eBusiness Weekly
Sylvester Mupanduki
The recent ZSE market drop has created some value plays. staraafrica has been one of the worst performers gaining only 38 percent since the beginning of 2022.
This company is responsible for over 80 percent of refined sugar consumed in Zimbabwe, with the remaining 20 percent coming from Triangle sugar estates which is wholly owned by Tongaat Hulett.
staraafrica has the capacity to produce 200 000 tonnes of refined sugar annually. Approximately, 70 percent of this refined sugar goes straight to beverage, confectionery, pharmaceutical industries and only 30 percent is going to private households.
A 50 percent increase in FY2022 revenue to $13,16 billion on the back of increased production and sales volumes was posted.
Refined sugar production and sales volumes jumped from 59 571 and 60 388 tonnes to 82 399 and 82 500 respectively.
Thanks to Takura Capital, the largest single shareholder who wanted only one thing, to turn Star Africa around and modernize the business.
It’s interesting to note that the local market is currently consuming 100 percent of what starafrica is producing and both production and sales volumes have been growing at a compounded annual rate of 7 percent since 2020.
Zimbabwe’s per capita consumption of sugar is approximately 24 kg/year, which is higher than the average Africa per capita consumption of 17,2 kg/year, as well as global sugar per capita consumption of 23 kg/year.
However, growth in Zimbabwe’s per capita consumption is currently constrained by the limits on consumers’ disposable income and lower demand from the struggling manufacturing sector.
In the long term, a potential improvement in disposable income and growth in the local manufacturing sector presents a huge opportunity for expansion in sugar consumption — also a huge chance for staraafrica to increase production.
Up until we get to a point where production exceeds local consumption, the refined sugar market still has a long way to go before it hits the consumption saturation point. For that reason, Star Africa’s better days still lie ahead.
Quality
staraafrica is arguably one of the best quality businesses on ZSE and Takura Capital seem to know how to deal with Capitalism at its finest.
It carries a Sales-to-Capital ratio of 3,95, meaning the business is generating $3,95 in revenue for every $1 of invested capital.
This company is doing a ridiculously good job of growing revenue from its invested capital, but it’s always ignored and hence undervalued.
staraafrica has zero long term debt and its long term funding is coming from equity.
Free cash flows hit $418 million this year from $268 million 2 years ago, a compounded annual growth rate (CAGR) of 25 percent.
A free cash flow yield of 5 percent is favourable. At the moment, 98 percent of the generated free cash flows are going into capex, but with the rate at which this company is growing, investors will surely be able to get a good return for being patient in dividend pay-outs soon.
I prefer cash flow yield as a valuation metric over valuation multiples like price-to-earnings because the cash flow statements offer me a better representation of the company’s operations.
EBIT Margins jumped to 13 percent from 5 percent in 2021 and are expected to stabilise at 15 percent in 2023 and around 20-25 percent beyond 2023.
The company is currently generating a return on invested capital of 38 percent which l think is good relative to my weighted cost of capital and I expect it to average 40 percent beyond 2023.
I forecast both production and sales volumes for FY2023 to increase by 15 percent to around 95 000 tonnes from 82 000 tonnes.
Improved efficiency and capacity utilisation will continue driving production upwards in the near term and the local market looks ready to absorb any amount of sugar that staraafrica produces.
For these reasons, Takura Capital has every motive to follow the same script they did with Cairns Foods, Lobels and Interfresh, revive the company, acquire 100 percent shareholding and operate it privately.
This time a good price has to be offered to the minority shareholders in a buy-out.
Valuation
staraafrica is currently trading at a Price-to NAV ratio of 2. My estimated intrinsic value using a DCF model is around $10 apiece. A potential 6 bagger and one of my top picks in 2022.
Disclaimer: Business Weekly has taken all reasonable steps to ensure that the information within this article is correct and no liability is accepted for any loss arising from reliance on it. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of the writer. Readers of this article shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report.
Sylvester Mupanduki/Phone: 0771 623 648/Twitter: @Real_UncleSly/Email: [email protected]
