HY16 results update: Delta reported its results for the half year ended 30 September showing an 8% decline in revenue to $314.522 million from $342.649 million prior year comparative. The result highlighted the impact of volume decline, down trading, and price reductions. Normal earnings per share of 2,89 cents were down 19% from 3,55 cents prior year comparative. Dividend for the period was up by 4% to 1,40 cents against 1,35 cents prior year comparative. The decline in revenue was on the back of a 10% decline in total volumes, changes in portfolio mix towards value brands as well as price reductions. The decline in volumes was more pronounced in sparkling beverages, down 13% due to intense competition from local and imported lower priced alternative offerings. Sorghum beer also declined quite significantly and was down 12%. The segment, however, reported a 1% growth in revenue due to the change in mix in favour of Chibuku Super. On the other hand, the decline in lager beer volumes stabilised, falling by just 2%, as a result of measures that were implemented to address affordability issues.
Margins coming off: While the decline in both revenue and volumes seems to be slowing, the same cannot be said for profits. EBIT for the period was down 20% to $43.5 million, while EBITDA was down 16% to $59.4 mil-lion. The bottom line was down 19% to $35.7 million. Operating margins were down to 18.21% from 21.47%. We believe pressure points stemmed from reduced prices, volume mix/shift in consumption towards the economy segment, higher input costs, as well as increased distribution costs for Chibuku Super. We do not see profit margins recovering immediately due to the negative effects of product mix and high costs of services and raw materials which would likely persist in the near term. Yet we do expect management to continue to implement initiatives that will slow down the rate of decline.
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Forward story: The bottom line is set to remain under pressure going forward as management intend to make further price adjustments to stimulate volume. We also expect the shift towards value brands to continue and in the process reduce margins. Volumes will also continue to taper given the continued pressure on discretionary spending and the resultant depressed consumer demand. Nonetheless we expect the weakness to be minimal given the measures that are being implemented by management. Focus will be on increasing efficiency and reducing value chain costs in order to retain consumers within the Group’s product portfolio. The new Chibuku Super plant will also help grow segment revenue while plans are at an advanced stage to open a further two new Chibuku Super plants and close the demand gap.
Investment Case: Delta remains a dominant player in all its operating segments with a 98% market share in the lager beer segment and an 86% share in the sorghum beer category. Although the market share in the Sparkling Beverages segment took a slight knock to 93% from 96%, Delta remains the dominant player. While we expect the headwinds from lower discretionary income, liquidity constraints, consumer trading down, and high costs to remain for the rest of FY16, we are positive that in the long term the Company will recover as the economy heals and consumer purchasing power regains strength.
The Group is still a strong cash generator having generated more than $58.8 million in the period under review. Net funding for the period stood at $65.8 million. This gives the Group enough financial muscle to invest in projects that will keep demand within its product portfolio. Delta is also in good financial health as it benefits from significant investment in capacity and productivity improvement. Furthermore the Company remains a strong dividend player with plans to keep the dividend cover within 2x cover.
We think an advantage Delta has is its flexibility and ability to play in all segments of the beverages market, which helps it keep consumers within its product portfolio. As a result we strongly believe there will be some switch back to the main stream lager brands as pricing issues are addressed, as well as when the economy recovers.
Delta also has access to SABMiller technology and brand innovation which gives it a wide pool of alterna-tive products to introduce into the market. Already the Group is in the process of refreshing its beer brands, as well as introducing new brands and beer styles. The new Fairbridge plant is expected to help recover margins in the sorghum sector. During the period under review operating margins in the segment were impacted by relatively high cost of maize stocks and high freight and logistics costs during the Fairbridge plant upgrade.
Recommendation: Although comparative revenue for the half year was down by 8% it was down by 5.96% when compared to the preceding six months to March 2015. This signals a slowing rate of revenue decline going forward. We therefore expect FY16 revenue of $536.2 million up from our earlier projection of $518.9 million, a 7% decline from FY15 revenue of $576.5 million. we forecast Attributable earnings to owners of the parent to be $75.90 million up from our earlier projection of $73.46 million. We now expect EPS of 6,09 up from 5,89 cents. Delta declared a DPS of 1,40 cents for the period, representing a dividend growth of 4% over prior year. This growth is in contrast to our expectation of a decline given substantial pressure on margins that the Company is currently experiencing. The dividend declaration points to the strong belief by management that margin recovery is on the cards and an indication that the final FY16 EPS may exceed our expectation. Although we still see restricted upside at current price levels we place a BUY rating on Delta. In the long term, we believe that Delta still presents one of the strongest value propositions in the market.