eBusiness Weekly
Business Correspondent
Delta released an unexciting set of results in which revenue was up by a marginal 1 percent to $250,1 million against an aggregate volume growth of 11 percent. Volumes were up across most segments, with the exception of sorghum beer that dropped 4 percent.
Sorghum beer was partly affected by the cash shortages in the market. Lager beers improved sales volumes by 11 percent while soft drinks recorded volume growth of 3 percent. Increased volumes were as a result of the good agriculture season which improved consumer demand. The sales mix was however dominated by value brands and value packs which lowered the top-line value gain when compared to volume growth.
Profit margins suffered as a result of the sales mix with EBIT margins for the period falling to 15 percent from 16 percent in the comparable period. EBIT for the period was down 4 percent at $38 million. Delta was however supported by a higher finance income and lower interest charges which improved its net finance income position for the period. Share of profit from associates was significantly up at $1.6 million from $0.4 million in the prior year which pushed the growth in net profit for the period by 4 percent to $32 million.
Delta continues to have a cash rich balance sheet. For the period, cash generated from operations increased from $87,3 million to $91,1 million mainly due to the unwinding of the stock position as well as repayment by debtors.
As at 30 September 2017, the company was sitting on cash amounting to $222,7 million on its balance sheet. Management pointed out that within this figure, there is about $100 million that represents dividends owing to foreign shareholders, outstanding technical fees and royalties (US$10 million), amounts owing to foreign suppliers (US$22 million) as well as funds that could possibly have been used to clear debt.
Delta has foreign debt amounting to $25 million owing to Barclays, which makes up 62 percent of their current debt. The balance sheet on overall remained largely unchanged, with total assets of $727,3 million from $721,9 million. Equity was slightly down at $483 million from $489,2 million in September 2016 due to the aggressive dividend payout in 2017 relative to the previous period.
Management foresees foreign currency shortages as one of their greatest challenge going forward. The strategy around it has been to streamline other product lines to try and save on foreign currency. Canned beverages volumes have been reduced because some of the units they distribute are imported.
They however, mentioned that generally they are not struggling to supply products into the market and reassured that they have enough raw materials to cover the festive season. Pricing has been stable as Delta has managed to acquire foreign currency for imports at no added premium.
On the TCCC contract, there has been no final resolution as yet and it continues with its operations as normal. The Natbrew Zambia acquisition transaction is still ongoing and management was not yet at liberty to disclose granular details. They however mentioned that the transaction will not be material to Delta.
The aggressive dividend policy is expected to continue as a means of utilizing the cash on its balance sheet to give back value to shareholders. Year to date, the share has gained 259 percent, which is slightly below the industrial index gains of 262 percent over the same period.
Our thoughts
While we are not disappointed with Delta’s results, we do get worried with the fact that they are losing margin while churning out more volume in the market. It simply depletes stock and leaves Delta with a big cash position that it has difficulty reinvesting in due to market factors.
Management has confirmed that they are able to supply what the market requires but however, on the retail end, from general observation, there seems to be a shrinkage in variety or even quantum available.
If supply is stable, one wonders were the product is going to. Possibly the retailers are diverting some of the product to the export market in order to generate foreign currency.
It’s a no brainer trade if restrictions are low, one uses a cheaper currency to buy product and offloads it in a hard currency market. It is unfortunate that Delta cannot do much about it; it has more restrictions to enter into exports of their product and will continue to be used as the cheap manufacturer that can supply the retailer with export products.
It will also be interesting to see how the pricing dynamics will pan out. Delta has not increased their pricing and management said they saw no reason to do because they have not incurred a cost in acquiring foreign currency. If they start incurring a cost in acquiring foreign currency, will they start to adjust their prices?
How will they justify for it officially (even though everyone will know why the prices are up)?
Given their size and relevance in the market, they are likely to be on the price watch radar. The fear would be that if they increase prices, they will initiate ways for other companies to follow suit. On the other hand, consumer incomes are not increasing.
Management even mentioned that the growth in money supply is concentrated on institutions; therefore it does not necessarily translate to increased spending on their products. Consideration will therefore be on the ability of its market to assume a price increase. Already, the market is spending in the value segments, an increase in price will force a further relegation to a lower (and low margin) value segment.
What is also worrying is the significant cash position that the company is holding. There has been an aggressive payout of dividend to shareholders but foreign shareholders have been losing out due to difficulties in making foreign remittances. Ideally, Delta can look for acquisition opportunities on the local market as a means of retaining value for shareholders. With about a $100 million available as free cash, they have a basis to start from.
Management was non-committal on the issue but however reiterated that they will do all things necessary to return value to shareholders. Our view is that Delta can acquire even a non-core, but foreign currency generating business, to preserve value as well as generate foreign currency for the business. When the environment corrects, such business can always be unbundled —Innscor/Padenga relationship is one such success case.
