Delta surpasses market expectations

Bernard Mpofu

IT didn’t come as a surprise for a few local companies when government, two years ago, officially introduced multiple currencies ending years of hyperinflation and economic decline.

 

The tide was turning.

For Joe Mutizwa, Delta Corporation CEO, the use of the greenback in February 2009 signalled growth for a company emerging from a command-type economy characterised by price controls and foreign exchange controls.
After Finance minister Tendai Biti rang the opening bell for the maiden stock market trade in hard currency, most companies were left desperately short of capital.

Competition increased when markets were liberalised and immediately companies reckoned that tough times waited ahead.
Mutizwa challenged delegates attending an economic outlook symposium on Monday in the capital to go back to the drawing board, a secret he credits for Delta’s turnaround.

Two years on, Delta, a blue chip on the US$4,3 billion Zimbabwe Stock Exchange, has surpassed market expectations driven by lager beer consumption currently 2,6% lower than all time peak of 1620 hectolitres in 1998.

Delta’s market capitalisation grew to nearly US$850 million this week from US$324 million recorded on February 20 2009.
Official figures show that with an average of 80% capacity utilisation, Delta has clawed back its market share with its lager beer and non-alcoholic beverages averaging for 90% market share apiece.

Notwithstanding this, the beverage manufacturer — which produces world brands like Coca Cola under licence — still faces stiff competition in up-market watering holes where consumers prefer rival brands like Heineken, Windhoek or Red Bull.

This development, according to Mutizwa, is “healthy for the market”.

On the flip side, cheap imported canes consumed by low income earners are threatening Delta’s foothold.
Mutizwa projected consumption of opaque sorghum beer to tumble to 2 971 hectolitres from 3 114 hectolitres recorded last year as the company continues to lose ground in that niche.

Still way off peak consumption of 4 580 hectoliters, sorghum beer has over the last 12 years been on a downward trend while demand for carbonated soft drinks steeply rose, almost trebling year on year since dollarisation.

Zimbabwe’s consumption of sparkling beverages rose to 770 hectolitres last year from 308 hectolitres recorded in 2009.

The group’s turnover grew to US$324 million last year from US$104 million surpassing beverage consumption in regional peers like Zambia. This year, Delta is targeting US$480 million income buoyed by increased consumption in lager beer.

“Delta did not waste the crisis of the last 10 or so years. Our ability to envision the future was a critical “Sine Qua Non” (essential) for the rapid progress we have made since dollarisation ,” Mutizwa said.

“We prepared ourselves during the crisis and were ready to seize the opportunities arising from the ushering in of political and macro-economic stability. Since then we have moved with speed to grow our business and shareholder value.”

Analysts also contend that the multi-currency payment system — which they say is a euphemism for dollarisation — is the most notable factor which brought stability on Zimbabwe’s manufacturing sector after enduring nearly a decade of contraction stemming from excessive market regulation.

“This is not to say we could not have done better. Indeed we are disappointed with our performance as we have left value on the table as we struggle to achieve full market supply,” Mutizwa said.

Apart from growing market share, Mutizwa says the prevailing economic environment prompted the group to off-load non-core assets in pursuit of profitability.

Within 12 months Delta rationalised some of its operations leaving the firm with two business units — MegaPak and Kwekwe Maltings — feeding the core business.

The group disposed its interests in Ariston, Food and Industrial, Headend and a spares unit  during the first year of dollarisation.

“As we acquired a stake in Ariston or Headend we knew that we would disgorge it as soon as normalcy returned. Our acquisition of a 49% stake in SZL and the launching of the Maheu Strategic Business Unit are in pursuit of our Total Beverage Business  objective,” Mutizwa said.

Analysts, however, attribute Delta’s success story in a capital-starved economy to strong  shareholder — SABMiller, one of the largest beermakers in the world with presence in Europe, Asia and Africa.

Typical of most bellwether stocks on the ZSE, the counter was one of the most preferred stock picks owing to what analysts say is a “potential for both capital preservation and capital growth”.

“Liquidity challenges are expected to prevail in 2011 as demand for working capital and capital expenditure finance is still huge in relation to available funding,” says MMC Capital.

“Deposits into the banking sector are also expected to remain largely short term given that the lender of last resort (RBZ) has only been funded with US$7 million (lower than the capital required for a single bank). It therefore follows that interest rates are expected to remain high (ranging from 6% – 30% p.a.) depending on banking institution.”

The SABMiller-owned firm has in the past years undertaken capital projects  that include last July’s installation of a PET line with a capacity to produce 350 000 hectolitres yearly.

“Shareholders will not support the plans of management who do not have confidence about the future of their country and their company.  You score a massive own goal if you are negative — you undermine yourself and your team,” Mutizwa said.