IAS - Agriculture Sector Report - 04 December 2013

IAS SSA Agriculture Sector Report | December 2013 High Yields/ha
Asset Management | Corporate Finance | Securities | Trust Services
IMARA INVESTING IN AFRICA
Table of Contents
Executive Summary................................................................................ Peer Comparatives......................................................................................... Sector review......................................................................................
Natural Rubber and Palm Oil........................................................................ Food...................................................................................................... Tobacco..................................................................................................
1 2 3 3
4
5 7
7 11 15 19 23 27 31 35 39
Company coverage................................................................................
PALM CI.................................................................................................. SAPH CI................................................................................................... SOGB CI................................................................................................... BAT Kenya............................................................................................... BAT Uganda.............................................................................................. BAT Zimbabwe.......................................................................................... Colcom Holdings........................................................................................ Seedco................................................................................................... Zambeef ..................................................................................................
Analysts:
Kudakwashe Kadungure Addmore Chakurira Tonderai Maneswa Loyiso Hoza Kudakwashe.Kadungure@imara.com Addmore.Chakuria@imara.com Tonderai.Maneswa@imara.com Loyiso.Hoza@imara.com
Equity Research SSA December 2013 SSA Agriculture Sector
Executive Summary
In this years edition of our SSA Agriculture Sector report, we explore the sectors attractiveness given the growth prospects in SSAs growing consumer market. Notably, the sector is viewed as risky, given its vulnerability to changing weather and climatic patterns. Never the less, we compare to global peers and find that our SSA Agri-companies have superior yields. SSA farmers are low cost producers. Benefitting from lower costs structures (labour and land), our sector manages to achieve higher EBITDA margins that their global peers. Despite being more profitable, and being able to mitigate certain risk, SSA agro-sector is a lot cheaper. From an earnings yield perspective, we see that our sector varies, balancing risk against growth prospects.
Whilst we think that the factors have been priced in justifiably for some of our companies, we also see that some factors may have been overdone or discounted. We think SAPH and PALM CI have unique growth prospects that have not been priced in and certainly expect the companies to rerate. SEEDCO also has significant growth prospects, more so, outside of Zimbabwe, and should also rerate. Overall, SSA agro companies offer attractive dividend yields. With dividend yields ranging from 9.2% to 3.5% amongst the dividend paying companies, the yields are exceptional given that global peers average 2.3%.
We especially note that our BRVM plantation companies PALM CI, SAPH and SOGB, produce globally traded commodities that are rather volatile. Despite a 5% excise tax charged on their rubber revenue, SAPH and SOGB achieve EBITDA margins of 19.7% and 26.1% vs. 15.6% for global peers. This means that our sector is able to i) absorb more commodity price volatility than their global peers and ii) typically have a lower break-even price for their product. We therefore believe that our sector should be trading at lower yields. SSA agro-sector is more generous to investors. Despite operating in economies with higher growth prospects, which in turn requires high reinvestment rates, a selection of our SSA agro-companies are able to leverage off their superior margins and achieve high dividend payout ratios.
Overall, we are generally bullish on our universe of SSA Agricultural Sector companies as we look forward to a combination of growth and rising dividend yields.
Natural Rubber (NR) & Palm Oil (CPO) plantations

Palm Oil
Indonesia and Malaysia remain the price setters Indonesia and Malaysia currently produce 31.0Mt and 19.0Mt of the worlds 58.1Mt of CPO production.
Global production ('1000t) history
60 000
50 000 40 000
Within Asia, the growth consumption drives were India, Indonesia and China were demand has grown at CAGRs of 9.8%, 8.2% and 6.3% to 8.4Mt, 7.8Mt and 6.3Mt, respectively. India and China have slowed down from 11.6% and 9.5% to 8.0% and 3.2% over the latter half of the decade. Indonesia on the other hand has seen growth accelerate to 11.6% over the latter half of the decade from 4.8% over the former half. CPO a key biodiesel feedstock Palm oil together with corn, rapeseed, soybean and sugar cane are viable feedstocks for use as first generation biofuel. In terms of yield productivity, sugar cane and palm oil rank the highest. Sugar yields 6,000l/ha whilst palm oil yields 5,000l/ha. However, palm oil is superior to sugar as it has 27% higher energy content (30.53 MJ/l) than ethanol from sugarcane (24MJ/l).
30 000
20 000
10 000 2003 2004 2005 2006 2007

