Annual Report
December 2nd, 2020
Below is an extract from the Chairman’s Review
It is my pleasure to present to you my inaugural report as Chairman of Zambeef PLC with respect to the financial year ended 30 September 2020.
On the back of a challenging 2019 financial year, 2020 followed suit and proved to be an even tougher year for the Zambeef Group. The 2020 financial year was characterised by difficult economic and market conditions that were exacerbated by the Coronavirus (COVID-19) pandemic. Despite significant growth in the first half of the financial year, macroeconomic headwinds, in particular those associated with the Kwacha depreciation, accumulated in the second half and negatively impacted on profitability.
The Group generated operating profit of ZMW210.5million (USD13.0 million) compared with ZMW161.2 million (USD13.1 million) in the prior financial year. Loss before tax was ZMW22.7 million (USD1.4 million) compared with a profit before tax of ZMW38.7 million (USD3.1 million) achieved in the prior financial year. The loss position is mainly attributed to a deferred tax asset impairment, higher financing and exchange losses following the depreciation of the local currency.
The Board believes the key to sustainable growth, while mitigating the effects of adverse economic cycles, lies in remaining committed to achieving its strategic priorities. As such, the key focus remains on the core divisions that generate sustainable and strong cash flows, while reducing debt to release cash for reinvestment in higher returning projects.
The Economic Environment
The global economy experienced a deep recession in 2020 as a result of the unprecedented reduction in production output and consumer demand following the slowdown in the first half of the calendar year. This COVID-19 related slowdown took a toll on the Zambian economy, which in turn impacted our customer base.
The COVID-19 pandemic, although a health crisis, had far-reaching effects on global trade and transformed social interaction. In the Zambian context, despite proactive and timely monetary and fiscal policy interventions by the government to support the economy, GDP is projected to contract by 4.2% in 2020 and rebound to growth of 1.8% in 2021.
The Zambian economy, which was already battling the effects of a high debt burden, cash illiquidity and waning global investor confidence, was left vulnerable when global commodity prices dropped amidst the reduction in global trade following the onset of the pandemic. The sharp depreciation of the local currency that came about as a result of reduced foreign currency inflows had a detrimental effect on the economy. Consumer price inflation closed at 15.7%, 730 basis points above the rate recorded the prior year.
As part of our sustainability programme, and to support Government efforts to contain the spread of COVID-19, Zambeef, in collaboration with partners, donated food and non-food items worth ZMW1.2 million. As a Group, we are always proud to be part of the solution to the challenges facing the communities in which we operate.
Zambeef Debt Position
Zambeef continues to de-risk the business by focussing on the reduction of debt to mitigate the impact of foreign currency volatility on future earnings. The net debt for the Group declined by 41% in Dollar terms and 10% in Kwacha terms during the 2020 financial year. Term debt repayments during the 2020 financial year amounted to USD8.9 million, reducing the total term debt to USD18.2 million from USD27.2 million in the previous financial year. With no new undertakings of debt, this puts the business in a less leveraged position and improves our debt service coverage ratio. However, our exposure to currency risk with our US Dollar denominated debt caused an increase in our term debt balance in Kwacha terms, due to the depreciation of the currency.
Divisional Performance review
Stockfeed
Stockfeed operations performed well during the year against the backdrop of the 2018/2019 drought and operational headwinds. This division was the largest contributor to operating profit for the Group due to a combination of increased sales volumes, and robust cost management on the back of improved operational efficiencies. The division sold 242,700 tonnes of feed in 2020, compared with 218,769 tonnes in 2019.
Retail and Cold Chain Food Products
The combined Retail and Cold Chain Food Products division posted a marginal 1.8% growth in operating profit in Kwacha terms on the back of an 18% growth in revenue. This was despite depressed consumer spending that negatively impacted sales volumes in our retail outlets. Cost pressures due to the depreciation of the Kwacha, continued load shedding and increased electricity tariffs further eroded margins.
Zambeef’s chain of 236 retail outlets – both own-brand and within Shoprite supermarkets – remain at the heart of the business, with demand from our customers driving supply. The Group’s focus during the 2020 financial year was to optimise our existing retail store performance. For the year ended September 30, 2020, we rolled out four new macro outlets in strategic locations, compared to seven in 2019. We also leveraged Shoprite’s growth, opening three new in-store butcheries.
Cropping
Cropping division revenue grew 37% from the previous year, despite a reduction in volumes, due to a good summer crop price and translational currency effects. However, the division experienced a sharp escalation in costs resulting from the increase in electricity tariffs and US Dollar denominated costs. Load shedding caused electricity shortages that affected the winter wheat yield as optimal irrigation programmes could not be followed. Despite the challenges, the division contributed positively to Group operating profit.
Disposal of Non-Core Assets
The Group entered into a binding sale and purchase agreement with Chenguang Biotech (Zambia) Agri-Dev Limited for the sale of Sinazongwe Farm. The disposal was executed in March 2020 for a cash consideration of USD10 million. Our Chiawa farm remains listed for sale.
Dividend
As a Group, we are steadfast in our dedication to enhancing shareholder value. However, in view of the financial performance and debt levels, the Directors have elected not to pay a dividend for this financial year.
Outlook
We expect the macro-economic climate to remain challenging in the 2021 financial year, characterised by an increase in volatility. The country’s national debt level remains a threat to macro-economic stability in the short to medium term.
We anticipate the COVID-19 pandemic will have minimal impact on our operations in 2021 as Zambia will adjust to living with the virus and resume life under the ‘new normal’.
The Group is committed to continued strengthening of its earnings potential and unlocking value through reducing debt levels in the medium term. This will mitigate foreign exchange and, interest rate risk exposures and free up cash for reinvestment in higher returning projects.
Acknowledgement
I express my sincere gratitude to my fellow Board members for leading the Group through this challenging year. To our management and staff, I express our utmost appreciation for your dedicated efforts, for producing solid performance, and for exhibiting resilience in challenging and unusual circumstances. The leadership our staff has demonstrated in adhering to safety protocols during this period of the COVID-19 pandemic is highly commendable.
As a Board we would like to express our deepest gratitude to the Chair of the Audit Committee, Dr. Lawrence Sikutwa, who will be retiring effective 31st December 2020. His leadership, strong commercial acumen and professionalism will be greatly missed. He has played a significant role in the Group and we all wish him the very best.
