Drinking all the way to the bank!

One of the oldest corporates in the country and the current biggest listed entity on the Zimbabwe Stock Exchange (ZSE) celebrated its 125th birthday in style. Of late the giant had fallen on tough times with its story characterised by trials and tribulations, from fresh competition in the sorghum division brought by the recently launched Innscor’s Nyathi beer to even more vivacious competition in the sparkling beverages division exerted by Varun Beverages which pushes the Pepsi brands in the land.

Nevertheless, the company managed not only to post a set of stellar financial results but to also cross the 4 million hectolitres mark in the sorghum division and to set new record of 2.2 million hectolitres consumed in lager divisions. To put things into perspective, according to Zimstat as of 2022 Zimbabwe had a population of 15.1 million, mean on average a single individual drank 30 litres of sorghum beer from Delta alone.?

From a regional operations perspective the Zambia market suffered from distortions that were brought about by the introduction of exercise duty and also from the depreciating Kwacha. However, the company remains optimistic given the good start of the Scud and Super Banana flavour. In South Africa, the company opened the 3rd brewery and is witnessing a steady recovery in volumes.

Delta also has some stake in the listed companies African Distillers and Nampak which it reports under associates. Volumes under Afdis were also on a smooth trajectory with the company reporting that it has gotten into a partnership with Heineken.?Sustained growth was also witnessed at Nampak as the company is benefiting from recovery in some customer segments.

The company also reported on issues related to Environmental, Social and Governance (ESG), which is recommended in terms of world best practices. Of interest from the ESG numbers was that 7,000 direct workers the company employees together with 150 apprentices and 50 graduate trainees per year. In terms of contribution towards national fiscus, the company paid taxes equivalent to US$176 million. Delta also reported on the work it does to help and support the community which included bursary for students, and building classroom blocks in schools across the 10 provinces.

Analysis.

After adjusting for inflation, the company’s top line improved by 60 per cent to ZW$536,92 billion. Albeit the 29% growth in operating income, the operating margin for the period took a 4.5 percentage point drop to 18.5% compared to FY22 numbers. This reflects a slower cost containment exercised vis-à-vis the previous reporting period. The net profit margin which was 11.7% was also lower than 14.5% recorded in the previous reporting period. However, the total comprehensive income as a percentage of top line was 14.7%, slightly higher than the previous period’s 14.4% owing to foreign exchange differences on translation of foreign operations.

The company’s shares in issue increased by 0.6% as result of options being exercised through the course of the year. The company’s basic earnings per share in inflation adjusted terms for the past 12 months to 31 March 2023 was ZW$48,42 translating to a trailing Price to Earnings (P/E) ratio of 25X which is cheaper than competitor Zambian Breweries selling at 44X P/E. The P/E ratio assumes that if you were to recover your investment purely from the company’s earnings or profit annually, how long would it take you and its 25 years for Delta versus 44 years Zambian Breweries.

The dividend, which is profit distribution to customers for the year was US$0.03. Since the company did not use official exchange rate to adjust for inflation, I will use a blended exchange rate of 2400 putting the dividend at ZWL72. The company managed to grow its asset base by 40% whilst liabilities increased by 41%. Delta’s net asset value is now ZW$185 giving a price book ratio of 6.72. Although the company uses its plant and equipment to manufacture the beverages, it will be unfair to judge it via this metric.

Delta generated ZW$128 billion from its operations, over double of what it had generated in the previous year after factoring for inflation. However, the overall cash and cash equivalence of ZW$14 billion were lower that ZW$15.8billion in FY22, owing to increase in dividend payment amongst other factors.

The lager division continues to contribute the lion’s share towards the top line with a 40% contribution whilst the sorghum beer was at 32%. The sparkling division, where it is in tight competition with Pepsi brands only contributed 17% to revenue. Delta squeezed a 25% operating margin from the lagers and a 10% margin from the sorghum beer side whilst categories classified as all other segments were the most profitable with a 49% margin.

Although having 67% of its revenue in US dollars, the response from management seemed to suggest that the company is not considering migrating to the Victoria Falls Stock Exchange. Nevertheless, with the Delta commanding almost a third of the ZSE market cap, the company continues to amongst analysts favourite and widely covered stock.