Business Maverick

Distell flags booze ban losses and R100-million unrest hit 

By Mfuneko Toyana 23 July 2021

Alcoholic beverage producer Distell sees headline earnings falling by more than half in the financial year ended June 2021 compared with last year, due to the impact of the lockdown bans on alcohol sales, the firm said on Friday, potentially jeopardising the purchase of the South African company by Dutch brewing giant Heineken. 

Mfuneko Toyana

Ciders, brandy and wine-maker Distell sees headline earnings rising by more than double in the financial year ended June 2021 compared to last year, boosted by gains in market share and resilient sales in its businesses elsewhere in Africa.   

The company however flagged the impact of lockdown bans on alcohol sales. Distell also said the violence and looting of retail outlets and factories last week had resulted in around R100 million worth of damages after its depot and distribution centres in KwaZulu-Natal were hit by looters.      

The company said the latest booze ban, announced on June 27, had resulted in a R30 million hit on operating profit.

In a trading statement ahead of its final result set for release later this year, Distell said headline earnings per share (heps), a measure of income from operations, trading, and investments, would likely be between 735,6 cents and 782,7 cents in 2021, from 235,3 cents in 2020, a more than 200% increase. 

The firm, which owns popular cider brands like Savannah and Hunters Gold, also flagged the impact of the prohibition on alcohol sales, saying the bans instead were fueling the black market run by criminal syndicates. 

“The recent unrest demonstrates the unfortunate effect syndicates have in an environment where poverty and unemployment have been exacerbated from the pandemic,” Distell said, putting the size of the illicit market at close to R5 billion. 

“Recent research shows that bans on alcohol sales have increased and fueled the illicit trade. This has now reached an unacceptable 22% of total market volumes in South Africa, worth R20,5 billion in sales value,” Distell said.  

The bans however are not likely to be reversed anytime soon. South Africa Breweries (SAB) had its court bid to scrap the latest alcohol ban dismissed in the Western Cape High Court. Wine-makers association Vinpro is also in court to have the ban lifted.

Distell revealed in May this year it was in talks with Heineken, the world’s 2nd largest brewer behind Anheuser-Busch InBev, over a potential acquisition that could be worth as much $3.1 billion. Since the Covid-19 pandemic made landfall in March 2020, South Africa implemented four bans on alcohol sales, the most recent in late June due to a third wave of infections driven by the fast-spreading Delta variant.

 Heineken was among the first alcohol firms to slash local investments in response to government’s prohibition on alcohol sales, bans which the industry says cost it billions of rands, and which they are challenging in court. 

In January Heineken announced plans to cut its 1,000 strong South African workforce by 7%. That was after it halted plans to build a R6 billion brewery in KwaZulu-Natal and halt other new investments. So while Heiken’s bid for Distell came as a bit of a surprise, the investment case still holds water.

“Foreign investors are probably looking at the longer view. Distell are very strong in the cider market, which their competitors haven’t to get a foothold in. Obviously they’re battling with the booze ban, but I don’t think it will slow down the deal,” said Greg Davies, wealth manager at Cratos Capital. “There’s a good chance of something happening in the next few months.” BM/DM

Story corrected to reflect headline earnings per share rising rather than falling for 2021. Apologies for the error.

 

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  • I think many assets are cheaper to buy than to build.

    Take a look at industrial buildings. To construct a new 10,000sqm solid factory (not talking the slabs with steel roof and sides) with fire sprinklers will cost at least R160 million.

    A bit of reverse engineering:
    one can rent at about R50 to R70 per square meter.
    put that through a valuation and the Valuation is close to half the replacement value.
    So buy a building rather than constructing one.

    That math will probably be even more acute in brewing, bottling etc production equipment.

    I’d lay odds the cost of buying Distell’s operating assets (buildings, breweries, bottling facilities, warehouses, etc) is MUCH cheaper than establishing that production capacity from scratch.

    I wonder if Distell AFS shows what the insured value of their tangible assets are??

  • As the wine industry is mostly concentrated in the Western Cape, I wonder if there is not something more sinister behind the booze ban by the ANC

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