Despite sustained economic challenges in Simbisa’s anchor market, Zimbabwe, the group managed a firm set of results for 1H20, reflecting strong growth, a resilient business model and diversification away from earnings concentration risk to the Group via the region.
Zimbabwe’s operating environment, characterized by currency devaluation, hyperinflationary pressures, frequent regulatory changes, and weakened consumer demand remained challenging. Customer counts fell 33% h/h and operating margin moderated downwards from 22.6% in prior comparable period to 20.4% in 1H20, however price adjustments led to a higher average spend ensuring sustained revenue growth.
Regional operations were promising showing customer count growth of 24% h/h however, revenue growth was relatively subdued as USD average spend declined due to currency devaluations across all regional markets against the previous period.
Navigating COVID-19 and the potential after-effects on QSR sector
The current COVID-19 pandemic has naturally impacted the QSR sector, especially proliferated by the national lockdown in anchor market, Zimbabwe and a curfew in critical regional market Kenya. Zimbabwe began a 21-day lock-down on 30 March 2020, which has been extended by a further 2 weeks; following this, stores will naturally experience reduced customer traffic and limited trading hours, putting pressure on customer counts, negatively affecting at least the remainder of H2 and dampening a recovery which had been observed in Q3.
We expect regional markets to have a similar experience as countries all around have been placed under lockdown or restricted business operating hours as governments comply with Word Health Organization’s (WHO) directive in efforts to manage the pandemic.
Naturally, we anticipate some reversal in the positive customer counts recorded in the region in H1 as well. In response, management has indicated that the focus, both in Zimbabwe and the region will shift to the delivery model (Dial-A-Delivery, DAD) – this will be a critical component of the group’s strategy going forward as we believe that even as COVID infection rates drop and lock-down measures ease, a culture of social distancing will purvey in the short to medium term. The delivery channel is a low-cost model while average spends on DAD come with higher margins than normal restaurant average spends which bodes well for the Group.
Simultaneously, the Group will focus on value offerings in Chicken Inn and Bakers Inn which are more tailored to the lower end of the pyramid particularly as disposable incomes come under further pressure and customers migrate towards more affordable meals. It is our view that currency instability will remain a continuous feature across the regional business as COVID impacts macro growth globally and Simbisa’s mainly commodity driven operating markets. We believe regional markets like Kenya will achieve economic recovery at a faster rate than Zimbabwe given less structural challenges and a higher base of per capita GDPs.
Boon on higher translation of USD earnings; Maintain BUY recommendation
We forecast Simbisa revenue at ZWL$2,206.6mn for FY20 up 464.64% y/y. We anticipate EBITDA to come in at ZWL$397.18mn to FY20 up 520.29% y/y. The EBITDA margin is forecast to increase to 18.3% from 16.4% in FY19 but weaken from 19.8% achieved in H1 as cost lags begin to narrow.
We foresee upside risk to our conservative estimates from foreign currency translation of region earnings at a more favourable interbank rate going forward, we have applied a rate of 25. We estimate that Simbisa trades at PER (+1) and EV/EBITDA (+1) multiples of 8.7x and 4.0x to 2020E, respectively; against comparable peers trading at PER (+1) and EV/EBITDA (+1) multiples of 21.5x and 13.2x, respectively.
Using a combination of multiples and a DCF valuation approach, we arrive at a target price of ZWL$5.26, which yields upside of 75.49%, thus we maintain coverage of Simbisa with a BUY recommendation.