Delta in successful rebranding exercise

Highlights Turnover up 231% to $103,7 billion from $31,3 billion Operating profit up 300% to $32,8 billion from $8,2 billion EPS up 291% from 656c to 2568c Dividend of 700c EBITDA up 294% to $32,8 billion Net cash position of $1,6 billion

Production capacity to be enhanced by $8,8 billion reserve. Exports up 276% to $5,2 billion


Current position

Macro-economic conditions have been declining over the past year and this deterioration has worsened sharply during 2003.


Price controls, power cuts and fuel shortages for most of the second half of the year affected carbonated soft drinks. Supplier failures, mostly on the sugar and bottles front, were erratic and severely affected the availability of soft drinks and the contribution of carbonated soft drinks to profits.


There was also a lot of activity during the year as Delta successfully integrated its beverage manufacturing divisions into one subsidiary, Delta Beverages, in a move which in our view makes the organisation leaner and enhances shareholder value.

The introduction of the 750ml Quart, or “Headmaster”, as it is popularly known was a strategic move on the lager front.


Besides being well received by the market as a value product, it also helped increase lager’s contribution to profit from 35% to 41% over the same period last year.


Result commentary

Group turnover increased by 231% from $31,3 billion to $103,6 billion during a period when exports improved by 276% to $5,2 billion.


The increase in turnover was underpinned by consistent volumes on the lager side, which managed to offset sales of sorghum beer and problems associated with the production of carbonated soft drinks (CSD).


EBIT grew 226% from $7,6 billion to $32,2 billion.

Finance costs declined to $310 million from $363 million reflecting positive cash balances for most of the year.


Delta currently has no gearing and the net cash position of $1,6 billion means the company is set to benefit from firming money market rates.

Headline earnings rose by 291% over the prior year. These are however distorted as a result of demergers that took place the previous year.


Strategy

Management’s focus and innovation is clearly demonstrated by the decision to allocate $8,89 billion to maintain infrastructure and expand operations.


Faced with the reality that southern Africa as a region will be having a power deficit by the year 2007, the decision to allocate over $3 billion now to equip key plants with generators augurs well for the company’s future.


Delta is also continuing with an aggressive supply procurement strategy of securing crucial inputs such as maize through the crop input scheme and barley by continuing the outgrower programne.


While management is continuing to assist Zimglass through this difficult patch, it is also cognisant of the fact that for the foreseeable future, Zimglass, will not be able to supply their needs and has resolved to continue importing glass.


Delta will also continue to import sugar as the Zimbabwe Sugar Refineries (ZSR) has also failed to meet their requirements because of coal shortages.


The importation of components in their product mix will result in pushing increased costs to their customers. There is a real danger that consumers will develop price resistance.


Valuation and recommendation

The company is performing ahead of inflation though its results were slightly below market expectations.


Management has streamlined business processes and restructured operations to produce a lean structure. Consumer expenditure has remained resilient despite high inflation levels.


Zimbabweans in the diaspora are also contributing quite significantly to the level of disposable income.


Price controls on carbonated soft drinks have been relaxed and we expect this business to make a more meaningful contribution to profits in the coming year.


Management has indicated that earnings growth will be above inflation in the coming year.

On conservative basis, earnings should grow by at least 300% to reach $80 per share.

On the basis of a PE of 8,6x, we value Delta at $612 per share. In this regard we recommend a Buy.


– This article was prepared by Barnfords Financial Services on behalf of the Royal Bank of Zimbabwe Ltd.

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