Business Maverick

Distell’s African cylinders are firing 

By Sasha Planting 29 August 2019

For years Shoprite’s Africa operations were the envy of South African business executives following the retailer’s slow and measured investment across the continent. However, as former Shoprite CEO Whitey Basson was fond of saying, Africa is not for sissies as the Africa promise proved slow to materialise. Many SA firms, including Shoprite, Tiger Brands, Woolworths, Consolidated Investment Ltd, suffered as volatile currencies and economies (and questionable investments), retarded their expectations. At first glance, it seemed liquor company Distell was to meet the same fate, but a closer look suggests the opposite is the case.

In 2015 wine, spirits and cider producer Distell set itself the goal of doubling revenue and earnings by 2022, an objective that it is on the way to achieving.

It is doing this by doubling down in South Africa, its core market; expanding into Africa and growing its international business. But it is doing this in a more focused way than before, selling off non-performing brands like its cognac business Bisquit and wine farms La Bonheur and Stellenzicht in 2018.

In the last financial year the maker of Savanna cider and Amarula liqueur has been less overt about its changes, concentrating on optimising and expanding its manufacturing operations in SA, shifting its wine portfolio towards the ‘premium’ level internationally and exiting various markets and categories; and managing Africa’s headwinds and tailwinds.

The headwinds were delivered by Angola and Zimbabwe.

In Angola the company decided to impair about two-thirds of the value of its 26% investment in Best Global Brands, the company it acquired a 26% stake in, in 2017. Angola is yet to recover from the recession that the country fell into following the oil shock of 2014.

And in light of the uncertainty and economic difficulties facing Zimbabwe, the group has  recognised a credit loss provision of about 80% on a US dollar-denominated savings bond issued by the Reserve Bank of Zimbabwe, yielding 7% and maturing at the end of 2020.

Distell invested in the bonds because its Zimbabwean supplier, African Distillers Limited (Afdis), in which it owns an indirect 31% interest, was unable to settle its trading debt owed to Distell due to the shortage of foreign exchange in Zimbabwe. With few other options, Distell accepted payment in local currency and invested the proceeds with the Reserve Bank of Zimbabwe.

“As painful as they were we believe these two write-offs were the prudent thing to do,” said Distell CEO Richard Rushton at the presentation of the company’s results.

On the face of it, they had a material impact on the company’s results.

While revenue for the year increased by 9.4% R26.2-billion, operating profit fell 26% to R1.8-billion largely as a result of the impairments. The impact flowed down the income statement where profit attributable to equity holders of the company fell by 45.5%.

Earnings per ordinary share 45.6% to 408,4 cents per share.

But these results don’t tell the full picture, particularly in Distell’s Africa (ex SA) business where revenues grew by 20% on sales volumes that grew by 10.3%. And outside of the Southern African Customs Union, in markets like Nigeria, Kenya, Ghana, Zambia and Mozambique, the growth was even stronger. Revenue and volumes grew by 40.6% and 28.6% respectively.

To put this into context, revenue grew by 9.5% in South Africa, with sales volumes down by 0.9% in the face of declining consumer confidence and disposable income and heightened competition from competitors, particularly in beer.

In its international markets, revenue remained constant while volumes declined by 10.6%.

On a normalised basis, which Distell believes is a better reflection of performance, earnings before interest, tax and the accounting stuff, increased by 12.4%. This excludes the impact of the impairments, profit on sale of investments, once-off losses in Tanzania from the prior year, retrenchment and group restructuring costs. Excluding foreign currency translation movements, normalised earnings, before technical accounting factors, increased by 7.5%.

“Momentum in our Africa operations is picking up,” says Rushton. This is being created by increasing local production in countries like Nigeria and Kenya (with Angola and Ghana planned); focusing on distribution and routes to market; and by highly targeted marketing.

“Building can be an uncomfortable phase with some setbacks which we have just had to ride out,” says Rushton. “We have a long way to go yet, but we are confident our strategy in Africa – which is conservative – is the right one.”

Growth in sub-Saharan Africa is expected to rebound to 2.8% in 2019, with countries like Kenya, Ghana, Tanzania and Mozambique exceeding that. While Angola will continue to struggle in 2019 and possibly 2020, the Economist Intelligence Unit suggests that policy reform is galvanising the economy. It says economic growth of 2.5% is expected from 2021, followed by 4.1% in 2022 and 5.0% in 2023, thanks to positive developments in the non-oil sector.

For Distell, the Africa region contributed 59.6% to foreign revenue, growing its overall contribution to group revenue to 15.5% in the period.

Despite the headwinds, the group declaring a gross cash dividend of 249 cents per share, up by 7% compared to the previous period.

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