Afdis maintains earnings momentum

Taking Stock with Barbican Asset Management

AFRICAN Distillers Ltd (Afdis) is a counter in the industrial consumer goods sector.



The Barbican Equit

y Model classifies Afdis as falling under the consumption sector and is also one of the middle-cap counters. It is mainly involved in the manufacture, importation and marketing of branded wines and spirits for distribution in Zimbabwe and exports. It was founded in 1944 and listed on the local bourse in 1951.



Shareholder analysis


The top three major shareholders are Afdis Holdings, Old Mutual, and Edward Nominees, which hold a 59,03%, 16,34%, and 2,45% respectively. Worth noting is the fact that corporate and pension funds constitute about 85% of the total shareholding. The shareholding structure is negatively skewed mainly due to the controlling interest that the major shareholder has in the company.


The level of free float in the counter is estimated at around 20% and the annual liquidity for the stock is about 14%, which is a sign of a relatively low level of marketability of the share. The 365-trading volume average is 27,350 and there are only 87,178,850 shares in circulation.


Technical analysis


Based on a technical analysis of the share price for the past year, the support level for the counter is around $550, which also happens to be close to the share price at which Afdis is trading. This implies minimal downside risk in the share price at the current levels.


The resistance level for the share price around $1 100 that happens to be way above the current share price.


The 12-day moving average is $543,83 and it happens to be lower than the 24-day moving average, which is $611,88. This is a sign of a current bearish trend in the share price. However, the bearishness of the trend is not sustainable given that it is failing to get momentum as can be seen by the very thin volumes of shares traded during this bearish moment. Hence, the momentum indicators are pointing towards a shift from a bearish to a bullish phase. On aggregate, the share price is showing an upward trend that mirrors the earnings growth of the company.


Financial analysis


Based on the interim results for the six months ended December 31, it can be seen that the company is in quite a healthy financial position and appears to be sustaining its earnings growth path. Turnover increased by 417%, which was higher than the rate at which the consumer price index increased of 219,53% during the same six month period. This was despite the decline in sales volume by 22%, which was mainly as a result of the unprecedented rise in interest rates that resulted in a decision by major customers to cancel or significantly reduce orders and utilize existing stocks in order to preserve cash resources.


The company has continued to improve its profitability levels despite the worsening economic environment. Net margin increased from 15,25% in December 2002 to 27,10% in December 2003. This is mainly due to the way in which overheads were controlled to grow at a rate below inflation.


There has been increased efficiency in the use of the company resources as can be seen by the increase in the return on assets from 32,3% in December 2002 to 39,3% in December 2003.


The return on equity however declined from 124,15% in December 2002 to 117% in December 2003. This was mainly due to the fact that shareholder equity grew at a faster rate that the rate at which income grew.


Worth noting is the improvement in the liquidity position as can be seen by the increase in the current ratio from 1,77 in December 2002 to 1,92 in December 2003. The liquidity position of the company can be viewed as being quite healthy as can be seen by the current ratio of 1,92 times.

A current ratio of more than one implies that the company is able to meet its short-term liabilities as they fall due.


The level of gearing of the company declined from 19,35% in December 2002 to 12,37% in December 2003. This is a positive trend since it shows that the growth rate of the total net worth of the company is higher than the growth rate of the company’s borrowings. Interest cover declined from 27,03 times in December 2002 to 14,77 times in December 2003. It is however still within the comfortable region of above two times. This implies that the company is in a position where it is able to generate earnings that suffice to cover all their interest payments.


Challenges


Decline in disposal income: Given that the products of Afdis are not considered to be basic commodities, the sector is being negatively affected by the decline in disposable income for the average person in Zimbabwe.

This has resulted in a decline in aggregate demand for the products of Afdis, resulting in sales volumes declining by 22%.


Strengths


Reduced Gearing: The company has significantly reduced its level of gearing and thus is not vulnerable to adverse movements in interest rates in the economy. The company is also able to access the concessionary funding under the Productive Sector Facilities of the Reserve Bank of Zimbabwe. Utilisation of this facility will contribute significantly in reducing the cost of funding operations.


Valuation


Currently, Afdis is trading at a rolling price-to-earnings (PE) ratio of 3,35 times, which happens to be the lowest in the beverages sector. The relative market PE ratio is around 0.37, which is an indication that the share price can be viewed as cheap relative to the market. Also worth noting is the historical fact that Afdis has been trading at an average premium of about 30% to the average of the beverage sector in the past two years.


This can be taken as a technical indication of some upside potential in the share price vis-à-vis the recently announced interim results given that Afdis is now trading at a discount of about 44% to the average of the beverage sector.


Based on our projections of earnings growth, the forward PE ratio for the counter is around 1,83x, which makes the counter quite an attractive buy given our exit PE of 14,82 Currently, Afdis is trading at a price-to-net asset value of 2,88, which happens to be lower than the average of the beverage sector of 5,32. This implies that there are more assets backing the share price of Afdis than would be expected from a counter in the beverage sector.