Still no growth story as Delta reports 13% drop in F16 earnings


Chief Executive Pearson Gowero and Finance Director Matts Valela

DELTA Corporation reported a ­­­­­­­­­­­­­­­­­12.9% drop in net profit in the year to March after the continued decline in all its beverage categories mainly due to pressures of the subdued trading environment. Chief Executive Pearson Gowero told analysts last Wednesday that it was increasingly getting difficult to capture additional value as consumers continue to search for affordability.  “Volume and value have been moving in the same (downward) direction but value has been moving down much faster.

In the period, lager beer volumes declined 8% to 1.3 mln hectolitres, soft drinks were down 6% to 3.58 mln hectolitres and sorghum beer dropped 3% at 1.38 mln hectolitres and alternative beverages were 2% lower at 190 000 hectolitres. In total volumes were down 5% while malt tonnage was up 11%. Gowero said a number of factors weighed down performance but chief among them low disposable incomes (which could also be impacted by the cash shortages), liquidity challenges affecting customer cash cycles and the strong US dollar which had seen an increase in imports from regional markets as local products are more expensive.

Quarterly, there had been improvements in gross sales and volume from the $150 mln in April-June to the July-Sept period ($159 mln) increasing to $173 mln in Oct-Dec mainly because of the heat wave but only to go down again in Jan – March at $143 mln which, although the volumes were higher than 1Q16, the change in the mix and pricing matrix had weighed on performance. Lagers made up 20% of revenue, same as last year, sorghum 56% from 55%, sparking beverages at 21% from 22% and Maheu flat at 3%.

Total revenue was down 7% to $538.2 mln (turnover – $633mln) as the group lost value to affordability due to the changes in the mix on the lagers while there were also price reductions in the period. FD Matts Valela said the loss of revenue in lagers and soft drinks was much higher due to the mix on the former and the switch to value packs on the latter. EBIT was down 14% to $96.1 mln with the decline more pronounced than it was at the topline. “Issues to do with the value chain management are under focus to try and improve on the margin. Its responding but not fast enough,” said Valela. As a result, the operating margin was down to 20% from 22.08%. EBITDA is down 10% to $129 mln with cost of sales still an issue. Net profit was down 12.9% to $80.1 mln leading to EPS of 6.49c

The group declared a dividend of 2.35c (interim div: 1.4c) while there was an additional special dividend of 0.95c. “We have been holding back on the dividends all along due to the various investments in capacity. But we have slowed down and we have got some cash so we found it appropriate to declare a special dividend,” said Valela. This brings the increase in the dividend to 29% from last year.

The trend on the lagers continues to go down from $352 mln (gross sales) in F13 to $235 mln (a decline of 15% on last year). “Value on the lagers is being lost to cheaper alternatives. We have lost $100 mln since F12 on the topline. Obviously in line with the economy the mix is towards cheaper alternative. There are changes to the way people are enjoying alcohol,” said Gowero. The mainstream lagers on the mix had dropped 59% from 66% last year in terms of contribution, premiums had continued to hold at 27% from 26% and economy had increased to 14% from 8%.

Gowero said the lagers category had been affected by the increase in parallel imports after the weakening of regional currencies. “Although our market share is growing, the reality is that like products are getting in cheaply.” He said there had been growth in value brands while competition from other forms of alcohol, which were cheaper had also increased. The group had however leveraged on the association with SABMiller and introduced a number of new products.

The sparkling beverages mix remained skewed towards returnable glass at 58% (F15:60%) convenience packs at 42% (F15: 40). Gross sales were down 10% to $183 mln. “The value erosion in the category was less dramatic when compared to lager.” The growth in value packs and 1L returnable glass pushed volume away from higher margin packs but the category had also been affected by parallel imports from Botswana and Zambia. The category also experienced higher demand in December/January driven by the heat wave. Alternative beverages gross sales were down 17% to $14 mln.

