Batanai Matsika
Delta Corporation released a trading update for the third quarter and nine months to December 2018. According to the statement, demand was buoyant driven by consumer perception of favourable pricing as the business maintained stable prices since 2013. However, the acute shortage of foreign currency led to disruptions to business operations particularly the soft drinks business. Below are the key highlights of the trading update;
Lager beer volumes grew by 27% over prior year for the quarter and increased 43% for the nine months. The business endeavoured to meet the high consumer demand in spite of the challenges in accessing some imported raw materials;
- The Sorghum beer volume in Zimbabwe grew by 15% above prior year for the quarter and 6% for the nine months. There were supply gaps due to frictional shortages of packaging materials and extended plant breakdowns mostly occasioned by lack of foreign currency for spares and contractual services. Chibuku Super contributed 85% of the volume;
- Natbrew Plc recorded a volume growth of 4% for the quarter and 9% for the nine months. There are positive volume trends following the relaunch of Chibuku Super in the 1.25 litre pack;
- The Sparkling beverages volume declined by 66% compared to prior year for the quarter and decreased by 26% for the nine months. There were extended production stoppages arising from limited access to foreign currency required for importing key raw materials and the failure to clear arrear payments to The Coca Cola Company (TCCC);
- Delta has entered into binding agreements to acquire the 100% stake currently held by Diageo Plc in United National Breweries Proprietary Limited (UNB). UNB is the leading brewer of traditional beer and owns the Chibuku brand in South Africa. The transaction is expected to close in H1 2019 and is subject to regulatory approvals in Zimbabwe and South Africa;
- Shareholders are reminded that Delta is trading under a cautionary issued with respect to the notice received from TCCC advising of an intention to terminate the Bottler’s Agreements with the Group entities (Notified Intention). The discussions amongst the parties are ongoing;
- Overall, group revenues increased by 5% for the quarter and 24% (19% organic growth) for the nine months reflecting the growth in the beer businesses which was weighed down by depressed outturn in soft drinks.
While the business remains profitable and continues to generate positive cash flows, there has been disruptions to operations arising from limited access to foreign currency. The sparkling beverages business has been hard hit (volumes down 26% for the nine months) given the need to import concentrates. We note that Delta lost out on the expected volumes peak during the festive season (Q3 2019). Further, Pepsi has “stolen market share” given that it has been aggressive in terms of market penetration. That said, Delta recently backtracked on a strict USD pricing model after engagements with the Reserve Bank of Zimbabwe (RBZ) but has managed to push through a 25% price increase. We think this should be able to offset the slump in volumes within the sparking beverages business. Using a conservative revenue growth estimate of 25%, we estimate revenues of USD715m for 2019. Applying a PAT Margin of 15.5% (F18), we anticipate that earnings will be around USD110m, implying a demanding Fwd PER of 32.7x. This is not cheap but the investment thesis remains intact: a well-managed market leader with a diversified product portfolio which cuts across all income groups. As a bell-weather stock which provides a solid route to gaining direct exposure to the country’s consumer story, we maintain a HOLD recommendation on the counter.
Author – Batanai Matsika
Head of Research – Akribos Research Services
+263 78 358 4745
batanai@akriboscapital.com
