Delta to focus on revenue generation and cost reduction as volumes decline in H1 2016
HARARE – Delta’s revenue for the half year to September 2015 declined 8% to US$269 mln reflecting changes in the portfolio mix, decrease in volumes and price reductions. Group CEO Pearson Govero told the analyst briefing that benefits of these initiatives to stimulate volume should have an impact in the medium term.
The trading environment remained difficult. “We are feeling the pressures of the trading environment were consumers are stressed with few people on regular income following accelerated job losses from the court ruling”, he said. In addition tightening liquidity has also seen traders destocking due to cashflow constraints.
“The strong dollar has increased imports from the region which compete against the groups products”, Govero said. Escalation in power cuts have also disrupted production and restricted cold availability.
Overall volumes were down 10% to 3.2mln HL as all beverage categories experienced a decline in volumes. Sparkling beverages were the worst hit declining 15% to 605k HL .Sorghum beer was down 10% to 1.79mln HL, Clear beer declined 2% to 682k HL. Alternative beverages were down 4% to 89k HL.
In terms of volume contribution, Sorghum beer contributed 57%( 58% H1 2015), Lagers 22%(19% H1 2015), Sparkling beverages 19%(20% H1 2015), Alternative beverages 2%(3% H1 2015). In the beer category, Sorghum beer contributed 72% to beer volumes (75% H1 2015) whilst Lagers contributed 28%(25% H1 2015).
Group FD Matts Valela told the briefing that operating profit declined 20% to US$43mln compared with the other half as a result of loss of financial leverage resulting from the volume and revenue declines. Sorghum beer contributed the largest chunk of 42% to operating profit(44% H1 2015) followed by Lagers with 30%(22% H1 2015).Consequently margins declined to 18.21% from 21.47% in H1 2015.EBITDA decreased by 16% compared to the 20% decline in operating profit ,the result of fixed costs containment. Higher positive net cash position resulted in flat finance income despite weakening interest rates. Income from associates increased by 37%, reflecting the addition of Nampak Zimbabwe and profitability of both Afdis and Schweppes.
“Afdis has seen growth in ciders and brown spirits but there are still competitive pressures from grey imports and white spirits”, Govero said. At Schweppes Zimbabwe volumes and revenue are under pressure due to competition but financial performance is improving. Beitbridge Juice had resumed supplies of juice concentrates to bottlers whilst a new water brand had been launched at competitive prices. Nampak Zimbabwe was still to report full year results.
Attributable income for the group declined 19% to US$35.7mln translating to an EPS of 2.89 cents. Dividend declared was up 4% to US1.40 cents.
Cash generated from operations was in line with prior half with an increase in debtors offsetting reduction in inventories. CAPEX amounted to US$13.7 mln. The balance sheet stood at US$675 mln.
Turning to operations, Lager beer volume performance was enhanced by price adjustments effected earlier in the year. The segment experienced a 9% drop in gross sales to US$126 mln. Market share was constant at 98%. The second quarter recorded a 5% volume increase driven by value brand Eagle Lager. “ A lot of consumers are now drinking Eagle Lager, not necessarily out of choice but because of the power of spending and the fact that Eagle is cheapest clear beer”, Gowero said. Post half year further price adjustments were made with particular focus on core lager which remains in decline. In terms of the mix Premium lager contributed 26%(26% H1:2015), Mainstream lager 60%(68% H1:2015),Economy lager 14%(6% H1:2015). Eagle Lager has been sustaining volumes as Mainstream lager has remained in decline. Premium lager has been holding and the group has expanded into new beer styles for the upmarket segment.
Sparkling and alternative beverages volumes were down 15% on prior year. This was partly due to stiff competition from lower priced imported alternative offerings which Govero said were being sold below the cost they incur to produce a 2 litre PET. As a result market share had declined to 93% from 96% which Govero attributed to the switch to value brands which are affordable. Govero also added that competition was largely in flavours and one way packs. A key driver of soft drinks consumption is discretionary income which the CE said had reduced. Also there is a huge proliferation of alternative beverages in addition to major raw materials being expensive. “Inputs in sparkling beverages are controlled which puts margins under pressure”, he said. Segment gross sales was down 18% to US$82mln.In terms of the mix, RGB were at 55%(59% H1:2015) whilst Convenient Packs were at 45%(41% H1:2015).
