‘Bet on Delta’

17

DEMAND for Delta Corporation’s (Delta) products is expected to remain firm in the near future, making the company’s stock a good bet, a financial advisory firm has said.
This was after the Zimbabwe Stock Exchange-listed counter, which manufactures lagers, traditional sorghum beers and sparkling soft drinks, ordered most of its suppliers to maintain their pricing parity or risk being removed from their tender list.
According to Old Mutual Securities (OMSEC), this strategy has seen Delta improving its margins in the half year to September 30, 2018 at a time most companies in the country were hiking prices of their products in line with inflation trends.
Zimbabwe’s inflation jumped significantly to over 20 percent in October following the introduction of a two percent tax.
“We believe that the current growth in demand cannot persistently be met by Delta unless either the foreign currency situation improves or the pricing of their beverages adjusts accordingly.”
Either way, OMSEC said revenue improvement was not doubtful at least in the immediate term.
In the absence of more lucrative investment opportunities in the brewery business the Old Mutual research unit said it expects Delta to maintain its current generosity in dividend pay-outs in the immediate to short term.
Delta recorded a 77 percent increase in after tax profit to $57,2 million in the half year to September 30, driven by increased lager sales.
The company managed to improve its return to shareholder’s equity by 460 basis points owing largely to a better net profit margin and equity leverage.
Asset utilisation improved as general capacity utilisation was up given the growth in the total volume of sales.
The marked growth in equity leverage was underpinned by the company’s excessive cash holdings as well as the limited growth in retained earnings due to greater dividend distributions.
“The higher cash holdings arose from outstanding dividend payments to foreign shareholders, suppliers and creditors. The delay in payments to these foreign creditors (concentrate suppliers, foreign shareholder dividend payments and equipment and plant suppliers) is being caused by the company’s bankers being unable to source requisite nostro funds to settle the aforementioned foreign commitments,” said OMSEC.
Resultantly the ROE achieved in the current reporting period represents a significant jump from the comparative interim period.
“Technically speaking, the cash holdings growth compounded by lower inventory holdings and less relative debt has increased the solvency of the company greatly,” OMSEC said.
The financial advisory firm further indicated that on a fundamental basis alone, Delta was highly attractive as it has great demand for its products and its tight cost controls sets it up well for long term investors, provided they buy the share at the right price.
OMSEC said it believes that the currency uncertainty continues to grossly overvalue the company as investors rush for liquid companies such as Delta.
The risk with this speculative demand is that the resultant high volatility of the share price can pose significant risk as witnessed in the last three months when the share shot up to 436 cents per share and dropped to 210,5 cents per share.
As depicted in the company’s price to earnings ratio trend line below, the company’s P/E ratio has traditionally followed the company’s profitability trend but this was distorted post the 2017 reporting cycle due to the Zimbabwe Stock Exchange’s increased volatility from local currency uncertainty risk.
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