Dairibord (DZL.zw) Interim Results Commentary
Market Cap = ZWL 13.5 bn
= USD 84m.
Made a profit on a historical cost basis but a loss in inflation-adjusted terms (makes sense).
Whereas other companies report high net monetary gains, which drive up reported profits, Dairbord does the correct thing of reporting a net monetary loss. It's intuitive, if you are operating in ZWL currency that is losing value, you should incur a monetary loss.
Most companies that report very high net monetary gains are effectively saying the bulk of their money balances are kept in USD even though the functional currency is ZWL.
Revenue of ZWL 4 bn, means the dairy producer generated roughly USD 26m in sales in six months. We can extrapolate it to annual revenue of USD52m. Since translated figures can be misleading, we can look at volumes. ...highest in 5 years.
Profit margins are low. It's either Anthony Mandiwanza is failing to control costs or the GP margins are low due to stiff competition from Dendiary for certain product lines. Future profitably has to rely on growth, if margins cannot be improved with ease.
Finance Costs are too high. They are so high that they are eating up 3.5% of the revenue generated. If the company borrows more or rolls over debt at a higher interest rate, finance costs could easily balloon to eating up 5% of revenue.
The strategy of borrowing heavily in an inflationary environment is brilliant. The high-interest rate of 40% is still below inflation. They issue new debt and use the proceeds to retire maturing debt and pay interest.
They could even increase dividends and pay them using funds borrowed at an interest rate of 40%. The strategy ONLY stops working when there is deflation OR when the inflation rate is less than the financing cost (i.e. interest rate).
Dairibord should retire all its debt if the rate of inflation goes below 40%. Will it have enough cashflows to retire debt, at that time? They could run into some problems, but it's highly unlikely that the inflation rate can go under 40% within a year.
The Dendiary Merger fell off the table. The parties failed to agree.
A P/S ratio of 3 makes this company appear somewhat fairly valued, though it is a little bit on the high....vs a P/S ratio of around 2.4 for the ZSE. Operations are generating tons of cash. Demand looks like it's set to pick up. The balance sheet is structurally solid.
Now that the merger is off the table, there is nothing extraordinarily exciting going on. It's business as usual. The economy grows, Dairibord does well. It can be a buy on that basis.