A Standing Ovation Performance: Zambrew 2017 Review

To create value from cassava on the back of one of the most challenge macroeconomic periods for business Zambia has ever seen deserves a standing ovation. It is clear from the Chairman of Zambrew, Valentine Chitalu, that he was proud of what Annabelle Degroot and her team had accomplished by financial year end 2017. Not only was the company dominate leader in the clear beer game, its cassava based lager enjoyed a favorable exercise rate of 10% which ZB used to encourage over 4000 small scale farmers to cultivate the soft commodity ensuring a duopoly of corporate governance as well as value creation in one financial year. Outstanding!

Although the highlight of the year was the InBev deal, Valentine was delighted to report that the board, management team and staff remained focused and delivered positive earnings for 2017. This is a team that was driven by a strategy that was included investment, innovation and managing costs. The end result was a 12.6% increase in labor productivity. Furthermore, Valentine indicated that his firm ensured that they delivered on various pledges made to Government in 2016 following the reduction in excise tax from 60% to 40% in January 2016.

On performance, the company recorded a 15.25% increase in revenue for the period under review. Gross and operating margins remained fairly flat with a 1% increase for the former and 1% decrease for the latter. However, cost of sales increased by 14% and SGA (admin costs) were up by 40.2% on the back of a drop in gearing to 0% (cleaning up the books before the “big deal” no doubt). This is confirmed by the 30% dropped in non-current liabilities which pointed to a change in their capital structure. Their corporate finance team opted for an increase of 35.3% in short term financing which resulted in a 98% increase in finance costs (almost double the previous year’s). With their working capital cycle increasing to 35 days from 13 in the previous year, access to short term financing was crucial because the company still had an acid test below 1 (indicative of strain on covering current liabilities). The increase in the cycle was attributed to the 8.7% increase in receivable days despite a reduction in payable and inventory days respectively.

Shareholders will be pleased with the 6% increase in return on capital employed (ROCE). Return on Equity was at 11% down by 7% from the previous year due to the 34% fall in earnings. However, they will be asking questions of the management team regarding improvement in SGA and working capital cycle performance. Annabelle has already indicated that the “Formula 1” strategy as being central to the company achieving cost reduction. These will target wage freezes, cutting back on overtime and fixed costs. If successful, a fall in SGA is inevitable. With the InBev deal being concluded in 2016, variables are bound to change in the coming financial year albeit to further unlock value.

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