Delta’s Half-Year Financials Unpacked: What Lies Ahead for This Half-Year Mark?

Delta Corporation Limited is a notable counter that garners significant interest from most residential analysts, which explains why its Analyst Briefings are among the most attended events in Zimbabwe's capital markets. Here's why this particular company stands out:

Delta is the oldest blue-chip stock listed on the Zimbabwe Stock Exchange (ZSE), with a history dating back to 1898. Initially listed on the exchange in 1946 as Rhodesian Breweries Limited, the company rebranded to Delta Corporation in 1978. Its longevity and resilience through various economic cycles in Zimbabwe make it unparalleled. In the beverages industry, Delta is often described as having an "economic moat," signifying its sustained competitive advantage over rivals.

Currently, Delta holds a market weight of 31% of the total ZSE market capitalization and accounts for approximately 65% of the daily trading value on the local bourse. With this foundational understanding of its prominence, let’s explore its business model by examining its primary segments, subsidiaries, and associates.

Subsidiary & Associates

One of the most interesting aspects of Delta's operations is its wings and branches, through obtaining a significant ownership stake on some of its counterparts. During my first month as a junior analyst, I had the opportunity to tour African Distillers (Afdis) manufacturing plant in Stapleford, which was an eye-opening experience as I got to understand the intricacies of the business operations in our hostile economic environment. According to the latest financials, Delta owns 51.14% of Afdis, granting it a controlling stake in this wines, spirits, and cider producer.

Delta also holds significant stakes in companies such as Nampak Zimbabwe and Schweppes Zimbabwe, with shareholdings between 20% and 50%. This positioning provides Delta with substantial influence over these businesses despite not having full operational control. Delta Corporation’s extensive operations, influential subsidiaries, and strategic stakes in key associates underscore its stature as a market leader. With this overview, we can now delve into segments contributing to the group’s top line and break down their percentage contributions.

Delta's top-line contributions come from four major segments: Lager Beers, Sparkling Beverages, Sorghum Beer, and Wines & Spirits (via Afdis).

As shown in the table above, Lager beer remains the primary driver of the group’s revenue. Its percentage contribution increased by 1%, which can be linked to a 9% growth in lager beer volumes recorded in HY25 compared to HY24. Sorghum beer, the group’s second-largest revenue contributor, accounted for 30% of turnover—5% lower than the same period last year. This decline aligns with a 12% drop in sorghum beer volumes during HY25. Sparkling beverages saw an increase in contribution during HY25, fuelled by a 10% rise in soft drink volumes. Meanwhile, the Wines and Spirits segment, managed under Delta’s subsidiary African Distillers, achieved an 11% volume increase compared to the prior half-year period. However, its revenue contribution remained stable at 7%, largely due to the promotional activities (discounts) that partially drove the volume growth.

Let’s explore each segment in detail to better understand the numbers:

Lager beer volumes have shown a consistent upward trend over the past five years, both in half-year and full-year periods. The lowest volumes for this segment in the last decade were recorded in 2020, with full-year volumes reaching 1,162 (hectoliters 000). This decline was primarily due to COVID-19 restrictions, which limited consumption opportunities and banned on-premise consumption channels.

The growth in half-year volumes has been driven by improved product availability and competitive pricing, a trend expected to continue into the second half of the year. Delta is well-positioned to exceed its volume performance in 2024, with full-year volumes for the current year likely to surpass those of the previous year. Market share for this segment has remained stable at 96% over the past two years.

Now, let’s dive into the Sorghum Beer segment. Shall we?

Sorghum beer volumes have declined across Delta's key markets. In Zimbabwe, half-year volumes dropped by 11%, in South Africa by 8%, and in Zambia by a significant 20%. These declines are attributed to several factors, including reduced disposable incomes in rural areas due to drought, rising costs of key cereals driven by El Ni?o-related drought conditions, supply chain disruptions, and increased competition. Consequently, this segment's contribution to group revenue fell by 5% during the half-year period.

