ZAMBEEF – Going Bold with a Cleaner Balance Sheet
Finance, Zambeef Products Plc

Zambeef’s 2016 annual report is aptly titled “A bold retail strategy for African growth”. This places some distance between this statement and their original mantra and company logo of “Feeding the Nation” (Zambia at the time). But why did they become so bold? Through vertical integration. As their profile states, they have been able to pursue markets beyond Zambia for value growth through securing their supply chain and reducing risks and earnings volatility through having a diverse portfolio.

In 2016, Zambeef continued with its aggressive expansion of its retail outlets. It currently boasts 140 outlets across Zambia that make it possible for the company to get their product to your plate 7 out of 10 times (author speaks of himself J). Furthermore, retail and distribution contributed to 57% total turnover. Pause a minute and remember how the company reacted when there was bad publicity? They were protecting their value creating asset. Rightly so.

On the cold chain production side, they dominate in almost every aspect from being the largest in piggeries, chickens, eggs, dairy and meat processing. Furthermore, vertical dominance is also evident in stock feed and cropping. Unstoppable they are. Hence why Dr. Jacob Mwanza (Chairman) described 2016 as a momentous one in their annual report. For their dominant vertical chain was boosted by a signed agreement with CDC Group (PLC) who became a significant and supportive shareholder in the group by putting USD65 million of new capital into the Zambeef “piggy” bank (see earlier blog by TFHZPC of the mechanics of this transaction).

 

Overall, the company increased its revenue by 58.2% from 2015 with operating profit going up by 15.7%. Improvements in their working capital was evident. Inventory days reduced by 29 days and receivable days went down from 35 to 7 days. In addition, its ability to cover short term debt improved from an acid test position of 0.97 to 1.74 which meant the company moved from bearish to bullish on liquidating short term facilities.

 

There was a 3% improvement on return on non-current assets and an increase in inventory turnover of 15%. As indicated in the joint CEO statement (Carl Irwin & Francis Grogan), controlling cost and reduction of debt was key to their strategy. SGA was down from 33% to 29% whilst gearing reduced to 14% from 34%. However, overall cost of sales went up by 71.3%.  Conversely, Master Pork, Zam chick and Zamhatch Limited’s added a fair amount of goodwill to the balance sheet. That’s because these are sure winners as evidence by the top 3 revenue earners being beef, chicken and pork (in that order). In addition, the company went from no cash and high trade receivables in 2015 to high cash and low receivables (signal of improved receivable days).

 

Shareholders will be proud of their 50% growth in equity for the year. Although return on capital employed remained flat at 9%, there was an improvement to 8% on shareholder funds (Return on equity). On the downside, no dividend has been proposed yet again in 2016. On the upside however, the board has signaled the adoption of a policy of regular progressive dividend payments to shareholders from 2017 onwards.

 

 

Following their strengthening of the balance sheet through the CDC transaction, we anticipate that the company will not seek organic growth but growth through acquisition as evidenced in their 100% acquisition of Zam Chick Ltd and ZamHatch Ltd. Why reinvent the wheel when you can just buy a new one that can sure up your revenue stream. Steady inflation rate and exchange rate will be a catalyst for revenue growth as industries rebound with the slight appreciation of copper price. Furthermore, jobs growth in the mining areas (i.e. Vedanta signals $1b into KCM) will see spikes revenue growth in surrounding areas as miners return to work.

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