Several stocks have been posting pleasing returns since the beginning of the year because of several factors that include improved liquidity and corporate transactions activity.
For example, Delta Corporation (Delta) posted a year-to-date real dollar return of 53% as at 06 April 2023 while Econet, Hippo Valley Estates, Tanganda Tea Estates, and First Capital Bank recorded real gains of 62%, 132%, 161%, 28%, respectively, just to name a few.
However, some are yet to respond follow suit but are constrained by several issues like very low free float and low visibility. We focus on African Distillers (Afdis), and we begin with the relationship between this counter and Delta.
Afdis is a subsidiary of Delta after the latter increased its stake enough to see the former transition from an associate to a subsidiary in 2021. Both businesses are in the alcoholic beverages sector but each with a different focus.
Delta manufactures clear and opaque beer, among other products, while Afdis manufactures and imports ciders, wines, and spirits.
The visibility of Delta’s products, however, dims its counterpart’s visibility but only because Africa’s alcoholic beverages market is largely driven by opaque and clear beer which collectively account for more than 75% of total alcohol consumed.
Wines and spirits, on the other hand, are only consumed by less than 10% of the continent’s alcoholic beverage consumers.
That said, Afdis remains a solid business in this space with strong presence in formal trade channels, largely positive operating cashflows in the last ten years, and fairly consistent dividend pay-outs.
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Another difference between these two companies is the liquidity of their shares on the ZSE.
Delta has 31.6% of its shares as free float, while Afdis has 8.6%. This means that there are more Delta shares than Afdis shares that are freely traded and not strategically held.
This underpins Delta’s average daily traded volume of 398,328 shares in the last 8 years which overshadows Afdis’ 19,325 shares that are traded daily, on average.
Afdis’ high liquidity risk profile has also pushed it out the purview of institutional investors, who typically drive stock market activity, and this underscores Afdis’ real dollar performance of -21% vs Delta’s 53% in the year to date.
Further, because Delta is regarded as the most liquid stock and receives half of Afdis’ earnings, investors are content with exposure in Delta alone and do not fear missing out by shunning Afdis.
We also add that, although both businesses manufacture alcoholic beverages, Delta has a footprint in other markets and other beverages. Delta also manufacturers non-alcoholic beverages like sparkling beverages and maheu, and its sorghum beer business has expanded into Zambia and South Africa over the years.
Afdis, on the other hand, only operates in Zimbabwe because of an established player in the regional market – Distell – which co-owns Afdis with Delta.
Given the parallels and differences we highlighted above, we undertake a relative price-to-earnings valuations of both companies to ascertain how these translate to value for the current and prospective shareholder.
We estimate FY23 EPS figures of US7.84c and US3.58c for Delta and Afdis, respectively, which we applied on risk-adjusted price-to-earnings multiples to come up with a ballpark valuation of US114.43c and US37.91c per share.
Based on these figures and current market prices, we observe that Delta has potential upside of 107% and while Afdis has potential upside of 80% in real dollars, and we largely attribute the difference in upside potential to different liquidity risk profiles.
In light of the above, we observe that, although Afdis is undervalued, Delta holds more upside after considering both companies’ fundamentals and associated risks.
This concurs with the exclusion of Afdis from many institutional investors’ portfolios and extensive investment in Delta.
Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.