Delta introduced Chibuku Super beer in 2013, and it has remained a staple on the market for nearly two decades. In December 2022, the Buffalo Brewing Company (TBBC), a subsidiary of Innscor Africa, made its first foray into alcohol manufacturing by launching the Nyathi brand of sorghum beer. That same year, Delta expanded its Chibuku Super portfolio with a banana-flavored variant. While Delta has maintained its market dominance, the Nyathi brand is gradually gaining consumer appeal in the past two years.

Looking ahead, Delta remains a strong player in the market but must address these challenges such as mitigating cost pressures through buffer stocks, to sustain the segment’s performance, especially against the backdrop of climate-induced disruptions.

Delta's market share in the sorghum beer segment, which had exceeded 90% for two decades, fell by 4% to 87% in the half-year period ending September 30, 2024. Unlike the sparkling beverage segment, sorghum beer is expected to record lower volumes this year compared to the prior year, as consumers increasingly shift towards lager beer and soft drinks in this current period. The consolidated sorghum beer volumes for Zimbabwe, South Africa, and Zambia are detailed below:

Now that we have explored the beer segments, let’s look into the soft drinks segment:

Similar to other segments, sparkling beverages have also experienced an upward trend in the past 3 years with an average growth rate of 44%. In the half year period ending 30 September 2024, the sparkling beverages grew by only 10% due to factors such as the introduction of a sugar tax. This growth despite headwinds can be attributed to reformulations and pack size adjustments that minimized the cost burden on consumers. However, some price increases were unavoidable and route-to-market policies also disrupted formal trade channels.

The group is actively working on reducing the sugar content in its soft drinks while maintaining the same taste, a strategic move in anticipation that sin taxes might leapfrog in the 2025 budget. At one point in the half year period reported, the contribution of US$ sales dropped from 88% to just over 60% due to inflation-driven distortions in formal trade channels. However, this gap has since closed, with US$ sales now contributing over 80% by the end of the recent half-year period.

This current half-year period is likely to record the highest volumes for this segment, particularly boosted by the festive season. Historically, this has been the trend that full-year volumes are likely to surpass those of the previous year. But with the economic hiccups at play, one would also not be surprised if this segment fails to deliver as expected.

Now, let’s shift focus to Delta’s subsidiary, which is the smallest contributor to the group’s top line:

Under African Distillers, volumes are driven by spirits, wines, and ciders. Over the past five years, volume growth has been supported by route-to-market strategies, such as expanding direct distribution to better serve the informal channel. However, the prevalence of cheaper and illicit spirits remains a significant challenge for the wines and spirits segment. The volume growth recorded in the recent half-year was largely driven by promotional activities. In my view, this growth is unsustainable as it leads to increased cost of sales. The company continues to engage with the government to combat the proliferation of cheap and illicit products, and a favorable resolution could help the company recover from the 42% decline in net profit margin reported in its recent half-year financials.

In conclusion, Delta Corporation remains the most liquid counter on the Zimbabwe Stock Exchange (ZSE) and has a strong history of dividend payouts, averaging a dividend yield of 5%. Despite the challenges of 2024, including the El Ni?o-induced drought and its visible effects, Delta remains an interesting counter to monitor closely. In terms of share price movement, Delta is a defensive counter and has a beta above 1, meaning it tends to outperform during a ZSE bull run.

However, the introduction of the sugar tax poses risks to both consumers and shareholders. The additional cost burden is passed onto consumers with limited disposable income, which could lead to reduced volumes. Moreover, a portion of the taxes paid represents shareholder funds that could otherwise be allocated to capital expenditures (CAPEX) or higher dividend payouts.

In my opinion, the counter is currently undervalued. Liquidity challenges on the ZSE are preventing blue chips from fully adjusting to the devaluation of the Zimbabwean Gold. This presents an opportunity for timing and strategic investors to acquire the stocks at a discount and realize gains when it eventually adjusts to its intrinsic value.