Equity Analysis /
Zimbabwe

Padenga Holdings: Dallaglio acquisition – an unusual pairing lowers concentration risk; Buy

    Michelle Mangwanya
    Michelle Mangwanya

    Junior Equities Analyst

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    IH Securities
    17 December 2019
    Published byIH Securities

    Padenga acquired 51% of Dallaglio, a gold mining company, subsequent to shareholders voting in favour of the transaction at an EGM held in August. The transaction comes against a backdrop of persisting economic adversities, including a shortage of foreign currency in the local environment. 

    The group’s current resources provide some scope to develop and grow the mining operation with the prospect of an unbundling and separate listing of the mining operation once the economy stabilizes. The outlook for gold is positive with prices projected to rally 6% in 2020 after being resilient for the past year surpassing US$1,500 in 2019 on heightened uncertainty in global markets and mounting geopolitical tensions that have subdued manufacturing. 

    Whilst the proposed transaction appears to be an unusual pairing, it is value accretive, as it diversifies Padenga’s concentration in crocodile farming and significantly enhances the business’ earnings whilst remaining purely export focused.

    With currently 79% of sales in 2018 being ultimately to one luxury goods brand in Europe, the croc-skin producer faces a significant client concentration risk. Product and customer concentration risk is exacerbated by the nature of Padenga’s core product, with receding water levels in Lake Kariba currently below 20% of maximum capacity coupled with increasingly unpredictable and extreme climate conditions posing a threat to livestock farming. Furthermore, recent years have seen increasing pressure from animal rights groups protesting the use of leather in the fashion sector with some the world’s largest luxury brands, including Chanel, limited and excluding animal furs in their product lines. We believe this transaction would assist the croc-skin exporter to further garner real assets and increase export revenue, solidifying Padenga’s position as a hedge against current local market conditions. 

    Although we have kept our long-term earnings growth forecasts conservative on Padenga’s farming operations, given that sales are fixed to bespoke supply contracts, we project a +43.8% growth to US$61.1mn in aggregate revenue for FY19 as Dallaglio’s financials are to be consolidated from July 2019. Consolidated EBITDA is anticipated to be US$23.4mn in FY19, while the EBITDA margin softens to 38.2% in FY19 from 42.6% in FY18, as a softer margin in the gold mining operation is likely to average down Padenga’s overall margin. However, we anticipate some upside to our forecasts given medium term plans to increase capacity in both the alligator and crocodile operations. Furthermore, we expect the commissioning of Eureka gold mine to boost Padenga’s long-term performance. 

    We estimate that Padenga, trades on a P/E (+1) of 8.1x and an EV/EBITDA (+1) of 7.0x, in relation to comparable peers in the aquaculture industry with average forward P/E (+1) and EV/EBITDA (+1) estimates to FY19 of 18.6x and 9.9x, respectively. Our SOTP valuation places a TP of ZW$6.33 on the company, after conservatively applying a forecast interbank rate of 18 to our USD TP of $0.35. This yields an upside of 157.5%, thus maintaining a BUY recommendation on Padenga.