zambeef fy 2014 post earnings review

Summary

• Zambeef announced its financial year 2014 results with a negative EPS of K0.099 and K1.64 billion ($279M) in revenues.
  
• Foreign exchange losses and finance costs triggered a pre-tax loss of K21.2 million ($3.6M).
  
• Improved H2 revenue performance in the company’s core cold chain food products mitigated the extent of losses.
  
• Stock price down 18.6% YTD
  

Lusaka Stock Exchange-listed Zambeef Products Plc released their 2014 annual report which had revenues up 3 % year-over-year at K1.64 billion with a pre-tax loss of K21.2 million after being firmly in the black last year. Earnings per share (EPS) was of course at negative K0.0992:

Income statement

Revenues

Zambeef had mixed performance with respect to revenue growth in comparison to 2013:

The Cropping and Edible oils divisions, which accounted for 40.6% of total revenues in 2013, had their contribution reduced by 26.9% and 14.5% year-over-year, respectively. The following challenges were faced in H1 2014 (in addition to higher inflation and fuel prices faced by customers):

• Lower Soya bean prices 
  
• Outbreak of African swine fever in
  
• Reduction in sales of cold chain food products through Zambeef’s retail network
  

There was also strong competition from cheap edible oil imports. However, these factors were mitigated by above 20% year-over-year revenue growth in Nigeria, Ghana, Milk and Dairy, Leather, Eggs and Stock Feed divisions as well as improved H2 performance in Beef, Pork and Chicken divisions. Zambeef generated 94 percent of revenues domestically.

Export earnings have increased by 591% over the last 3 years to K177.5 million in 2014. They account for 10.8 percent of total revenues, with most of this growth being exports into the SADC region.

Profit/loss

Gross profit increased slightly by 0.4 percent year-over-year to K555 million. Gross profit margins decreased from 34.7 percent in 2013 to 33.8 percent in 2014. Zambeef declared a loss for the year of K20.2 million (K16M profit in 2013):

The loss was primarily driven by increases in exchange losses and finance costs of 119% and 24% year-over-year, respectively. The Zambian Kwacha is down 12.5 percent year-to-date as at time of writing but had depreciated as much as 28 percent in the first half of 2014. Zambeef is also exposed to $49.9 million of US dollar denominated debt from 3 entities:

The positions are only partially hedged and any significant movements by the Kwacha against the US dollar have the potential to materially affect earning as was the case in 2014.

Balance Sheet

Assets

Total assets grew by 12 percent year-over-year to $1.8 billion - driven by growth in property, plant and equipment (PPE) (up 6%) and current biological assets (up 25%). As at end of year 2014, the value of biological assets stood at:

 A total of 18,230 feedlot cattle, 610 dairy cattle, 6,896 pigs and 5,848,460 chickens were culled during the year.

Liabilities         

Total liabilities increased by 34 percent year-over-year to K709 million driven by an increase in long term debt (up 11.5%) and bank overdraft facilities from 5 commercial banks (up 41%). Long term debt is broken down as follows:

38.6% of the debt is repayable within the next 12 months. Zambeef closed the financial year highly geared with a ratio of 56 percent (54% in 2013).

Cash flows

Zambeef generated K81.6 million in cash from operating activities – down 25 percent year-over-year. Here are a few other key highlights from the statement of cash flows:

• Company spent K79.4 million in Capex on PPE and plantation development
  
• Sourced K41 million in long term, short term and lease finance
  
• Paid down K49.8 million in long term debt
  
• Closed the year with a negative cash balance of K147.9 million
  
• No dividend will be paid in 2014.

Stock performance

Zambeef stock is down 18.6 percent year-to-date on the Lusaka Stock Exchange (LuSE):

The closing price yesterday was K2.85. Market capitalization has decreased by K161 million year-to-date to K707 million. The company also trades on the London AIM and in the US as a Depository Receipt (DR) over-the-counter (OTC).

Going into 2015, there are a few developments which could boost Zambeef’s earnings:

• Holiday season sales could be boosted by the recent (modest) drop in domestic  fuel prices
  
• There is also the possibility of a more significant pump price decrease in 2015 should the Kwacha appreciate or global crude prices continue to fall. This would increase disposable income of customers and reduce Zambeef costs
  
• The significant  increase in excise duty on imported edible oils as per 2015 national budget could boost sales
  

On the flipside:

• Increased cheap beef imports on the market could affect beef margins
  
• Possible currency fluctuations going into the first quarter of 2015 because of presidential elections could again impact earnings
  
• Uncertainty on policy environment owing to a new president being elected in 2015
  
• Increase competition, especially from ‘More Beef Zambia’ which is in the process of being acquired by Berlin-based Amatheon Agri