24 May 2013

Zimbabwe: Still Rolling Out the Barrel

Delta Corporation Limited, the biggest counter on the Zimbabwe Stock Exchange (ZSE) by capitalisation, recently published results for the 12 months ended March 31 2013.

Results from the brewer are always much anticipated by the investment community and as such the results presentation is always well-attended. This is because Delta accounts for 30% of the total market capitalisation on the ZSE and is the favourite stock among offshore investors.

The counter is usually the first to kick-start the March year-end reporting season. This year the market was curious to see if the numbers would sustain the share price, which has firmed by 35% since the beginning of the year.

In line with what has come to be the norm, the beverages giant released another spectacular set of results, with earnings attributable to shareholders going up 36% to US$102,5 million.

Sales volumes for the year were flat at 6,9 million hectolitres (hl) as the improvements of 4%, 9% and 42% recorded in lagers, soft drinks and maheu were offset by an 8% drop in sorghum beer volumes. Maheu volumes had a huge jump as they were coming off a low base.

Volumes of opaque beer were negatively affected by the poor agricultural season as the beer is usually consumed in the rural communities. Growth in lager volumes was slower than anticipated as the increase in excise duty to 45% from 40% saw the fourth quarter take-off responding slowly to the disruption in retail pricing.

Regardless of volumes remaining flat, revenues improved by 14% to US$631,3 million, benefitting from the company's strategy of pushing premium brands. Among lagers, the green bottles are regarded as premium beers and sell at a higher price per volume compared to those in brown bottles. Their contribution increased to 18,4% of total volumes from 15,6% in the prior year.

As for soft drinks, the Pet bottles and canned drinks also sell at a higher price per volume.

As a result, earnings before interest and tax (Ebit) margins firmed to 24,7% from 20,5% in the previous year. Ebit improved by 37% to US$135 million, benefiting from improved margins. Delta continues to benefit from improved efficiencies arising from the refurbishment of plant and machinery.

Over the year, the company channelled US$83,6 million towards capital expenditure and a total of US$287,5 million has been invested since the adoption of multiple currencies.

It is beyond doubt that the slowdown being experienced in the broader economy is impacting negatively on performance of corporates in all sectors. From the results that have been filtering onto the market, volumes are either dropping or remaining stagnant. The same trend was evident in the numbers from Delta. Management, however, should be commended for being able to grow profits by 36% in such a difficult environment.

Growing volumes going forward will become harder to sustain, which management admitted. The impressive growth rates registered since 2009 are attributable to the recovery in the economy after a decade of contraction as evidenced by the strong growth registered in Gross Domestic Product (GDP).

Admittedly, beer consumption per capita levels in Zimbabwe are low when compared to other countries in the region. However, these can only go up if disposable incomes improve, which might not be possible in the short-term as this depends heavily on how well companies are performing.

Investors might, however, enjoy increased dividends. Investment towards capital expenditure is likely to decline going forward and this might translate into more cash for distribution among the shareholders.

The improvement in dividend cover from 3x in the previous year to 2,5x in the current year might be a signal that the company is now prepared to release more cash to investors.

Delta has again shown strong ability to generate cash. Long-term borrowings were unchanged at US$60 million while short-term debt declined to US$18,6 million, leading to a 78% drop in finance costs. The debt to equity ratio also improved to 23% compared to 30% in the prior year.

Delta currently has an installed capacity of 9,8 million hl and in the past year volumes stood at 6,9 million hl. This therefore implies that the company still has room to push more volumes with the current capacity.

However, it would appear that management's thrust will be on improving margins through pushing high-value products onto the market. This strategy nonetheless has its drawback in that it can contaminate the brand equity that premium brands presently enjoy.

Again, relative valuation metrics for Delta remain attractive. The counter is presently trading at a historical PE of 17x which compares favourably to peers in the region. These range between 20x to 30x.

Delta is one company that is well-managed, which offshore investors love and has the potential to rerate positively if the economy starts to tick up again.

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