Cash flow cultivation delayed
Zambeef Products, (ZAMB) is one of the largest integrated agribusinesses in Zambia, with a broad spread of operations domestically and retail operations in Nigeria and Ghana. After two warnings and weaker profits in 2013, the shares trade on a wide discount to the peer group average and on less demanding valuations after the recent correction. With operations expected to recover in FY14-15 and debt forecast to fall as cash flows rebound, Zambeef is hoping to be able to restart dividend payments.
Strategy: Vertical integration and regional expansion
Zambeef’s strategy is to continue to grow, expand and diversify the business with the target of becoming the leading food producer in Zambia and the surrounding region. Its integrated business model is intended to secure the supply chain, ensure margins are enhanced by value-added products, reduce earnings volatility and maintain recent growth rates, by replicating the strategy in other markets.
Financials: FY13 challenges to start to ease in FY14
Zambeef issued two profit warnings in FY13. It removed all imported beef products from its retail outlets and put an embargo on them after a food security issue. It also warned that the wheat price was lower than forecast, hitting sales further, as well as the year-end valuation of its excess supply. In November, Zambeef reported a 63% fall in FY13 adjusted PBT, a 79% fall in EPS and EBITDA fell on lower divisional margins, stock write-offs and higher overheads.
We expect profits to rebound in FY14-15, as sales recover in beef and most other main divisions, offsetting the lower wheat prices. A cash inflow of US$21m in 2013 reduced net gearing to 44%, although it was largely driven by the sale of 49% of Zam Chick. As margins recover and finance costs fall, stronger cash flows in FY15 should allow further debt to be repaid, although we don’t currently expect dividends.
Valuation: Discount to peer average remains
Zambeef is trading on 7.9x EBITDA and 0.8x sales our 2015 forecasts, which are significant discounts to the peer average. The discount implies that investors attach a greater risk premium to Zambeef, because of its size, its less developed home market, or because it is not backed by a multinational, not just its weaker financial performance recently, or its strategy. Our valuation range of 26-41p is based on WACCs of 11.5%-13.5% and a 3% terminal growth rate. To progress up the range, Zambeef will at least need to show last year’s food security issues are behind it.
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