Innscor's Profeeds Divestment; An Obstacle or Just a Storm in a Teacup?

It would be remiss not to examine the Supreme Court's ruling for Innscor to divest from Profeeds and assess whether this decision has a significant impact on the group's top line. Innscor Holdings is currently the second-largest stock by market capitalization on the Victoria Falls Stock Exchange (VFEX), with a market weight of 21.5%, just behind West Properties, which holds 25.3%. In the third quarter of 2024, total market turnover on the VFEX declined by 23% to $7.8 million compared to the second quarter, and Innscor was the largest contributor, accounting for approximately 38% of the total. Simbisa Brands, which spun off from Innscor in 2015, was the second-largest contributor, representing 18% of the turnover.

You can probably imagine what would be the state of the USD-denominated bourse, had this blue-chip stock not been listed in the first place. Eddie Cross describes Zed Koudounaris, a major shareholder, non-executive director, and deputy chairman of Innscor Holdings, as arguably one of Africa's top businessmen. In a recent interview, he shared his view that Zed's ventures outside Zimbabwe have arguably surpassed domestic operations, positioning him to compete directly with top businessmen in Nigeria. With this context in mind, I'm sure you're eager to explore what lies ahead for Innscor Holdings, a company deeply rooted in the domestic market. So, let's dive in, shall we?

The Supreme Court’s ruling for Innscor to divest from Profeeds was widely welcomed, with many expressing satisfactions over concerns that the merger between Innscor Holdings and Profeeds violated competition laws and risked creating a monopoly in the stockfeed industry. In 2015, Innscor acquired indirect influence over Profeeds through its full ownership of Ashram Investments, which held a 49% stake in Profeeds. Additionally, Innscor's 37.45% stake in National Foods, another major player in the same sector, heightened fears of monopolistic control. Following the merger, Profeeds and National Foods together commanded 57% of the stockfeed market, with their nearest competitor holding just 11%. During this period, Profeeds experienced significant growth, expanding its store network from 19 to 40 locations. It then becomes interesting to realize how much of Innscor’s revenue was driven by Profeeds.

The public’s reaction to the Supreme Court ruling mirrors the same positive reception of Starlink's entry into Zimbabwe, with many pointing out that Econet Wireless had long operated as a monopoly in the ICT sector, also charging high prices. As a capital markets and securities analyst, I endeavour to take a more objective approach, analyzing these developments based on reasonable basis rather than emotions. Whether the Innscor-Profeeds merger was beneficial or not is not the focus of this article. Instead, the key question is how severe the ruling is in terms of the conglomerate's revenue-generating potential. While the Supreme Court’s decision undoubtedly impacts the group's long-term projections, I doubt it will hinder their path towards achieving the US$1 billion revenue mark.

I was a guest on Zimpapers TV Network's Prime Show, Beat the Market, where we discussed both the Half-Year and Full-Year Financials of Innscor Holdings. I'd like to give you an opportunity to explore some of the key points we covered, which I believe are highly relevant to this issue. I'll aim to simplify Innscor Holdings' business model so that it's easily understandable, followed by a breakdown of revenue contributions by segment. I fondly recall my first seminar on investment analysis, when my mentor, Ranga Makwata, emphasized the critical importance of understanding a company's business model when conducting analysis. Since then, I've consistently dug deep into models of our major local listed companies. So, let's dive into it.

Innscor's top line is primarily driven by three key segments: Mill-Bake, Protein, and Beverages & Other Light Manufacturing. The Mill-Bake segment, which includes National Foods, Profeeds, Bakeries, and Nutrimaster, is the largest contributor to the group's overall revenue constituting a share of 51%. To keep things clear, I'll break down the revenue contributions by segment, and then take a closer look at the Mill-Bake segment to analyze Profeeds' specific contribution within it.

Revenue Breakdown by Segment

For the full year ending June 30, 2024, Innscor achieved revenue of US$910.1 million, reflecting a 13.2% growth compared to the previous year. This positive growth was driven by a positive volume growth of 15.7% across all manufacturing units. In terms of segmented EBITDA performance, the Mill-Bake segment emerged as the top performer, contributing 58% of the group’s total EBITDA of US$86 million. Over the past three years, the group has focused on expansion, investing approximately US$190 million in capital expenditures. The Mill-Bake segment has several key capital projects commissioned and others nearing completion, indicating a potential increase in volumes for the current financial year.

Under National Foods, the Patsa Plant (US$7.7 million) and the Biscuit Plant (US$5.6 million) have both been commissioned. Additionally, the Bulawayo Bakers Inn production plant (US$30 million) has been commissioned, while the Harare Baker’s Inn production line is set to be commissioned in Q3 of 2025. A project with Profeeds is also in progress, with the Bulawayo Stockfeed Factory (US$6.7 million) scheduled for commissioning in Q2 of 2025. For Nutrimaster, the granulation plant is under development, with commissioning anticipated in Q2 of 2025. Management has expressed intentions to transition from project mode to operational mode to boost volumes in the current financial year. Now, let’s take a look at the volume contributions and growth percentages from the four sub-segments within the Mill-Bake segment for the year ending June 30, 2024, compared to the previous year.

Volumes growth by Sub-Segment

You can clearly see how the Bakeries sub-segment plays a significant role in the Mill-Bake segment, contributing over 90% of the total volumes. In a like-for-like comparison, National Foods far surpasses Profeeds, contributing nearly four times more in terms of current volumes generated. Compared to the previous year, Nutrimaster saw the largest volume growth, followed by Bakeries and National Foods, while Profeeds recorded the slowest growth, with a modest 2.3% increase. Considering the group's average fixed asset turnover ratio over the past three years (1.66x), and this surged by 79% in 2024 compared to 2023, reaching 2.01x, Profeeds’ asset base remains relatively insignificant to the overall group's fixed assets.

In my view, Innscor is still poised to achieve higher volumes and, in turn, increased revenue this year. Being conservative, I forecast a minimum fixed asset turnover ratio of 2.07x, which was the peak over the past three years, recorded in 2022. The CAPEX project pipelines within the Bakeries and National Foods subsegments alone are robust enough to absorb any negative impact from the forfeited volumes of Profeeds.