Investment In Feed Capacity Paying Off
BMI view: Zambeef ' s 2012 FY results confirm our strong outlook for food consumption growth in Zambia, especially for value-added goods such as meat and dairy products. The company ' s margins have improved in 2012 thanks to increasing investment in feed production and storage capacity. However, the sudden growth in capital expenditure in 2012 boosted working capital needs, taking operating cash flows in to negative territory and debt higher. This will put short-term downside risks to the company ' s share price.
Zambeef's 2012 FY results confirm our outlook for strong food consumption growth in Zambia, especially for value-added goods such as meat and dairy. For all the company's meat and dairy products, demand outpaced supply, pushing sales higher mainly because of higher volumes and prices. Revenue growth was strongest in the pork and beef segments, mainly because the company's procurement capacity was the strongest in these segments while Zambeef had more difficulty meeting the booming demand for chicken and dairy products, resulting in slower sales growth. We expect demand for these food products to continue growing at a strong pace in the coming years and our Africa team is forecasting real GDP growth of 7.1 % in 2013: among the highest growth rates in the world.
|Zambia - White Maize Retail Prices (ZMK/17kg)|
The company's margins improved again in 2012, especially in the meat divisions, thanks to the increasing vertical integration. The company plans to expand its feed division's capacity and has already invested in Mpongwe farm in order to increase soy production in sufficient amounts to meet feed demand from livestock divisions. The company's farm currently produces about 31,000 tonnes of soybean per year, while demand from Zamanita, Zambeef's soymeal and oil production facility, could reach about 100,000 tonnes annually. For 2012, the company's increasing internal soybean production as well as strong stocks helped take gross margins higher, especially in a context of high meat prices. Over the medium term, we expect higher investment in feed production and storage capacity to continue pushing down the cost of goods.
|Zambeef - Gross Margins By Division (%)|
The significant increase in capex in 2012 linked to investment in feed production and capacity, as well as in more efficient dairy operations, could nevertheless result in a reduced liquidity or increase indebtedness in the short-term. This could delay improvements to profit margins, which only increased from 4.5% in 2011 to 4.8% overall in 2012 (excluding US$9.7mn potential tax payment on which the company has challenged Zambian authorities). In fact, the company's cash flow from operations was taken into negative territory because of a significant increase in working capital requirements. Similarly, the company increased both short-term and long-term debt in order to finance its acquisition, doubling the company's net debt/EBITDA ratio to 6.3x and taking the interest coverage ratio down to 2.3x (from 3.8x in 2011).
|Correction In Sight?|
|Zambeef - Share Price (GBp) & RSI (Below)|
In line with these trends, even if we see long-term upside potential for the company's share price on the back of revenues and margin expansion, we see little short-term upside potential on the basis of technical indicators in overbought territory and overvalued multiples. In fact, the company traded at 51.0x earnings (compared to 13.4x for Astral Foods and 14.9x for Rainbow Chicken, two South African competitors) and has an Enterprise Value at 22.8x current EBITDA (compared to 9.6x for Astral Foods and 10.8x for Rainbow chicken). Thus, we do not exclude a short-term correction in the share prices in the coming months.