during the period (HY-2022: 452 tons) compared to a budget of 653 tons. Cumulative gross profit of 23.49% was achieved (Budget: gross profit of 25.24%). This is the second year Beef division has achieved gross profit above 20% due to the following measures which were implemented:

·      Effective monitoring of animal travel mass losses;

·      Careful selection and purchase of healthy animals with high growth potential by the farm manager;

·      Aggressive pricing to meet customer demand;

·      Consistent monitoring animal meat dress out ratio to achieve a minimum of 52% of the animal weight;

·      Streamlining processes and reducing costs.

Operational loss for the period decreased from US$ 0.276 million to US$ 0.264 million as compared to prior year. Finance costs decreased to US$ 27,000 (HY-2022: US$ 29,000) and the loss after tax decreased to US$ 0.272m (HY-2022: loss US$ 0.284m).

Beef division is creating several revenue streams by diversifying and/or creating new markets. The following initiatives are increasing revenue for the Beef division:

·      Diversifying into the supply of goat meat. The challenge being faced is to secure sustainable supply of goats to meet customer demand. Management is searching for new areas to buy goats to meet the demand.

·      Pushing more carcass sales to supermarkets in northern Mozambique, where the imported South African meat cannot be supplied at competitive rates.

·      Offering of a new economy cut stewing meat package for retailers to purchase and sell in smaller portions in the informal markets. This is proving to be very popular, and the sales are increasing rapidly each month, driving up the value attributed to each carcass.

·      Commenced the production of free-range pigs at the farms to improve farm productivity and reduce cost per kg. As at 30 September 2022, Mozbife has 162 pigs. Beef division is targeting to slaughter 40 pigs per month which will produce 5 tons of pork per month from April 23 onwards.

Snax Division

The Snax division has seen strong market penetration reflecting a superior quality product and has been operating above 75% of the installed plant capacity. In August 2022, Snax division purchased a new extruder to increase the production capacity from 110 000 bales to 150 000 bales per month. The new extruder has been funded by internally generated funds and Snax division has plans to expand into new geographical markets in Mozambique.

Snax division generated US$ 1.3m revenue (HY-2022: US$ 0.7m). Mozambique has not been immune to global price pressures which have affected the cost of cooking oil, fuel and packaging materials. Consequently, gross margin decreased from 32% to 19.60% as compared to prior year. However, due to significant increase in sales volumes, gross profit increased from US$ 206,629 to US$ 250,165. Operating expenses increased by US$ 63,925 due to a 5% management fee payable to Grain division. DECA Snax is a joint venture and based on International Financial Reporting Standards, revenue is not consolidated but the profit portion attributable to the group is included as share of profit in equity accounted investee in the Consolidated Income Statement.

Deca Snax reported a profit of US$ 70,000 (HY-22: US$ 94,000) and the group's share of profit in equity accounted investee is US$ 35,000 (HY-22: US$ 47,000).

Group Results

Group revenue for the half-year ended 30 September 2022 increased by 2% to US$ 5.0m (HY-2022: US$ 4.9m). As a result of increase in the cost of fuel and packaging in all divisions, gross profit decreased to US$ 1.1m (HY-2022: US$ 1.3m) achieving a group gross margin of 22% (HY-2022: Gross margin of 27%). Aggressive cost cutting in Grain and Beef division decreased operating expenses from US$ 1.9m to US$ 1.6m as compared to prior period. Decrease in the operating expenses mitigated the decrease in gross profit and operating loss decreased to US$ 466,000 from US$ 510,000.

Finance costs increased by 28% to US$ 0.918m (HY-2022: US$ 0.715m). Significant decrease in finance cost is expected from October 2022 to March 2023 resulting from the refinancing of external bank debt with the shareholder loans amounting in total to US$ 7.9m. At least a US$ 0.5 million saving is expected by year end.

During the period, inventories have decreased by US$ 0.051m to US$ 2.125m as compared to 31 March 2022. Grain division is keeping low inventory levels as a result of the revised strategy to reduce stock holding cost and finance cost in Grain division. Net debt at 30 September 2022 was US$ 10.9m (31 March 2022: US$ 10.7m).

Outlook for H2-2023

The Grain business is entering H2-2023 with over 7,000 tons of grain in silo which is not sufficient to take us to the next harvest and the strategy is to rollover the working capital until we link to the next grain buying season. This will reduce finance cost for the group as well as stock holding expenses. On the other hand, Beef division has already set the platform for ramping up operations and will increase feedlot capacity utilisation to 64%.  All divisions have been striving to be self-sustaining at low-capacity utilisation and now are expanding into profitable operations as volumes increase after rightsizing. Management will continuously monitor operations for profitability and seize new market opportunities creating a group basket of products to effectively lower overheads per product in the medium to long term.

Grain remains the core group business and management will seek to add value by creating additional product lines building on the success of Deca Snax. Additionally, for the FY-23 period, we are working on a financing programme to rebuild the beef stocks and to improve our overall distribution of products for Deca Snax and Mozbife.

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