Huge profit growth for Zambeef

Zambeef reported a staggering 200% increase in operating profits, with beef and poultry performing exceptionally well in its unaudited six-month trading results, posted on 8 June.

The meat processor’s strong interim results came within a challenging macro-economic environment. Zambia’s economy is battling high inflation and a 42% year-on-year depreciation of its currency, the kwacha, against the US dollar.

"While currency is outside of the company’s control - and this [has] had an impact on the first half results, and will remain a headwind for the rest of the year -  it won’t necessarily be a limiting factor on future performances," said a source close to the business. "Zambeef is taking steps to address this by transitioning some of its debt from US dollars into local Kwacha to limit future impact."  

Raymond Greaves, head of research at Fincap, said Zambeef’s strong underlying half-year results were also “complicated” by a $3m tax write-back, coupled with foreign exchange depreciation.

Economic uncertainty

While he conceded there were “uncertainties relating to the Zambian economy”, lower administration costs at Zambeef gave brokerage firm Fincap the confidence to upgrade its forecast for Zambeef’s full-year pre-tax profits by 22%.

Zambeef reported operating profit of ZMW155.3 million, up from ZMW51.4m at the same point last year. This is a 72% increase in US dollar terms, with operating profit of $13.7m, up from $8m in half-year trading results for 2015.

“With the strong focus on the retailing operations, Zambeef is confident that this robust performance will continue, demonstrating the resilience of the group’s business model,” said Zambeef chairman Dr Jacob Mwanza in a press statement. “As a consequence of this strong operational performance, the board is confident of meeting full-year expectations.”

‘Aggressive’

The strong improvement in operational profit has been driven by Zambeef’s focus on its core business unit: the production, processing, distribution and sales of cold chain meat products, especially beef and poultry.

Beef revenue pulled in $22m, while poultry chalked up $20.4m. As both meat categories performed well, Fincap has revised its full-year expectations: gross profits for beef and poultry are expected to be $0.4m higher when the year ends.

Zambeef has also been involved in a process of “aggressive expansion” in west Africa, according to the company. During 2016, the business opened two butchery shops, with two more renovated and fitted with modern equipment. Five new stores are under construction and will be up and running by September 2016. Zambeef is awaiting planning permission on a further five sites.

Damaging drought

The strong performance for Zambeef comes against a challenging economic background. Zambia’s economy has been hit by a global decline in copper demand, forcing its GDP growth rate to shrink by 5% in 2015. Analysts expect the GDP to continue its contraction, with a 3.3% fall expected for 2016.

Weather conditions have impacted Zambeef too. “Drought in the region is putting pressure on crop yields and has resulted in crop prices increasing,” said Raymond Greaves, head of research at Fincap. This has not had a huge impact on Zambeef as its “crop areas are irrigated from secure water supplies”. Greaves said the drought was more of a concern to the economy at large. “Zambian electric power is generated through hydro resources and the drought has necessitated widespread ‘load-shedding’, negatively impacting virtually every local business and household.”

This will increase the operational costs for Zambeef as it will have to use the far more expensive diesel power. Similarly, it will mean consumers have less money to spend.