Padenga operations at risk

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GOVERNMENT’S policy on exporters’ retentions could put Padenga Holdings at risk as 50% of its operations are US dollar-denominated, financial services company IH Securities has said.

By Melody Chikono

In his monetary policy statement on February 20 this year, Reserve Bank of Zimbabwe governor John Mangudya announced an 80% retention threshold for exporters to allow companies to benefit from the inter-bank foreign currency market and to promote an uninterrupted flow of forex into the economy.

This threshold, IH says, poses a risk to Padenga’s operations as 50% of the crocodile skin producer’s total expenses, including feed concentrate, chemicals and medication, are denominated in forex.

“Hence, the group is in a bid to enhance its export revenue capacity through a prospective transaction in which the group will invest in an export-oriented business, currently placing the counter under cautionary on the ZSE,” IH said.

In full-year 2018, RTGS-denominated short-term loans to fund its working-capital cycle increased by US$10 million while its long-term US dollar-denominated liability stood at US$7,24 million.

Padenga posted positive results in FY 18 despite the local inflationary pressure triggered by monetary expansion policies of the central bank over the years and inflation emanating from the weakening of the RTGS dollar against the US dollar.

This was, however, assuaged by an increasingly stringent croc-skin market, which constantly sets a moving target in terms of quality standards.

Padenga projects its Zimbabwe operation to sell 46 000 premium quality skins in FY 19 despite an ongoing shift in the industry towards curbing the use of exotic skins by increasing the standards for environmentally sustainable and good husbandry practices as animal rights groups mount pressure on the industry.

“Thus, Padenga has concerted its efforts to address the historical micro-defect issues impacting negatively on skin quality through the construction of a research laboratory for scientific analyses into disease transmission and skin quality. Efforts on the northern farms to complete the 330kWp (kilowattpeak) solar energy project that commenced in 2017 continue in a bid to reduce carbon footprint. Although exporters are allowed to retain 80% of their forex proceeds for 30 days, a change in policy by government poses a risk to operations as 50% of the croc-skin producer’s total expenses, including feed concentrate, chemicals and medication, are denominated in forex,” noted IH.

Going forward, Padenga’s revenue for FY 19 is seen at US$44,18 million with US$29,06 million stemming from Nile skin sales and US$11,61 million from local trading.

Earnings before interest, tax, depreciation and amortisation (Ebitda) is anticipated to be US$19,22 million in FY 19, while the Ebitda margin improves to 43,5% in FY 19 from 42,6% in FY 18.

“However, we anticipate some upside to our forecasts given medium term plans to increase capacity in both the alligator and crocodile operations. We estimate that Padenga, trades on a P/E (+1) of 44,1x and an EV/EBITDA (+1) of 31,7x in RTGS terms and 10.4x and 7,5x, respectively in USD-terms to comparable peers in the aquaculture industry with average forward P/E (+1) and EV/EBITDA (+1) estimates to FY19 of 15,93x and 12,25x, respectively,” IH said.

During the period, revenue surged 40,3% year-on-year from US$30,28 million in FY 17 to US$42,48 million in FY 18, with the Zimbabwe crocodile operations contributing US$39,23 million, 92% of revenue which includes US$10,46 million from local trading.

The alligator operation in Texas contributed US$3,25 million versus US$1,76 million in FY 17.

Net operating costs increased to US$25,33 million, up 36,6% year-on-year, as they were driven by skin quality improvement activities in tandem with soaring inflation in local costs towards the end of 2018 following the separation of FCA nostro and RTGS accounts by the RBZ.

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