In my analysis of Zambeef Plc’s financials over the last 5 years, I have been able to draw on a number of issues impacting the group’s growth and profitability. Looking at the company’s annual reports from 2014-2018, a lot can be unwrapped from the company’s business model, their profitability and some of the challenges they’ve faced in sustaining their revenues which will hopefully inform prospective readers on one of the most recognizable brands in the country.
Zambeef Plc’s mandate is to be the most accessible and affordable quality protein provider in the African region. It has primarily achieved this through its vertically integrated business model which has enabled the company to maintain strong revenues with a secured supply chain, and has ultimately contributed to their sustained growth over the years. The company’s business model which goes right through the entire supply chain enables them to have control of their products i.e. their own dairy farms, piggeries, maize and soya processing plants, where these raw products are processed and converted into dairy and meat products. Consumers are then able to purchase these through Zambeef’s own retail outlets or other mega supermarkets such as Shoprite, through its concessionary agreements that enables them to manage entire butcheries in Zambia, Nigeria and Ghana to mention a few. Its’s this major control it has of the value chain that has allowed Zambeef to mitigate unnecessary supply chain disruptions and earnings volatility and ensured the company’s success thus far.
Performance Review
2014 saw Zambeef report a net loss of K20.2 million(-$3.4 million) which was a fall in profits from 2013 where they recorded a profit of K16 million($3.2 million). The dampening results were mainly attributed to the outbreak of African Swine Fever which impacted their pork operations as restrictions on the movement of pigs across the country were imposed. Lower than anticipated soya prices further added to a squeeze on margins that saw their profit numbers decline significantly. Finance costs increased by 23.8% which was mainly due to the decision to convert some of their US Dollar denominated capital to Kwacha as they serviced some of their debt obligations. 2014 was the year when the Kwacha was going through a particularly volatile period, depreciating over 15%. This affected the company as the purchasing power of consumers was lowered, while rising input costs affected the agribusiness even though Kwacha Revenues rose 3% in 2014. The company aimed to direct its focus on its core Cold Chain food products business and strengthening its retail and distribution network which saw the situation improve slightly in the second half of 2014 as Gross Profit was up 41.5%. However, these were unable to offset their incurred losses.
In 2015, the group recorded losses after tax of 54.6 million even though revenues rose 24.9%, moving from K1.24 billion to just over K1.5 billion. The group attributed the losses to the major challenges impacting Zambia as a slowdown in the Chinese economy- which impacted emerging markets in general, along with a strengthening Dollar which saw the value of the Zambian Kwacha depreciate over 90% moving from K9.49 to K19.57 against the dollar in what was a turbulent year for the currency. The introduction of power rationing which saw Zambeef move towards the more extensive use of diesel generators contributed to lower production volumes and higher production costs also waned in on the company’s profits and further contributed to the loss reading. Inflation which increased to about 14.3% from 7.8% the year prior impacted the company as petroleum prices and exchange rate volatility continued to push costs up, reflected in the rise of cost of sales by 18%. The company did see rises in their operating profits as they increased by 189% owing to increased performance of their cold chain food division which includes chicken, pork, fish and dairy products which was up 29.1% in the year. Their diversified product portfolio proved to be invaluable once again as growth occurred in different product segments even though profit numbers were negative. The company also completed the sale of Zamanita( their segment focussed on edible oils and fats) to Cargill Holdings(Another Agro-Business) for $27 million which aided in lowering Zambeef’s total debt in US Dollars by 39%.
Deal of the Year?
2016 served as a year of tremendous success for the Zambeef Group recording record profits during the year which was partly due to an agreement struck between the group and the U.K.’s Commonwealth Development Corporation(CDC) who acquired a significant share holding in the company that enabled Zambeef to generate $65 million in new capital. Highly revered as the African deal of the year seen by its nomination by the African Banker Awards, this deal enabled Zambeef to purchase shares by exercising their put options contract- which is a contract that allows you to sell shares at a predetermined price in future with RCL Foods over ZamChick and ZamHatch(poultry focussed businesses) with the buyouts further consolidating Zambeef’s position in the poultry space. It saw CDC claim a 17.5% stake in Zambeef with news of the deal seeing the value of the company’s stock on the London Stock Exchange, Alternative Market (AIM) rise as much as 50% following the announcement. The deal saw CDC Directors, David Osborne and Tim Pollock join the board. Profit wise, the success of the deal was further reflected in the Group’s Profit After Tax of K157.4 million($14.5 million) which was a significant improvement from losses that were recorded in 2014 and 2015. EBITDA increased by 111.1% as a strong performance within their branded daily products drove revenues up. The stabilisation of the Kwacha cannot be overstated as the negative impact of its depreciation had previously waned in on the company’s performance as it reports its results in both Dollar and Kwacha currencies. One of the key drivers for the company’s strong performance was its decision to direct its focus on its retail and cold chain food products division(CCFP) as it seeks to be the leading provider of these goods within the Zambian market and their strategic focus being on expanding its retail stores by moving into larger stores which was the backbone of their growth in the year.
