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

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

HY-2022 Interim Results

Agriterra Limited, the AIM listed African agricultural company, announces its unaudited results for the six months ended 30 September 2021.

Chair's Statement

I am pleased to provide an update on our performance in the first half of the 2022 financial year ('HY-2022'). These results will be made available on the Company's website.

Operational update

Grain division

The Grain division has become more efficient over these last 6 months: the mill upgrades have improved the overall extraction rate from 75% in FY21 to 79%; and cheaper maize purchases have improved the overall gross margin to 26.7% vs the 15.41% achieved in prior period. These efficiencies have enabled the division to improve its overall performance per ton sold. However, volumes sold declined to 7,981 tons (HY-2021: 10,103 tonnes) which was mitigated by favourable average selling price of MZN29,977 per ton (HY-2021: 28,792).

The drop in sales is mainly due to the excessive volume of maize being imported from Malawi and Zambia, where favourable climatic conditions and government subsidised fertiliser schemes have resulted in exceptionally high maize production. The supply is far greater than the local demand and as such, the grain is entering Mozambique and eventually making its way south to Chimoio, Beira and Maputo, forcing our meal to compete with the cheaper grain available in the markets.

A total of $6.1m was secured, contributing towards the purchase of 30,000 tons of maize needed for this season. The business has in silo a total stock of 18,942 tons of maize (HY-2021:11,222 tons), which will see the Company through to June 2022, when the new crop will be available to purchase.

Revenue for the 6 months decreased to $3.6m (HY-2021: $4.1m). Operating costs increased by $0.2m to 0.7m resulting from appointment of senior management and bush buying administrative and transport expenses. EBITDA increased to $ 0.2m (HY-2021: EBITDA of $ 0.1m) due to extraction efficiencies and reduced maize cost as compared to the prior year. However, finance costs increased to $0.7m (HY-2021: $0.4m) and the assets revaluation led to an increase in depreciation cost to $0.25m from $0,09m in HY-2021 resulting in a loss after tax of $0.9m (HY-2021: loss $ 0.4m).

In response to the depressed sales and excessive maize availability and to avoid a price war that would negatively impact on the potential margins to be earned from the 18,942 tons of maize in stock, we have taken the following steps:

·      Approached smaller wholesalers, offering them volume-based deals, subject to them increasing their average monthly sales to an agreed target over the next 6 months.

·      Implementing a DECA meal marketing and advertising campaign from December to March in the cities of Beira, Tete and Chimoio. This will involve social media, radio adverts, music, jingles, competitions, events and promotions.

·      Improving the distribution network for our meal, by selling and delivering directly to the small to medium retailers.

·      Improving out potential gross margins, by driving the 1kg DECA meal package sales along with the larger bags.

·      Protecting our maize to guarantee that we are ready to supply meal to the market in the first half of 2022 (before harvest and a time when there is a shortage of maize in the market).

Beef division

The Beef division suffered a loss in business between March and April 2021, following the suspension of all oil and gas related activities by Total Energy and Exon, response to the terrorist attacks in the north. The division has focussed on identifying new customers, improving operating margins and cutting overheads. With a new feedlot and sales teams, these initiatives are delivering improvements.

The revised approach has improved our Gross Margin to 25% (HY-2021: 9.62%) resulting from higher average selling price of MZN 254 per kg (HY-2021: MZN 240) and increased average dress out rate of 52%. The latter is a result of larger carcasses due to the improved feed lot performance, better cattle buying practises and training of small farmers (average quarter weight is now 50kg vs the historical average weight of 40kg). This in turn has allowed the business to improve quality and increase unit prices.

Company overheads have been reducing at an average of $0.1m per month, as we offered voluntary retrenchments and agreed not to replace staff that either resigned or whose contract came to an end. We still have the cost of the 3 farms that remain in care and maintenance and which are up for sale, but these have been slow to move, given the economic and travel challenges experienced with the COVID-19 pandemic.

