Recovery in consumer spend as inflation subsides and lockdown restrictions ease
The operating environment eased as COVID-19 induced restrictions were relaxed and inflation declined giving rise to a relatively stable local currency. With the stabilising currency, TV Sales & Home reintroduced credit sales allowing the company to defend market share and grow volumes (debtors’ book grew 130% y/y). TV Sales & Home volumes were up 40%; sales were also driven by growth in the store network.
Equity accounted earnings mainly comprised of earnings from Restapedic Bedding (grew 231.29% y/y). DGA - Zimbabwe increased sales of locally produced products as substitutes for some imported products which helped defend volumes (up +4%) while Transerv had a decent increase in sales. DGA – Region was adversely affected by the devaluing Kwacha, loss of distributorship agency in Zambia as well as shrinking modern trade space in Malawi.
Consolidated turnover for DGA Zambia and Malawi, in US$ terms, declined by 16% over the comparative period while contribution to the ZWL$ top line decreased from 20.89% in 1H20 to 14.03% in 1H21. For our analysis historical financials were considered for the period under review. In historical terms, AXIA’s top-line for 1H21 came in at ZWL$8.92bn, +646.41% y/y versus annual inflation of 348.20% for matching period (ended Dec 2020) on the back of improved volumes. The financial income line is mainly comprised of unrealized exchange gains on foreign denominated cash and cash equivalents. For the period under review, Axia recorded a 475.04% growth in financial income to ZWL$136.12mn from ZWL$23.67mn.
Despite the inflationary pressures on costs, the company managed to sustain its EBITDA margins, remaining flat at 19.48% from 19.40% in 1H20 (a marginal decrease from the 20.46% recorded at FY20). EBITDA was reported at ZWL$1.73bn, +649.40% y/y. Borrowings have increased by ZWL$591.95mn from June 2020 mainly to support strategic working capital investments. Total assets for 1H21 grew to ZWL$5,747.35mn from the FY20 position of ZWL$2,755.16mn whilst total liabilities were recorded at ZWL$3,372.33mn from ZWL$1,520.73mn in June 2020 resulting in an NAV of ZWL$2.37bn. The Group generated cash of ZWL$366.34mn from operations which was up 684.90% y/y. AXIA is re-investing most of its free funds into its bedding and lounge suite manufacturing businesses and therefore declared a dividend of ZWLc24.50 per share.
Q4 recovery in consumer spend to dull effects of COVID induced slump in Q3
The trading environment in the 3rd quarter was significantly impacted by the level 4 COVID-19 lockdown. However, with the grain selling season and tobacco auction floors opening in April 2021, as well as the relaxed lockdown restrictions, we expect a drastic recovery in consumer spend going into the company’s 4th quarter.
We anticipate that inflationary pressures will ease as the interbank market stabilises foreign exchange rates further boosting consumer confidence. Revenue is forecasted to increase by 378.39% for FY21 from ZWL$3,656.93mn in FY20 to ZWL$17,494.54mn in FY21. SI 185 of 2020 allowing the use of free funds in the trading of local goods and services allows the company to earn foreign currency in the local market, easing the strain from foreign creditors. DGA-Zimbabwe concluded a major local distribution agency, we expect the positive impact on operating profit to be more apparent going into FY22.
Management’s strategy to take control of their value chain and focus on local products will aid in containing operating costs, we expect a marginal decrease in EBITDA margins from 20.26% FY20 to 18.00% for FY21. Going into FY22 we expect margins to return to historical averages. We anticipate a 325.00% growth in EBITDA to ZWL$3,149.02mn from ZWL$740.95mn. Resultantly, we forecast net income attributable to shareholders to rise 133.90% y/y to ZWL$1,214.59mn.
The depreciation of local currencies in Zambia and Malawi remains a cause for concern as they negatively impact the net assets of the consolidated business. Given the continued drive to reinvest in earning capacity of the business, dividend payout ratio is forecasted to remain below 20% for FY21 and FY22.
Maintain BUY recommendation
We estimate that Axia is trading on a PER (+1) to FY21 of 7.12x versus its peers at 9.96x, and EV/EBITDA (+1) to FY21 of 2.62x compared to peers at 5.40x. However, it is worth noting that the company’s historical 5 year average PER is 4.72x. Using a blended DCF and multiples-based valuation method we now arrive at a target price of ZWL$20.47 for Axia, implying upside of 30.77% at current levels. We therefore maintain our BUY recommendation.