Sorghum beer recorded a volume decline of 12%.There is now a marked shift to Chibuku super which benefitted from the additional production capacity at Fairbridge Brewery. The change in mix in favour of Chibuku super saw gross sales increasing by 1% to US$95mln. “We have collected the spend but not made the volume”, Valela noted in reference to the 1% increase in gross sales. Operating margins were affected by the high cost of maize stocks carried forward from last season. There was also extended logistics due to freighting of product from one site as the Fairbridge plant was being upgraded. Overall volumes were affected by poor performance in agriculture particularly in tobacco were prices were depressed. “This resulted in mass reduction of consumption particularly in rural areas where sorghum beer is the choice,” he said. Market share remained flat at 86%
Chibuku super contributed 49% to sorghum beer volumes versus 24% in H1 2015.Post half year to October 2015, the contribution has increased to 67%.Growth in Chibuku super would have been huge had it not been for disruptions to supply and limited capacity. To this end, the group has lined up expansion projects for the Chibuku Super and are targeting to set up three factories by August next year. Gowero said that at least two plants will be ready by mid-year next year and the three factories will be constructed in Masvingo, Midlands and Manicaland.
“It is our priority in the next five months is to accelerate additional investments into Chibuku Super and we have identified three areas and we are going to do that simultaneously,” he said.
Going forward, in addition to increasing investments in Chibuku super, affordability and competitiveness will also be a priority hence the reduction in beer prices in October 2015.Phased roll backs on soft drinks is still work in progress. Cost reduction will also be a focus area and the group is engaging value chain partners to correct input costs as well as working with employees on cost reduction initiatives. “While revenues go south, every other costs and efficiencies have to improve and go down in order to reflect in margins,” he said. Govero noted that the strong dollar was encouraging imports and the group will continue to react to market pressure in order to deliver solid performance.
Our Thoughts on Delta Corp
Delta Corporation is facing the same headwinds as other companies in Zimbabwe, but its biggest advantage is its scale which we believe gives it some sort of buffer against the tough operating environment. All key ratios are above average and the quality of earnings are showing signs of an improvement compared to the same period last year. With the stock sliding over the last few months the company needs to improve on the equity value of the business through dropping its debt levels, capital expenditures and increasing cash.
While business growth looks somewhat flat over the next two years, the company has an okay rating on profitability and financial health. And with a P/E ratio at 11, the company sits with a more significant valuation than most of its peers. The average global beverage company has a P/E multiple of 21, making Delta a very interesting investment case worth the gamble.
The company has better growth prospects and we strongly see some upside from current share price levels. The company has a very solid dividend of 1.40 cents per share up 4% on prior year and we expect the dividend yield to stay stable in the forecast period as the company continues to work on improving its margins. Additionally, we remain bullish on the company over a 3-5 year window given its potential to churn out cash. With a salivating cash pile of around $130 million Delta is not by any means limited in what it can achieve if it puts that cash to good use. The company is not that leveraged and its net cash position is one of the best on the ZSE. We however would like to see an improvement in the debtor numbers and the inventory turns.
On the negative, one of the most significant issues for Delta is its continued expansion into the sorghum beer space which we still believe is not justified a few years down the line. It is a fact that the average Zimbabwean consumers are now price sensitive and anything priced at the low end sells but what will happen when it turns. We also have another bone of contention with the company over its continued acquisition of vehicles for the logistics division. We believe a more solid solution is outsourcing logistics to third parties as a way of cutting costs. On one hand the CE is complaining how vehicle purchases are expensive for the group in terms of capital outlay, salaries, and amortisation. Justifying these two contradictions in one briefing is weird.
Volumes and margins dropped last year, but we attribute this to declining aggregate demand and competitive pressures from mainly imports. However were the group to sort itself out, we should expect some growth in the level of profitability going forward hence we are optimistic about the company’s future financial performance. The stock will hold up and provides some upside from current levels. It might not be significant in the short term, but over the long haul there is a real growth story.
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