Despite these challenges, the team have begun to recover those lost sales (more carcass sales in Maputo and Pemba) and our revenue for the 6 months is now $1.5m (HY-2021: $1.5m). However EBITDA improved to a loss of $0.08m (HY-2021:  loss $0.1m). Finance costs decreased to $29,000 (HY-2021: $74,000) and the loss after tax decreased to $0.3m (HY-2021: loss $0.4 m).

There has been a monthly improvement in sales and revenue, and to increase the profitability of the beef division, the management team has begun to implement the following strategies:

·      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 and indirectly driving up the value of the overall carcasses

·      Diversify into the supply of goat meat. The first goat slaughter of 17 animals was received well. We sold most of it in our outlet in Chimoio and as carcasses in Beira. This initiative offers a high Gross Margin of 37% and we have been increasing the monthly slaughters, with a goal of achieving 300 per month.

·      Diversifying the farm operations to include the production/purchasing of sugar beans, which will be packed into 500g and 1kg packs and sold along side the meal. We currently have 100 tons in stock and expect to start sales in January 2022.

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

Snax Division

The Snax division has now been operating for 6 months and we have a better understanding of the market dynamics. It has become clear that our main consumers are school children, who have until recently, been studying from home, following a national lock down response to COVID-19. These same consumers and their parents have not been exposed to the products and as such have very limited knowledge of the quality, range or pricing.  The sales have been lower than expected, but the Gross Margin % is currently at 31% and the overall profits are within the target for this period.

The focus now is to get the brand known in the market and to turn it into a household name, using the following activations from December 2021:

·      Introduce a catchy Snax jingle that will be played on the radio

·      Establish an Instagram, Facebook and web page running, engaging the younger consumers and getting them involved

·      Drive competitions and events, to allow consumers the chance to taste the product

·      Introduce new flavours and products, in line with client preferences  

Group Results

Group revenue for the half-year ended 30 September 2021 decreased by 11% to $ 4.9m (H1-2021: $5.5m). As a result of cost management in all divisions, and despite the difficulties in the Beef division, the Group's gross profit is double that of the same period last year (HY-2022: $1.3m vs HY-2021: $0.6m), while the trading operations showed an increase in the operating loss before interest to $0.51m (HY-2021: loss $0.45m). The containment of the direct cost of production due to aggressive cost monitoring and control measures implemented by the management team during the period. Operating expenses increased to $1.9m (HY-2021: $1.2m due to revaluation of land and building which increased depreciation, appointment of senior management and restructuring of farms which increased salaries and maize bush buying strategy which increased other operating expenses by $0.2m, $0.2m and $0.3 million respectively. Finance costs increased by 40% to $0.7 million (H1-2021: $0.5 million).  The Group loss after tax increased to $1.2 million (H1-2021: loss $0.997 million). During the period, inventories have increased by $1.6m to $4.3m). Net debt at 30 September 2021 was $10.7m (31 March 2021: $6.2m). Increase in net debt resulted from procurement of grain stock using the overdraft facility, which will provide sufficient grain to mill in the second half of the year.

COVID-19 and security in the northern region

COVID-19 continues to have a significant negative impact in Mozambique, both economically and socially. The risk of the virus escalated in June/July when many of the team tested positive. Fortunately, many staff already had their first round of vaccinations, but this had a negative impact the Group's operation. Currently the incidence of COVID-19 is very low but appears to be heading towards a 4^th wave. The recent closure to travel to and from Mozambique by the UK and the EU due to the new Omicron variant has had a significant impact on the tourism sector, which has historically been an important sector, contributing to sales, especially during the festive season.

The security situation in the Northern Province of Cabo Delgado appears to be under control, as troops from Rwanda, South Africa and Botswana continue to assist in removing the insurgents from the major towns and villages. Total and Exxon have indicated that they will consider resuming activities in Q2-2022 if the security situation has improved and stabilized.

Outlook for H2-2022

The business is entering H2-2022 with over 18,000 tons of grain in silo and the prospect of a higher demand for meal and beef in Q4 of FY-2022. We believe that the initiatives of marketing, the new products launches and the reopening of the Oil & Gas sector in the north will contribute towards improving our overall performance in the second half of the financial year. Additionally, for the FY-23 period, we are working on a financing program to rebuild the beef stocks and to improve our overall distribution of products.

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