Time to take a position in Dairibord

Batanai Matsika

One common way to make money on the stock market would be to bet on a roaring rebound in the local economy as aggregate demand improves and pushes up top and bottom-line figures of listed companies.

But here is a sage piece of investment advice you might not usually find in any tip-sheet, newsletter or weekly column on capital markets.

Here it is. Buy stocks based on some positive potential transactional or M&A activity going on and always follow where the “big and smart money” is going.

Good case studies on the Zimbabwe Stock Exchange (ZSE) include the likes of Meikles Limited, ZB Holdings and First Mutual Holdings.

Of course, share prices of these counters have already rallied but here is the next alpha bus you will not want to miss; Dairibord Holdings.

The dairy processor has issued several cautionary announcements indicating that it is in merger and acquisition negotiations with Dendairy Private Limited.

The negotiations with Dendairy were first announced in July 2020. Dendairy is a producer of dairy products and fruit juices in Zimbabwe and it is envisaged that a successful conclusion of the discussions could lead to improved raw milk production for Dairibord Holdings while also boosting foreign currency earnings. 

The transaction will also consolidate Dairibord Holding’s dominance in the local dairy market. On the Zimbabwe Stock Exchange (ZSE), the share price has responded but we believe there is still room for further upside.

When evaluating the Dairibord opportunity, the following points should be considered;

• The Zimbabwean dairy industry is failing to meet local demand. There is a deficit of c60 million litres of milk per annum.

This is because the local industry has dropped production numbers consistently since the year 2000 while the national demand has remained high (c120 million litres).

The country has c19,000 milking cows currently against a peak of 119,220 in the early 1990s.

These constraints are the reason why the combined entity has a viable opportunity to increase production and introduce new products at a minimal risk level;

• The Zimbabwe per capita milk consumption is very low.

Around 2000, milk consumption per capita for Zimbabwe was 28.6 litres per person. This has dropped to 8 litres due to economic constraints.

Population growth of c2.0% p.a is also expected to boost demand. In our view, this presents a long term growth opportunity for the dairy processor;

• Nutritional literacy of consumers is growing and this has led to increased demand for health foods such as fruit and milk blends. Dairibord and Dendairy also focus on other related food and beverage categories that serve these emerging nutritional literate consumers;

• Synergies and economies of scale to reduce production costs. We highlight that there is indeed a need for more cost effective methods of production bearing in mind the high cost of stock feed and vaccines.

The combined entity should be able to leverage off improved capacity and technology sharing;

• The local industrial policy drive is leaned towards import substitution.

It is a fact that local products have always been under pressure from cheap imports. However, concerns are that if the imports of milk are to be banned, this will not arrest the deficit of the product but will only result in countrywide shortages.

This raises the need for local players to rapidly build capacity and ensure that the gap is closed.

In conclusion, Dairibord Holding’s FY2020 results show a 5.5% increase in revenue despite a fall in sales volumes.

Covid-19 restrictions disrupted distribution channels and had a negative impact on volumes.

However, the ongoing national vaccination programs are set to reduce the impact of Covid-19 related restrictions.

The group has also been exposed to high operating risk associated with limited supply of stock feed for dairy cows.

However, the good harvest reported this season should provide a cushion for the sector at large.

We think there is scope for further share price upliftment once the merger and acquisition talks are concluded.

Take a position in 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

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