THE El Niño-induced drought affecting Zimbabwe and at least five other Southern African economies will present National Foods (NatFoods), one of the country’s largest food manufacturers, with growth opportunities, according to analysts at Morgan&Co.
“We observe that, historically, NatFoods sees a sales volumes increase in maize during drought seasons because of depleted grain coffers that force consumers to purchase grain from the miller,” Morgan&Co said in its analysis of NatFoods financial results for the half-year ended December 31, 2023.
“We opine that the same will happen in 2024, considering that sales from the maize milling division have already begun to recover, albeit at controlled prices. We also add that the top and bottom line of the group will improve upon the completion of capacity expansion and capex projects in the snacks, stockfeed, biscuits, and pasta divisions.”
However, considering that most of these divisions’ products are relatively income elastic, the researchers anticipated strong sales growth only after disposable incomes recovered from currency depreciation, El Niño-induced drought and a challenging year in the mining sector.
“We also add that capex is at its tail end and the accruing operating cash flow from the investments will be key in keeping the interest burden low going forward,” it said.
NatFoods reported an overall sales volume increase of 3% because of a recovery in sales volumes in several sub-units. The flour milling unit registered 5% sales volumes increase because of the lower global wheat price, which softened local flour prices.
Sales volumes in the maize milling unit, however, were down 10% because of duty-free imports. Rice sales were down because of a rice export ban in India but this was somewhat cushioned by growth in volumes in the cereals and snacks divisions. A decline in the interest expense further supported the bottom line, which grew by 51%.
Expansion projects in the biscuits and pasta manufacturing divisions pushed the value of total assets higher and this was largely funded by internal resources.
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Operating cash flows were also used to repay borrowings as well as pay dividends.
“NatFoods will likely experience a sales volume increase in maize in 2024 because of depleting maize stocks,” the researchers said. “We also add that capacity expansion and capex in the snacks, stockfeed, biscuits, and pasta divisions, which are nearing completion, will significantly improve the top and bottom line but only the medium to long term because of a crunch in disposable incomes in 2024.
“Margins will likely remain under pressure because of imposed price controls amid a surge in grain prices globally. However, the lower debt burden will cushion earnings through lower servicing costs,” Morgan&Co added.
Revenue increased by 3,3% to US$172 million, with the moderate increase being largely volume related. Gross profit decreased by 2,1% to US$784 000 in absolute terms, as pricing was moderated to maintain volume momentum.
Operating costs, which continued to re-base in real terms, increased by 7,9% to US$25,7 million, driven mainly by power (both from the grid and generators), repairs and maintenance, and higher wages at factory floor level.