The company continued to focus its growth through utilising its wide value chain, while cutting on costs with 2017 seeing the group sell a 90% stake in Zampalm (Its oil palm growing business) to the Industrial Development Corporation(IDC) of Zambia for $16 million. Its operational performance which was driven by its Cold Chain Food Products (CCFP) division and its capacity expansion programme which saw 10 macro stores opened was in line with the focus the company had in driving its cold chain business. Unfortunately, an Outbreak of the fungal disease, Septoria lowered wheat yields by 10.2% which waned in on earnings as seen in the 88.3% fall in EBITDA related its cropping operations (activities involving growing of crops). Soya and maize prices also took a hit as global food commodities slumped during the year, with some respective commodities recording 7-year lows. Following general elections in Zambia which came to an end towards the back end of 2016, measures taken by the central bank aimed at reducing inflation and stabilising the currency affected consumer spending through the interest rate channel (high rates lower consumer demand). With all these challenging external factors, Zambeef were still able to record a profit of K3.26million ($343,000) which was significantly lower from the highs of the previous year. Sales Revenue continued to grow, increasing by 27.3% with their CCFP Division volumes up over 15%. However, higher diesel and electricity costs impacted cost of sales and contributed to their lower profit numbers.
Where are they now
In 2018, the Zambian economy was relatively stable with GDP growing by 3.9% as good crop harvests and low inflationary pressure drove growth with a 4% forecasted growth for 2019. This was the case until September 2018 when significant depreciation of the Kwacha which was fuelled by the major selloff of assets within emerging markets, stirred by the Venezuelan crisis, and the Turkish Lira slump having a domino effect on countries including Zambia, South Africa and Argentina. The end of 2018 saw the Kwacha depreciate, trading at K9.67/USD to K12.24/USD by the end of it. However, the negative sentiment still didn’t curtail Zambeef as a 14.2% increase in revenue was reported. The outbreak of cholera during the months of December and January led to a number of the company’s retail stores being shut, with many others in the country following suit as the government stepped in to control the disease. Further diseases in April i.e. the outbreak of foot and mouth disease saw the group lose 175 cattle in their Kalundu dairy farm which was covered by insurance compensation of $240,000. Rampant outbreak of diseases continued to impact volumes as wheat yields slumped following an outbreak of Bacterial Leaf Streak which waned in on profits. The group ended the year with a profit after tax of K10.4 million ($1.06 million). Gross Profit increased by 20.1% owing to the 6.5% revenue growth within their Retail and Cold Chain Food products Division. EBITDA margins were up to 9.7% but increasing fuel prices and electricity tariffs moving 12% and 50% respectively during the year offset gains. The Group continued to cut costs down and was seeking buyers for its Chiawa and Sinazongwe farms as it looks for ways to continue to reduce its debt levels while ensuring its capital expenditure is sustainable.
The big idea
By looking at Zambeef’s results and Business operations its clear to see how the organisation’s Business Model plays a major part in driving its growth forward. Its large portfolio of products, along with the major control it asserts over its entire value chain from primary production, through processing and distribution and finally its retail business ensures the company’s secured along its supply chain and is well shielded in times of earnings volatility and uncertainty. The strategic moves through the disposals of ZamPalm, Zamanita and the 2016 deal struck between the group and CDC has ensured the company has the balance sheet to service its dollar debt as well as maintain healthy working capital. Even though the company is prone to a number of external factors such as exchange rate volatility, the impact of animal and plant diseases on their production volumes and adverse climatic conditions, the company has maintained its focus on being one of the most accessible and affordable quality protein providers in the Southern region and this is likely to continue as their drive towards increasing their retail space as well as its shifting focus to its core Cold Chain Food business are all likely to keep them in good stead going forward.