Expect more M&A activity among consumer names

BATANAI MATSIKA

According to the International Monetary Fund (IMF), economic recovery in Zimbabwe is underway and is expected to strengthen in 2022 despite some constraints at the local, regional and global level.

In fact, Gross Domestic Product (GDP) is projected to grow by 3.9% in 2021, signalling a rebound from the recession in 2019 and 2020.

While the second and third waves of the pandemic and uncertainties about the likely timing for a broad based roll out of the vaccine in Zimbabwe and its key trading partners will suppress external demand, the key agricultural sector has provided a sound footing for a rebound.

In fact, the agricultural sector is expected to spearhead Zimbabwe’s recovery given the favourable rainfall in 2020.

Already, there has been strong recovery signs from some of the listed consumer-facing companies such as Innscor, Delta Corporation, Dairibord Holdings and Meikles Limited from a volumes-growth perspective. That said, an important assessment would be on what would be the major growth drivers for these companies in 2022 and beyond.

The question on growth drivers is best answered by studying the life cycles of some of the product offerings.

A very important element highlighted by the product life cycle is the concept of changes in market share for the competitors in any industry.

Most consumer goods tend to follow a well-established life cycle in that the trends in sales values are rationally explained by reference to the current stage of development of the product.

In addition, by breaking down the life cycle into several stages, it does become possible to assess what the long-term future trend in sales levels might be.

In the beverages sector for example (Pepsi and Coca-cola), the fast growth in demand attracts late entrants into the market.

The new entrants will increase the total capacity for the product, but the existing players are also trying to increase their shares of this growing market.

As illustrated in the infograph, this can cause a significant increase in total industry capacity, even though the demand for the product is stable.

As a result, many businesses in the industry will have spare new capacity, which can cause fierce price competition until a more stable equilibrium position is established.

The bottom line is that the “happy state of affairs” eventually ends when demand for the product starts to die away.

This can be caused by saturation of the market or by the launch of a better replacement product which rapidly attracts away most of the current mature product’s users.

When this happens, some of the strategies that could be pursued by corporates include (i) exploring export markets or (ii) acquisitions to consolidate market share.

Taking Delta Corporation as an example, we note that alcoholic beverages have a unique advantage in that they are habit-forming and consumers always tend to up or down-trade to suit different dynamics.

However, the sparkling beverages business is different and Delta Corporation has gone ahead and acquired Mutare Bottlers to consolidate its foothold in the space. In terms of opaque beer, Delta has embarked on a regional growth strategy by acquiring National Breweries in Zambia and United National Breweries Proprietary Limited in South Africa.

Similarly, Innscor Africa has also been consolidating its footing in food production through investments in businesses such as Profeeds, Probrands, Probottlers and Prodairy. Of course, the investment thesis in Innscor lies in the integrated business model (highly interdependent businesses with synergistic advantages).

Elsewhere, Dendairy and Dairibord are still in merger and acquisition negotiations whilst Tanganda Holdings (Meikles Limited) and Ariston Holdings have also issued cautionary statements. It appears that we should expect more transactional activity amongst the consumer names on the Zimbabwe Stock Exchange.

All in all, we remain overweight on the sector and recommend investors take long-term positions in Delta Corporation, Innscor Africa and Dairibord Holdings.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or               batanai@morganzim.com / batanai@piggybankadvisor.com