Headwinds facing Delta Corporation to hit earnings

Headwinds facing Delta Corporation to hit earnings

HARARE, March 21 (The Source) – Delta Corporation has endured falling revenue since 2014, but a combination of a deteriorating economy and an acute dollar shortage have left the company facing another earnings drop, according to a leading investment firm.

The beverage maker, which accounts for $1,071 billion of the Zimbabwe Stock Exchange’s total valuation of $3,9 billion as at close of business on Monday, remains an economic bellwether and its struggles mirrors Zimbabwe’s stuttering economy.

Revenue at six months to September 30 , 2016 was eight percent down to  $246,6 million, while it was nine percent lower than the previous year at the close of the third quarter on December 31.

A report on the firm by a United Kingdom-based securities company, Exotix Partners LLP, warns that lager and sparkling beverage volumes are likely to remain weak and that growth from Chibuku Super will not be sufficient to offset the drop.  

“Margins are likely to continue shrinking as volumes fall, however ongoing efforts to reduce costs may help to counter this. We estimate an earnings decline of 11 percent for FY17 and relatively flat in FY18.”

Full year revenue is forecast to decline by 8 percent.  

With constrained disposable incomes, consumers are seen dumping the high value lager products opting for Chibuku, impacting the bottom line.  

Delta is seen lowering prices even further in an attempt to retain its dominant market share.

The beverage maker, which imports a significant part of its raw materials, particularly for sparkling beverages, has not been spared by the ongoing shortages of foreign currency and depleting nostro accounts.

“While Delta is an importer of raw materials, and thus classified as relatively high priority, they have faced delays and are behind on supplier payments. Fortunately they have adequate cover for stocks, and given their strong relationships with their suppliers, we think it is unlikely they will be cut off altogether,” notes Exotix.

“At this stage a product shortage is not a concern, however we could see a more limited range of products in the future.”

The shortage of foreign currency plus a ban on imports ban have helped curb inflows of cheaper competition, helping its sparkling beverage units retain their market share.

Delta Beverages, now an associate of Anheuser-Busch InBev (ABI) which acquired SABMiller last year, faces uncertainty after the Coca-Cola Company (TCCC) last year signalled its intention to terminate sparkling beverage bottling agreements with Delta and its associate Schweppes Holdings Africa.

TCCC, which formed Coca-Cola Beverages Africa (CCBA) along with SABMiller and the South African owners of bottler Coca-Cola Sabco in 2014, had retained the right to buy SABMiller’s stake in the event of a change of control at the brewer.  

Any resultant deal from the negotiations could provide a clearer path for local assets but the separation would likely lower Delta’s revenue and assets by a third.

But Exotix says the process could be complex given that Delta’s sparkling beverage units share a number of manufacturing plants and services with the lager beer business, along with other shared services in management, ICT platforms, distribution fleets and depots.

“There would certainly be dis-synergies if the business were separated and sold. Key considerations include who the eventual buyer preferred by TCCC would be, and whether Delta decides to retain its assets and develop a new soft drinks franchise. Given all the unknowns we cannot speculate on the repercussions at this stage,” said Exotix Partners.


An analyst’s view

Revenue has been falling since 2014 and the downward spiral is most likely to continue as economic situation worsens. In the 2016 full year results revenue dropped 4,6 percent from the previous year and in 2015 it dropped another 4,3 percent before it further declined by 6,7 percent in the full year 2016 to $538,2 million.

Earnings Before Income Tax Depreciation and Amortisation (EBITDA) has been also on a downward spiral since 2014. In the full year 2014, EBITDA fell by 1,7 percent from the previous year before it dropped 9,8 percent in 2015. In the year to March 31, 2016 it came in 10 percent lower at $128,9 million. That trend is likely to continue.

In line with the revenue and EBITDA, net profit has been on a downward spiral since 2014. Between 2013 and 2016 profit after tax decreased by 23 percent from $104,1 million to $80,1 million, and the trend is most likely to continue as revenue remains subdued.

Both return on equity (ROE) and operating profit margins have been depressed since 2014 owing to subdued earnings. ROE declined from 27,94 percent in the full year 2012 to 16,41 percent in the full year 2016, while the operating margins declined from 25,02 percent in 2013 to 20 percent.

But total assets have been increasing since 2012 as the company continues to invest in more plant and equipment to expand its operations, particularly on the Chibuku Super segment. Between 2012 and 2016 total assets grew by almost one half (49,04 percent ) from $497,1 million to $696,2 million.

Overall  performance of the company has been deteriorating since 2014 as the top line remains depressed owing to waning aggregate demand which further puts pressure on profitability.