ECONOMIC theory tells us that monopolies are uncompetitive and generally waste resources because they have no incentive to compete and by inference to be profitable. However Delta Corporation has just shown the market that theory is not always correct.
Delta’s earnings before interest tax depreciation and amortisation in the six months to September grew 10 percent to US$77,7 million. This was after revenue for the period increased 5 percent to US$315,5 million (turnover at US$367,3 million).
Finance Director Matts Valela told an analyst briefing on Wednesday that the group had leveraged revenue growth on EBIT at US$62,6 million, an increase of 10 percent on the same year ago period.
“Obviously on EBIT, cost control and good management of the value chain are the biggest games in town,” said Valela.
Delta’s earnings look strong enough to warrant a dividend at US3,83c per share. The interim dividend was up 14 percent to US$16 million at US1,3c with Valela saying they had adopted a 2,5 times cover policy going forward from 3 times. Cash generating capacity is unsurpassed US$82 million which is why perhaps Delta is the only listed firm earning interest which is more than its finance expense.
The fact is Delta is operating in a strong position with a market share of circa 95 percent on the sparkling beverages, never mind the valiant attempts from the Indians with production facilities in Zambia and Mozambique to re-introduce Pepsi.
Despite a drop in revenue from the lager business, the domination remains absolute, same applies to the opaque variants.
The intoxicating Chibuku is a market leader, the Super Chibuku is a good innovation in terms of packaging and appeal, and perhaps many who have sampled it have a generally good assessment of the brew.
Senior Business Reporter Golden Sibanda says Chibuku Super is generally smoother and tastier than other opaque (sorghum) beers. Chief Executive Pearson Gowero said Chibuku Super was “the magic bullet” which came with a new consumer acceptance with volumes having grown 1,794 million hectolitres and revenue in the portfolio growing to US$76 million, an increase of 24 percent.
Gowero said the group was in the process of putting together investment in order to beef up the product. The group is going to construct an US$8 million line for Chibuku Super. The line is being shipped into the country and construction work is already underway at the Chitungwiza plant. The group would also launch a 1,25 litre Chibuku Super with new packaging.
The less intoxicating opaque brew – Maheu is also doing very well and very popular with the US$1 lunch time budget and those on the go. Maheu grew 57 percent. Gowero said product extension and new pack innovations. Sales under the portfolio had grown 59 percent to US$7 million.
For Schweppes, Minute Maid is a winner, hands down. Delta tried to up the ante with the introduction of the dairy flavoured Super Sip. The jury is still out on this one but perhaps Dairibord’s Cascade remains light years ahead and could be followed by His Excellency’s (and this is said without favour).
Analysts expect Delta to use its massive distribution network to challenge for space in this segment, once formulation has been adjusted to remove the nasty lingering tanginess.
Delta’s market domination is down to two things, cost containment and a strong distribution network. This group in its never ending wisdom thought it could cut the middle men (read distributors) and land product at the foot step of each street corner.
That is easier said than done. How do you manoeuvre a truck with 800 crates delivering 10 cases per vendor among the 800 downtown Harare vendors? You still need the distributor.
Delta is one of the few local companies which have invested in upgrading and expanding its production. Its performance is not a function of some feeble coincidence and wishful crying about the economic environment, the need for an economic blueprint and lately they delay in the budget by the minister.
These guys mean business one can only assume that the mantra is “execution without excuse”. Many companies are conveniently complaining about liquidity and if you probe further – so what is the plan? Ah well we have to wait and see but how does that justify the company paying fees for the kids at St George’s?
Delta deserves the respects it generates in the market. How many companies can raise US$60 million loan facilities at a reasonable 7 percent per annum over a three-year period?
The six months period covered by the reports is usually a trough in terms of beverages sales due to the weather, notwithstanding sales were 5 percent ahead of the previous comparable period. Liquidity constraints and all Delta is poised for a strong full year, barring introduction of taxes of alcoholic beverages there will be minimum to stop the behemoth from delivering a stellar set of results at full year.
Three months ago the share price was trading at US$1,22. Analysts share price forecast on the counter was around the range of US$1,43. However, that was surpassed when the share price went slightly ahead.
The economy is indeed in a bad shape as is, but Delta has managed to capture the less US$1 spending per day market. Their earnings going forward can only be affected by a massive slowdown or market saturation.
Some analysts say at 13,3 percent, Delta’s return on equity is relatively lower than its regional peers. This might be an indication that the company has to some extent an inefficient structure in terms of cost management and margin maximisation and might not be efficiently utilising its equity base to enhance the return to its investors.
Delta closed trades on the Zimbabwe Stock Exchange with a US0,5c or 0,34 percent gain to US145,5c. The spread was made up of buyers at US145c and sellers at US150c.