Dependable delta surpasses targets

Well, besides the obvious reason of being able to down the ‘wise waters’ served after the briefing, the major objective is to hear first-hand how the company would have achieved its sterling performance.

As usual, the company did not disappoint as it surpassed the targets set at half year. Revenues net of VAT grew by 36% to US$554,7 million buttressed by strong volume growth across the board. Overall volumes of 6,9 million hectoliters (HL) grew by 19% compared to the 15% achieved in the 12 months to March 31, 2011. Delta is one company that continues to experience growth at a time other companies are experiencing a slowdown.

 

What’s more, Delta is one of the few companies that has recorded real growth post dollarisation as other companies are still recovering from years of contraction. Lager volumes for the year of 1,9 million HL were 22% above the historical peak of 1,6 million HL set in 1998, volumes at Megapak of 7 196 tonnes were double the 3 483 tonnes achieved in 1998 and were at their highest level ever.

Operating margins improved by 1% to 18% due to improved efficiency after commissioning of new packaging lines. Management disclosed that these margins could have been greater had the company discontinued using old machinery. However, this was not possible as demand remained strong on the market. Margins again improved as the company made a deliberate strategy of pushing premium brands on the market.

 

On lagers, the proportion of premium brands namely Golden Pilsener, Zambezi and Bohlinger’s to total lager sales rose from 11,3% to 15,6% while that of soft drinks increased to 28,6% from 20,9% in the previous year. Premium brands under the latter include the PET and canned drinks. Green bottles are profitable in that they have less volume per bottle but command a higher price.

Attributable earnings for the year were US$73,7 million representing a growth of 38% from 2011 levels and well above the 30% promised at half-year. This translated to an EPS of US6,22 cents and the company went on to declare a three times covered dividend of US2,08 cents per share. Cashflows from operations were also solid coming in at US$121,3 million which was 1,64 times above the company’s attributable earnings to shareholders.

Delta is one stock whose share price you would expect to firm on publication of its results. The company has a virtual monopoly of the beverages industry evidenced by its market share in all product lines which is above 90%. Delta also managed to recapitalise its operations through assistance from SAB Miller and has a low debt to equity ratio of just 30%, made up of US$60 million long term debt at a cost of 7% and short term debt of US$21 million at an average cost of 10%. This is unlike the bulk of the companies listed on our local bourse that are highly geared, and using old machinery which compromises efficiency and are experiencing a slowdown in product demand due to stiff competition from foreign companies.

The company is evidently benefitting from the huge investments in capital expenditure made from the onset of dollarisation which most other companies failed to do. In 2012 alone US$74 million was spent on machinery with US$52 million going into expanding operations whilst US$21,5 million was used for repairs and maintenance.

 

Investments in capital expenditure since the onset of dollarisation now stand at US$178 million and notable ones are the Harare and Bulawayo lager lines, the soft drink plant in Harare and PET line for Megapak. An additional US$79 million is again going towards further upgrading packaging lines.

Delta acknowledged the existence of foreign competition and has been leveraging on the SAB Miller’s portfolio to protect its local market share. Burn energy drink for instance was brought on board to compete with Red Bull. The company has also been improving its product packaging to meet that of international brands.

It is beyond doubt that demand for Delta products will always be there. One trend that has been observed is that growth in consumption of beverages, particularly lagers, always outperforms economic growth. Any improvements in disposable incomes again results in more money finding its way to the drinking holes.

Though management this time around were reluctant to give the market projections as is the usual norm, only indicating that volumes growth will exceed GDP growth, we feel that there is still headroom for Delta to grow its earnings further. Consumption levels per capita in Zimbabwe of 16 litres remain low when matched with other regional players in Namibia and South Africa. Furthermore the management anticipates Capex/EBITDA to decline to between 30% and 50% from the current 62%. This will translate into more profits which will possibly enable the company to pay out more dividends.

Delta valuation metrics again look undemanding as it is currently trading at a forward Price to Earnings Ratio of approximately nine times against regional comparatives of around 20 times. The company is undoubtedly in a strong position and as such you would expect the share price to firm, but this has not been the case as investor sentiment towards equities remains bearish.

 

However, as Warren Buffet always says, invest in a business that you understand, that has a strong history of profitability and a dominant business model and whose share you are prepared to hold for more than 10 years. Delta’s model of producing and distributing beverages is simple. The company again has monopoly in the local market.

 

Delta is one stock you would not hesitate to recommend and one which you can hold until sentiment improves on the market as product demand will always be there!

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