Delta's $100 million 'war chest' at risk

Published: 23 November 2017
ABOUT $100 million of Delta Beverages' "war chest" is at risk of losing value due to a spike in inflation that has been driven by a surge in prices and high money supply growth sparked by a Treasury Bill binge, according to researchers at Old Mutual Securities (OMSEC).

Delta, one of the largest listed firms on the Zimbabwe Stock Exchange (ZSE) by market capitalisation, said last week it held $100 million in cash reserves during the half year ended September 30, 2017.

The huge cash reserves were expected to be deployed in investment opportunities such as a brewery in Zambia.

During the review period, Delta clinched a deal to acquire Natbrew Zambia, a sorghum beer operation in which it is reported to be eyeing 63 percent shareholding.

In an analysis of the Delta's results, OMSEC pointed to inflationary pressures and economic uncertainties in the country, as the reasons behind the caution.

The economic environment in Zimbabwe and political risk continues to negatively affect quoted firms, including Delta.

"As illustrated in the balance sheet, the company's total assets grew slightly from their 2016 position largely from increased cash holdings," OMSEC said in its three page analysis.

"Cash holdings growth superseded the decline in inventories as the company continues to maintain an increasingly more solvent balance sheet. The decision to have a solvent balance sheet is part of management strategy given the liquidity risk in the economy. We are concerned with the cash holding that the company has amassed given growth in currency and inflation risks as this exposes the company to significant value erosion risk potential. The company currently holds in excess of $100 million that they hope to deploy in worthwhile investments such as the Nat-brew Zambia brewery acquisition as well as any other investment opportunities," added OMSEC.

Delta has been trading on a cautionary with regard to a potential termination of a bottler agreement between the firm and the Coca Cola Company. Last week, management said negotiations were in progress.

The firm was working on securing a franchise agreement to continue producing sparkling beverages if termination goes ahead.

"Termination of the agreement could have economies of scale downside for the company as well as a significant loss of revenue. The biggest arising risks for the company going forward relates to high inflation and policy uncertainty," said OMSEC.

On Wednesday last week, Delta Corporation said profit after tax increased by four percent to $32,3 million during the review period, from $30,98 million in the comparable period last year, on improved finance and income from associates.

Revenue rose by one percent to $250,1 million from $246,6 million in the same period last year driven by higher volumes of lager beer.

Lager beer volumes were up 11 percent to 676 hectolitres while gross sales increased by nine percent to $119 million.

"Volume recovery was driven by value packs and value brands (Eagle) due to improved disposable incomes encouraging consumers to trade up from subsistence and economy categories," chief executive, Pearson Gowero told analysts.

Sparkling beverages volumes remained flat while sales of alternative beverages increased by 19 percent on the prior comparable period.

Sorghum beer volumes declined by four percent on the back of disruptions experienced in the rollout of the new 1,5 litre "scud", coupled with transactional challenges in the rural markets and a shift to lager beer.

The company, however, envisages sorghum beser volumes to improve in the third quarter.

"The launch of an improved 1,5 litre scud is expected to impact volume and revenue from third quarter," Gowero said.
- Fin Gaz
Tags: Delta,


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