Highlights
- Revenue up 15% to USD 804m
- EBITDA down 13% to USD 91m
- EBITDA margin down from 15% to 11.3%
- Dividend payment up 12%, to $15m
- Cash generation up 12% to $112m, 23% more than EBITDA
- Most business units seeing double digit volume increases except for National Foods and Bakeries
- $50m spent on expansion capex during the year
- Change of functional currency from ZWL to USD
- High wheat prices stifles demand, squeeze margins
- Costs have fully dollarized now
- Formal sales channels remain challenging
In a welcome move, Innscor have changed their functional currency from ZWL to USD, and accordingly released a set of audited USD financial statements. The last full year in which the company reported genuine USD results was 2016, since from 2017 to 2019, although the official currency was USD, a dollar wasn’t truly a dollar, and then Zimbabwe dollar was formally introduced in February 2019, eventually to be mostly replaced again by the USD. So, in seven years, the company has gone the full circle from USD, to Zimbabwe dollar, and back to USD dollar as the functional currency. The Property, Plant and Equipment accounting policy has changed from the cost model to revaluation model. Prior period numbers were restated to account for this revaluation to ensure the values are reasonable and fair.
High level performance
Consolidated revenue for the 12-month period ending 30th June 2023 was $804m, a healthy 15% increase from prior year. Using the rule of 72, if the company continues growing at this rate, revenue will double in under 5 years, which is extremely rapid growth.
Except for the Mill-Bake cluster of businesses, which includes National Foods and Bakeries, most business units across the protein, stockfeeds, beverage and light manufacturing clusters, saw double digit volume growth from prior year, which is testament to the vibrant growth Zimbabwe has been witnessing.
National Foods had a difficult trading year, with volumes down 3% in aggregate, (flour down 12%, maize down 9.4%, stock feed up 10%). The war in Ukraine sent international wheat prices well over $800 per ton last year, compared to less than $600 per ton now. These large increases led to higher pass-through costs to the customer, reducing demand and squeezing margins. Maize volumes were down due to the country opening the borders which enabled lower cost maize to be imported.
Profitability
Operating profit/EBITDA was down 13% from $105m to $91m, whilst the EBITDA profit margin reduced from 15% to 11.3%. The compression of this margin was attributed to a combination of higher raw material purchasing costs which couldn’t be fully passed on to customers, and an increase in operational expenditure of 16% from prior period, as the country continues to dollarize. The report notes that most cost buckets have now fully dollarized.
The operating profit infers to a return on capital employed of 14%, which is slightly above the weighted average borrowing costs of 12%. This is below par by the company’s standards, but is not surprising given the difficult year incurred by the company. Long term targets are 20% annual returns on capital employed. Equity accounted earnings decreased from $6m to $1.7m – reasons weren’t given for the drastic drop in profits. The companies in which IAL have a non-controlling interest, and so equity account for earnings, include ProDairy, ProFeeds (and subsidiary Nutrimaster), and ProBrands.
PBT decreased by 40% from $80m to $48m. As well as the lower operating margins, other contributing factors include the foreign currency losses of $16m, and additional depreciation of $2.5m. Surprisingly, interest costs reduced from $17m to $13m, even though borrowing increased from $45.8m to $68.1m during the year. PAT attributable to shareholders decreased from $45m to $32m, giving a net profit margin of 4%. A full year dividend of $15m was declared, implying 46% of profits paid out. I think the higher dividend payout signifies that management believe some of the losses were once-off in nature, because typically dividend payouts are at most, one third of profits.
Cash Flow
Cash generated from operating activities was $112m, up 12% from the prior year. Compared to an EBITDA of $91m, this is an exceptional performance, and demonstrates high quality earnings. Investment in net working capital was $98.2m, down from $121.7m in prior year, which is interesting as it shows the investment in working capital has reduced, thus freeing up cash, and explains the unusually high ratio of cash from operating activities to EBITDA.
Cash generated from operations (after interest and tax) was $86m, and $85.8m was used in investing activities, including $50m expansion capex, and the balance, presumably, $35m, maintenance capex. The fact that almost the entire cash profit was reinvested in capex activities for the future is encouraging.
Financing cash flows was a negative $3.9m, meaning net repayment of loans took place during the period, leading to ending cash and cash equivalents of $29.2m.
Balance Sheet
Overall, the balance sheet appers clean, with conservative gearing of 14%, and current ratio of 2. Shareholders equity, or book value increased from $278m to $291m. The market cap currently, as at 29th September, using 54c as last traded price, is $308m, implying a price/book ratio of 1.06, which appears well priced.
Expansion and future prospects
Many of the group business units continue to expand which is encouraging. $22m was invested in the bread divisions automated production line in Bulawayo, whilst ProFeeds invested $7m to expand its Bulawayo plant.
FY 2024 will be the first full financial year that the Buffalo Brewing Company will be in production. It will be very interesting to see how they perform, and watch the competitive response from main competitor Delta.
Some of the Innscor companies have been exposed to the Metro Peech Business Rescue proceedings, particularly the Pro Group. A high-level scan of the creditors schedule shows the ProGroup is exposed to the tune of $1.4m (ProDairy, ProBottlers, ProBrands, and Nutrimaster), of which the amount attributable to Innscor shareholders is roughly half of this amount. It is not clear what the National Foods exposure is since it is quoted in ZWL. Innscor has an allowance for credit losses in its financial statements of $1.4m.
Strategic Thrusts
The company will continue on its capital investment drive to expand and modernise manufacturing lines and plant capacities and improve operational efficiency through economies of scale.
Route to market initiatives will continue to be expanded, particularly to address the issue of the growing informal sector, which is posting a significant threat for companies which are not acting quickly. Products which are dependent on formal sales channels such as Colcom’s bacon have seen muted growth. The Texas retail chain under AMP meats and ProFarmer have grown to 50 stores each, as both brands bring their products directly to customers.
Group companies continue to add new business units and develop new products.
Valuation
Enterprise value at a conservative 7 times EBITDA is $637m, less debt of $68.1m less minority interest of $126.3m, plus cash of $29.2m gives an equity value of $443m, compared to a market cap of $308m. With 571m shares outstanding, this gives a price per share of 78c. Given the current price of 54c, there is conservatively 44% of potential upside, which I would opine is a strong BUY. Based on the full year dividend declared, this implies a dividend yield of 4.9%, so a healthy cash return to investors too.
Looking at the price from a GARP perspective (Growth at a reasonable price), the current implied P/E ratio is 9.6 times earnings. Whilst this year’s growth in profits was negative, next year’s will surely be positive given the various initiatives in place and the fact that many losses incurred this year are non-recurring. At a 12% earnings growth rate for next year, this implies a forward PEG ratio of 0.8 which is also a BUY.
The market cap currently, as at 29th September, using 54c as last traded price, is $308m, implying a price/book ratio of 1.06, which appears attractive.