Currency devaluation constrains consumer spending
Influenced by the devaluation of the ZWL$ and liquidity constraints which spurred inflation, disposable incomes remained strained, weighing down volumes in a number of Innscor’s operating units.
Within the Mill-bake segment, the Bakery division experienced a 45% collapse in volumes due to limited flour availability and controlled pricing constraints, which has since shifted to market-related pricing. Volumes at National Foods slumped 32% to 211k mt owing to a reduction in consumer spend and removal of subsidies in the flour value chain. Profeeds recorded a 27% decline in feed volumes, as well as a 33% decrease in day-old chick volumes. In the Protein segment, Colcom reported subdued performance as sales volumes decreased 17%, despite a 7% growth in pig production. Irvine’s recorded a 26% growth in table eggs production, whilst frozen chicken and day-old chick volumes dropped 14% and 34%, respectively.
Owing to continued growth of the retail network, volumes at AMP Group improved by 18%. A mixed set of results were observed in the Other Light Manufacturing and Services segment, where Natpak and Prodairy experienced volume growth of 18% and 25%, respectively, whilst Probottlers volumes retreated by 26% and Probrands volumes were 14% lower than those in 1H19.
Complying with IAS 29, Innscor presented inflation adjusted results, however, for the purpose of our analysis historical financials were considered for the period under review. Despite volumes tumbling across most segments, revenue grew by 491.7% to ZWL$2.90bn, due to the removal of subsidies on numerous products and the shift away from controlled pricing. Owing to the combination of sustained improvement in product mix, well-priced strategic raw material investments and a well-controlled overhead structure, the group reported a 1,084.8% surge in operating profit to ZWL$953.67mn from ZWL$80.49mn reported in H1 19.
The devaluation of the ZWL$ has dampened consumer spending, resulting in a reduction in the real value of parts of the group’s livestock herds due to a lower real selling prices to enhance consumer affordability. Contrastingly, in nominal terms, the company reported an increase in fair value adjustments on livestock and listed equities from the ZWL$1.94mn loss recorded in 1H19 to ZWL$199.98mn.
PAT increased by 1,447.7% to ZWL$990.68mn, whilst headline earnings per share grew 1,502.5% to ZWLc121.47. Total comprehensive income closed the period 2,043% higher at ZWL$1.37bn owing to a ZWL$381.26mn gain on exchange difference arising on the translation of foreign operations. Total assets for 1H20 increased 147.8% to ZWL$4.18bn, whilst total liabilities grew 182.0% to ZWL$1.83bn, resulting in an improved NAV of ZWL$2.35bn from ZWL$1.04bn in 1H19. An interim dividend of ZWLc13.73 was declared for the period, payable to shareholders registered on 3 April 2020, while the shares will be traded cum-dividend up to 31 March 2020.
Product line diversification and production efficiencies to sustain profitability
We anticipate that the factors bedevilling operations in 1H20 will continue into FY20, with the likelihood of being further exacerbated by the Covid-19 global pandemic. The development allowing entities with free funds to directly import maize into the country was positively welcomed. However, if the spread of the virus continues across the globe, we anticipate that the critical maize situation will worsen as countries from which Zimbabwe imports maize will look to preserve or enhance their reserves to avert food insecurity.
On the back of below average rainfall experienced during the 2020/21 season, we anticipate that the group will need to import most of its major raw materials, which may face delays as necessary precautions to contain the virus are exercised. It is our view that production will decline across most industries due to disruptions on global supply chains for products and raw materials, as nations lock-down to contain the disease.
The government recently announced a 21- day nationwide lockdown to prevent the spread of Covid-19 and has stated that they will continue to monitor prices of basic commodities during this period, a development which may have a negative impact on the group’s performance if this develops once again into a price control regime down the road. Attributed to the combination of the 21-day lockdown, which has the potential to be further extended, and electricity outages, we expect that consumers will shift to a non-perishable product mix, positively impacting many of the group’s defensive lines.
Overall for FY20, we estimate that volumes across majority of the segments will come under additional pressure, whilst consumer spend remains further strained and concentrated on basic and essential commodities. We do, however, note that the group has begun to see volumes recovery in some lines in H2 albeit off a low base. In spite of the difficult operating environment, management have emphasised their commitment to continue accruing benefits from the automation of its plants and capacity building, which will be fully beneficial in the future when the economy starts to gain upward momentum.
In light of the challenging operating environment, we forecast that the group will maintain their strategy of deploying resources to working capital, as indicated by the negative cash flow from operating activities of ZWL$70.70mn in HY20. Despite the challenging operating environment, we remain optimistic that the business will be able to adjust their strategies and plan accordingly to ensure viability and profitability of the group’s operations.
Maintain Buy with a TP of ZWL15.76
We forecast that revenue in FY20 will improve by 381.1% to ZWL$6.18bn from ZWL$1.29bn in the prior comparable period on account of the inflationary environment and market related pricing strategy on most commodities. We now estimate that Innscor trades on a P/E (+1) of 3.6x to 2020E, compared to peers at an average P/E (+1) of 15.6x and EV/EBITDA (+1) of 2.2x compared to peers at an average EV/EBITDA (+1) of 10.0x. Using a blended DCF and multiples-based valuation we have arrived at a target price of $15.76 for Innscor implying upside of 103.5% at current levels. We therefore maintain our Buy recommendation on Innscor Africa.