eBusiness Weekly
Enacy Mapakame
Although the economy is experiencing headwinds that have reduced disposable incomes affecting the beverages sector, analysts remain positive on beverages manufacturer, Delta Corporation as one of the stocks to watch in 2020.
The beverages sector has not been spared from the troubles bedevilling the economy and anticipated to continue posing challenges in the short-to-medium term.
Foreign currency shortages will keep the two listed beverages firms, Delta and Afdis in a fix. Non-listed Schweppes cannot be excluded from the grouping, together with dairy processor, Dairibord as their survival strongly depends on consumer disposable incomes.
Last year, Government implemented some monetary reforms to tackle the distortions that were brought in by past policies as well as to create confidence in the economy.
However, these fuelled massive inflation and a dislocation of disposable incomes as the cost of living continued to increase.
These, coupled with shortages of foreign currency to source raw materials and meet foreign obligations, the economy also suffered poor energy supplies which affected on production time as well as increased overheads.
Market watchers, however, contend that companies like Delta remain attractive on their cash generative business models, although it has suffered volumes declines of late.
Survival of the beverages giant will also be hinged on price competitiveness, as the market is now looking for value for money, while others are downgrading to value brands.
“Disposable incomes have significantly tumbled following reform-induced inflation. It is imperative for Delta to remain price competitive despite Zimbabwe’s inflationary environment,” said brokerage firm IH Securities in their 2020 Equity Strategy report
“Whilst Delta is trading on a demanding multiple at present, we believe it is one to keep an eye on should there be temporary weakness in price,” said IH.
In the week to Wednesday, Delta was pegged at $4,50, representing a 12 percent increase from the previous week. Since beginning of the year, Delta shares have jumped 24 percent on firming demand.
For companies like Delta, one of its major challenges have been sourcing foreign currency for the procurement of essential raw materials like concentrate as well as packaging materials, which has resulted in supply shortages particularly in the sparkling beverages segment that was severely apparent during the festive season.
In a latest trading update for the third quarter and nine months to December 31, 2019, Delta alcohol volumes went down as the market suffered waning disposable incomes due to inflationary pressures.
Lager beer volumes declined 43 percent for the quarter and 46 percent for the nine months compared to the same period in the prior year.
Sorghum beer volume in Zimbabwe declined 41 percent for the quarter and 25 percent for the nine months.
“There has been a significant slump in consumer spending as market conditions tighten and inflation erodes real incomes which are not growing in line with the current inflation trend.
“Every sector in the country has been subject to aggressive price adjustments, which are expected to push inflation higher in the near term,” said IH.
Sparkling beverages segment’s volumes, however, grew 38 percent for the quarter on the back of a good performance of new products, but was down 40 percent for the nine months.
Although the economic volatility is expected to weigh down on business performance, companies like Delta and other top capitalised stocks are expected to survive the turbulence on the back of their strong cash generative businesses while those with foreign currency exposure will add to their allure.