Sorghum beer gross sales had increased to $193 mln from $176 mln last year in spite of the volume dip. Chibuku Super now dominated the mix at 56% from 29% last year and standard Chibuku was on 44%. This follows investments in Super capacity at Fairbridge Bulawayo. There was a recovery in standard Chibuku volume following the price review. “Sorghum beer is a happy story at the moment. The value being brought is also growing.” Chibuku products offer an accessible and affordable entry into commercial alcohol. In terms of volume contribution by beer category sorghum was on 73% and lagers on 27%.

Gowero said the group would increase Chibuku Super capacity by commissioning new plants in Masvingo and Kwekwe at a cost of $30 mln. The group would also reduce the contribution of the standard Chibuku going forward as

On the associates, Afdis had seen softening volumes, at Schweppes volumes were holding through under pressure and at Nampak there had been a steady increase in earnings. Valela also said the group had been buying Afdis shares to a direct holding of 8% taking the total to 38%.

Our Thoughts on Delta Corp

The biggest drawback of these results is that there is no growth story and management is alive to that with Gowero saying there are “no opportunities to deploy capital.” Competition is also intensifying across the group’s product offering and this can only mean reduced market share and revenue for the group. Down trading towards cheaper offerings is also putting an unwanted squeeze on profit margins which are now falling at a much faster rate than net sales. Operating margins came off by 9,42% while net sales came down by 4.58%. While the dividend payout of 4,70 cents (including the special dividend) or 3,75 cents can be an attraction we are of the view that the yield is not sustainable. The current dividend yield which is at an all-time high of 5.13% (excluding special dividend) and at 6.43% including the special dividend is very attractive but we see this retreating back to the historical average of 3%.

At half year we said Delta needed “to improve on the equity value of the business through dropping its debt levels, capital expenditures and increasing cash.” We are happy to note that the business has made effort in addressing some of these issues with debt being reduced by $5 million although we believe more could have been done towards this instead of paying the special dividend. Capital expenditure is however still high at $44.3 million up from $41.5 million amid plans to add two more Chibuku Super plants. Last year we had our reservations on the increased capex on Chibuku Super but these results seem to have vindicated management’s decision as the contribution of Chibuku Super to Sorghum Beer has increased from 29% to 56% resulting in the value of Chibuku increasing to $193 million from $176 million prior year. While we are still sceptical about the future use of these plants if there is an economic turnaround it is our hope that the high margin product will become the entry point for commercial alcohol consumption at the expense of traditional Chibuku. Management seem to be thinking along those lines after announcing plans to reduce the contribution of traditional Chibuku further down.

We also reiterate what we said at half year that while business growth looks somewhat flat over the next two years, the company has an okay rating on profitability and financial health. Cash generation has been improved from prior year with cash flow from operating activities increasing by 4.38% to $137.4 million. And with a P/E ratio at 11.25x, 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.

While rising competition partly accounts for the erosion in Delta’s profit margin, we observe that the impact of falling disposable incomes is dominant. Given the currency in use (US$), there is a mismatch in cost and revenue and this has heightened the vulnerability of profit margins. Easing input costs, and most importantly continued restructuring of all cost lines is a major catalyst to positive margin outlook for Delta going forward. We thus expect the stock to hold up and provide some upside from current levels. FinX

Consolidated Income Statement
Details31-Mar-1631-Mar-15% Change
Operating Income96,072,000111,136,000-13.55%
Net Finance Expense5,895,0007,362,000-19.93%
Profit before tax105,911,000121,763,000-13.02%
Profit for the year80,089,00091,954,000-12.90%
Earnings per share6.497.44-12.77%


Consolidated Statement of Financial Position
Details31-Mar-1631-Mar-15     % Change
Total Equity487,899,000456,645,0006.84%
Total Assets696,238,000663,665,0004.91%
Current Assets296,130,000277,097,0006.87%
Current Liabilities94,506,00095,240,000-0.77%
Current Ratio3.132.91
Statement of Cash Flows
Details31-Mar-1631-Mar-15    % Change
Cash Flow from Operating Activities137,463,000131,690,0004.38%
Cash Flow from Investing Activities-49,426,000-41,908,00017.94%
Cash Flow from Financing Activities-55,632,000-42,660,00030.41%
Cash and cash equivalents at the end of the period166,016,000133,611,00024.25%