When the announcement was made that Natbew had found a new home with Delta of Zimbabwe, the question of how life after being Zambrew’s baby would soon be answered when the 2018 financial performance results came in.
“Delta reportedly snapped up an estimated 44,1 million shares from Anheusur Busch InBev SA/NV to acquire a controlling stake in Natbrew at an estimated cost of US$12 298 639,32, with a single share going for approximately US$,028”, according to an article attributed to the Independent of Zimbabwe.
In the articles Financial Insight published on the acquisition (Budweiser lacks taste for Chibuku 2017 and Delta steps in to ‘save’ Chibuku), we had indicated the reason why the AB Inbev chose not to continue owing the opaque beer asset as this was a territory they were unfamiliar with.
With Delta stepping in, they were soon tested in their ability to sure up the operations and profitability of the company that was deeply embedded in the Zambian Breweries DNA.
A look at their income statement is revealing. Although it compares 9 month prior period to a 15 month one, it is clear to see that it has been tough year for the Zambian outfit. Gross profit only grow by 31% whilst the company’s cost of sales swelled by 68%. In the 15 month period, their distribution costs rose by 100% while administration costs went up by 48%.
The top half of the income statement shows that the company has now come to terms with life after Zambrew. The “umbilical cord” that ensured the EBITDA margins of over 20% in the earlier part of this decade, are now a distant memory. We can imagine that DELTA now has taken its gloves off and are now grappling with competition from local unstructured bulk suppliers. In addition to that, they are having to realign the business model to fit the Delta way of doing things.
“In the 15 months following change of control, the Company has focused on rebuilding skills to support a stand-alone entity; aligning systems, processes and practices with those of Delta Corporation”, read the statement from the Chairman of the Board Richard Mazombwe by order of the board on 6th June 2019. “This has been in the face of significant headwinds, a period in which margins were eroded due to high increases in the cost of imported packaging materials emanating from the currency depreciation”
The Chairman admits to the Porters forces of intense competition and unregulated players in his market. “In addition, the Company faced increased competition from bulk traditional beer producers and unregulated cheap spirits”
Finance costs also rose by 86% as the company now sees itself adjusting its capital structure in its new life. Being part of a large group ensures that some of these concerns would be “absorbed” at group level, but it is clear in the Chibuku maker is beginning to walk with its own two feet.
Ultimately, the company recorded a loss after tax of K45.5 million. This was 474% more in loss terms from the previous year. Tax credits often help some companies return to profitability but in the Natbrew case this was far-fetched with the current financial year’s income tax credit coming in at K7.8 million.
The board chairman will have to face investors in the company at the next AGM with the announcement of 3725% loss on earnings per share. Investors who have Natbrew in their portfolio will also be turning the attention to the underperforming LuSE All share index as it has also been on a downward trajectory as most equities indexes globally have faced a rout.
From a strategic perspective, the company does a number of things right that will only yield results over the long term. For example “during the period the Company discontinued the 1 Litre PET Chibuku Super Pack and introduced a 1.25 Litre pack which had the impact of lowering costs and improving margins”. They believe “as a result of this development, it was in a position to pass on some benefits to consumers through lowering the price per litre”, a plus for consumers.
The company has also invested in new technology that it sees itself introducing new products to market. “Major strides were also made towards the launch of an enhanced malt brewing formula packaged in a new 1.5 Litre returnable bottle to differentiate our beverage offering, whilst addressing affordability in the economy segment of the market”. However, with every new product that comes to market, the guys in marketing will be watching their marketing budgets to ensure product penetration. This impacts your administrative costs (proof of life as to the reason why internal decisions impact the bigger picture).