Delta Corporation: Is the ‘sandstorm’ back?


Delta chief executive officer Pearson Gowero and Finance director Matts Valela

ZIMBABWE’s biggest beverages producer, Delta Corporation, could see its full year revenue to March 31, 2017 tumble by nine percent to US$489,8 million, from the US$ US$538 million reported for the full year ended March 2016, a leading advisory said last week, blaming a volatile economy ravaged by liquidity shortages.
The Zimbabwe Stock Exchange listed conglomerate had itself given a gloomy view of the outlook, noting that headwinds, including an avalanche of imports, diminishing buying power and job losses would undermine operations.
These factors had already seen revenue dropping to US$538 million in 2016, from US$576 million during the prior comparative period in 2015.
Researchers at MMC Capital forecast the slowdown to continue into the current reporting period, and affecting earnings per share.
“We project a negative nine percent decline in revenue to US$489,8 million for the FY17 (full year 2017) on the back intense competition and transactional difficulties due to cash shortages in a shrinking economic environment,” MMC said in a note to investors.
“This will translate into an earnings per share of 5,95 cents per share. Our price to earnings valuation metric…points to a fair value price of 101 cents, an upside potential of 38 percent relative to the current price of 73 cents,” MMC said.
The researchers however maintained a buy recommendation on the Delta stock, a sign of confidence in the business.
Earnings per share dropped by 13 percent to US 6, 49 cents during the review period, from US 7,44 cents the previous year.
MMC said Delta’s operational efficiencies had come under pressure, as reflected by the deteriorating margins, with earnings before interest, tax, depreciation and amortisation dropping by 10 percent to US$129 million.
Last week, Delta said annual profits during the review period dropped by 12 percent to US$80 million, from US$92,8 million the previous year, after turnover slipped by seven percent amid spending pressures.
Operating income retreated by 14 percent to US$96, 1 million, from US$111,1 million the previous year, as volumes tracked weak consumer demand and a general economic slowdown.
The group said lager volumes declined by eight percent, while sparkling beverages and sorghum beer also slowed.
“The business has remained very cash positive, generating a total of US$137 million from operations which is higher than the group’s net profit of US$80 million, signalling high quality of reported earnings,” said MMC, noting that Delta had started benefiting from a restructuring in its distribution chain.
Delta said last week it would commission two plants outside Harare in the final quarter of the year, in what could be a show of confidence in a country battling to overcome liquidity shortages and a shrinking market.
It said it would be commissioning Chibuku Super plants at a cost of US$30 million in Kwekwe and Masvingo, even as the outlook remains gloomy with a “difficult trading environment ahead”.
“Chibuku Super plants in Kwekwe and Masvingo are scheduled for commissioning by September 2016 at a cost of US$30 million ,” said Delta chairman, Canaan Dube, indicating, however, that the trading environment remained volatile.
“Top line revenue was weak at seven percent below last year underpinned by economic headwinds. The El Nino induced drought, poor cash and liquidity availability, delayed remuneration and continued retrenchments all worked to constrain consumer demand. There is some infiltration of products from adjacent markets due to the stronger US dollar,” said Dube.
The beverages producer is to follow up price cuts announced during the review period by “deploying complementary beverage portfolio to defend our share of consumer spend”.
Analyst, Kingstone Khanyile, said Delta may have no option after planning for the plants during boom times in the post dollarisation era in 2009 when the economy posted double digit growth for two years.
After 2012, the economy began to experience a slowdown in growth, with deflation crippling consumer demand.
Now that the projects were already underway and the economic crisis had deepened, it could be difficult to abandon them midway, according Khanyile, the chief executive officer of Mtilikwe Financial Services.
“These investments may have been decided way before harsh policies were announced,” he said.
“We took off well at dollarisation in 2009 and Delta recovered market share. Government was consistent with policies and that stability gave investors the confidence to raise capital for expansion. But that has changed, yet some projects cannot be stopped,” he said.
Indeed after dollarisation, Delta had spectacularly recovered, claiming back its market share which had been lost to imports during the hypinflationary crisis.
Huge investment from SABMiller, the key shareholder, supported renovations and plant overhauls.
New products were introduced, and those that had been stopped were brought back.
A year after the country adopted a hard currency regime and ditched the domestic currency to deal with hyperinflation, Delta reported that lagers and sparkling beverages consumption had surged, pushing total beverages volumes to levels not seen since 2005.
Delta took advantage of the strategic partnership with Coca-Cola and SABMiller for technical and other expertise, overcoming all manner of competition on the domestic market.

Former Delta CEO Joe Mutizwa

Former Delta CEO Joe Mutizwa

As a vote of confidence on the resurgent Zimbabwean business, SABMiller said on October 18, 2010 that it had recommenced reporting the results of the Zimbabwe associate with effect from April 1, 2010.
The global brewing giant had ceased to include the results of Delta in its reporting in 2006 after the Zimbabwe unit had the year before stopped paying dividends and remitting capital due to foreign currency shortages.
Joe Mutizwa, who resigned as Delta’s CEO shortly after turning around its fortunes after dollarisation, said the challenges of managing the company during the pre-dollarisation era was akin to “white water rafting”.
“The challenges have been large, varied and relentless. The demands have been many, requiring perpetual vigilance and constant adaptation,” Mutizwa said in October 2010.
But he said he had been gratified by being able to “assist young managers to take charge of the destiny of the company in the middle of a blinding macro-economic sandstorm”.
At a briefing a year later, Mutizwa had told journalists and analysts that they had “beaten the back of competition”.
Yet that “macro-economic sandstorm” he spoke about in 2010 may be on a resurgence.
The company had over the past two or so years adjusted prices downwards, as consumption suffered from an erosion of disposable incomes, caused largely by increasing unemployment, estimated unofficially at 90 percent.
Many people have been forced into the informal sector, were incomes are unreliable.
The cash crunch has become so severe that the central bank has given notice that it may introduce bond notes, a form of currency it said would be pegged at the same rate as the United States dollar, to inject liquidity into the economy.
How much this will boost or undermine beer sales is unknown, but market-wide fears are that it would spur unprecedented economic contraction.
That would surely undermine the investment put into the economy by Delta.
Delta is an integrated beverage company with a diverse portfolio of local and international brands in lager beer, traditional beer, Coca-Cola franchised sparkling and alternative non-alcoholic beverages. It has investments in associate companies whose activities are in cordials and juice drinks, wines and spirits.
The company is listed on the Zimbabwe Stock Exchange, where it first listed in 1946 as Rhodesia Breweries Limited.
Its origins, however, date back to 1898 when the country’s first brewery was established in Harare, from where the brewing industry developed into a major industrial and commercial operation along Cameroon Street.
By 1950, the company had built the Sable Brewery in Bulawayo, producing pale ale, milk stout and Sable Lager.
Over the years, the company continued to expand its portfolio of businesses and diversified its brewing base.
In 1978, the name was changed to Delta Corporation Limited and the company assumed the mantle of a holding company for a broad range of interests serving the mass consumer market. These included lager and sorghum beer brewing, bottling of carbonated and non-carbonated soft drinks, supermarket and furniture retailing, tourism and hotels and various agro-industrial operations.
The hotel, supermarket and furniture retailing businesses were demerged from the group between 2001 and 2002, resulting in Delta focusing on the core beverages sectors.
Some supply chain related investments remained part of the group until 2014 when the plastic packaging entity, MegaPak, was demerged.
The company has a minority shareholding in the now-consolidated packaging group called NamPak Zimbabwe, which took over the MegaPak business.

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