Africa
2008 2009
Rest of Asia
2010
2011
2012
Indonesia
Malaysia
LATAM
Source: World Bank
Global production has grown at a CAGR of 6.8% over the past decade and has largely been driven by production in Indonesia which grew at a CAGR of 10.0% over that period. In 2003, Indonesia producing 12.0Mt per year was the worlds second largest producer behind Malaysia then at 13.4Mt. However, as Malaysia only managed to grow its output at a CAGR of 3.5% over that period, it was therefore overtaken by Indonesia. Asia is the largest consumer of CPO Global consumption of CPO has grown at a CAGR of 6.8% to 55.9Mt, in line with production. With Asias consumption growing at a CAGR of 7.5% over the past decade to 36.0Mt in 2012, the region has been the most influential market place for CPO demand.
CPO consumption ('000t) by region
60 000 50 000 40 000 30 000 20 000 10 000 -
Malaysia and Indonesias biodiesel reforms to increase demand Indonesia is the top producer of palm oil and consumes about 5.0m bbls of biodiesel a year, just over half of its target to consume 9.4m bbls its should consume under current regulations. The new regulation, which raises the minimum bio content in diesel to 10%, up from levels of 3% -10%, and 20% for the power industry from 10%, targets consumption of 25.0m bbls, increasing consumption of CPO in Indonesia by c.18.43%, and increase global demand by 2.92%. In Malaysia, the constitution of CPO in biodiesel increases by 40% to 7.0% and this alone will increase domestic CPO consumption by 4.94%. Overall, we would expect global stocks to come under pressure and therefore support global CPO prices. Limited farmland and deforestation concerns to restrict supply As the worlds demand for palm oil increases, deforestation and the resulting release of carbon dioxide emissions continue to be a concern. Palm oil has become a lucrative business especially as the crop produces a higher yield of edible oil compared to soy and grape seed. However, the huge demand for palm oil in the world marketplace has fuelled expansive land clearances, and most of this is done illegally, without the consent of the local land owners. This has therefore also become a human rights issues as the likelihood of local communities and indigenous peoples right to food is being threatened because of the massive expansions of the palm oil industry.
2003
Asia EU
2004
SSA
2005
2006
2007
ME
2008
N. Africa
2009
2010
2011
2012
LATAM
N.America
Other
Source: World Bank
A United Nations mandate created in 2001 called the Roundtable on Sustainable Palm Oil, or RSPO, was designed to bring deforestation under control. In addition it established clear guidelines for the ethical and ecological production of palm oil that member companies, which represent about 40% of the global palm trade, would adhere to.
However, with land as a finite resource, expansion of the resource is restricted, especially as there have been calls from international conservation bodies calling for the protection of forests and inhabitants. NR price more volatile than CPO Over the past decade, the price of NR has been 1.10x and 1.15x more volatile than that of BFO and CPO. In the past five years, NR was 8% more volatile than before.
10 Year price index (USD) history
600 500 400 300
Natural Rubber (NR)

Demand sensitive to economic shocks The main consumer of rubber is the transportation industry, of which tyre manufacturers alone absorb about 65% of total NR consumption. As it is, NR currently constitutes about 24% of raw materials used in Michelin tyres whilst SR constitutes about 22%.
Global NR market ('000t)
12 000
11 000
200
6.00
5.00
100 Dec-07 Dec-12 Apr-06

Feb-07
Jun-10
Jun-05
Apr-11
Aug-04
Aug-09
Feb-12
Oct-03
Oct-08
10 000
9 000
4.00 3.00
2.00
8 000
7 000
BFO
NR
CPO
6 000 5 000 4 000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Production Consumption Price (USD/kg)
Source: Bloomberg
1.00 -
Behind the commoditys volatility, has been its exposure to economic shocks compounded further by the producers inability to adjust output. This has rendered operators in the industry, especially NR producers, as relatively volatile entities.
Source: International Rubber Study & Bloomberg
NR competes with Synthetic Rubber (SR), a petroleum based polymer and in 2012, 15.1Mt of SR were consumed against 11.4Mt of NR. The NR/SR ratio, in favour of SR, has been observed over the past decade despite NR being generally the preferred rubber input as it possesses superior physical qualities (better resistance to heat and mechanical forces) which are particularly useful for construction equipment, agricultural, aviation and logistics industries. NR supply severely restricted Supply of NR is restricted by the duration of the gestation period and the availability of land. According to management, the establishment of a new, 10,000 ha operation in Cote dIvoire will take between 8 10 years to develop. NR also has a 6 to 7 year gestation period, meaning that existing producers are not able to respond immediately to changes in demand. NR plantation yields can vary from 1.1t/ha to 2.0t/ha, with investment in R&D boosting yields in recent years.
Meat and grain

Given SSAs growing middle-class, we expect food consumption habits to favour meat, and less of grain staples. However, we expect certain grains, which i) are used as livestock feed and ii) complement meat dishes to grow in line with consumption of meat. Economic growth to drive consumption With SSAs markets expected to be some of the fastest growing economies, we expect the growth to more than offset the growth in their respective populations.
Oct-13
Food consumption (USD) per capita

1 000 900 800 700 600 500 400 300 200 100 South Africa Nigeria Kenya 2007 Ghana Zambia Zimbabwe
Consumption per capita (Q) relative to South Africa

9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 -
180 160 140 120 100 80 60 40 20 Pork South Africa Beef Nigeria Poultry Kenya Ghana Wheat Zambia Maize Zimbabwe
2012
GDP (USD) per capita (RHS)
Source: BMI
Source: BMI & IAS
As shown above, South Africa with GDP per capita of more than fourfold that of the next wealthiest, Nigeria, its consumers spend significantly more than those from its SSA peers. Owing to its reliance on imports, Ghana exhibits high expenditure of food relative to its GDP per capita. From this we expect to see consumption per capita on food to grow along with per capita incomes (GDP per capita). Expenditure on food per capita growth to diminish as GDP per capita increases Once again, comparing SSA frontier markets to SA, we see that there is an inverse relationship between consumption on food per capita against GDP per capita.
Food expenditure growth diminishes as GDP per capita increases
60% 50% 40% 30% 20% 10% 0%
South Africa Nigeria 2012 Kenya 2007 Ghana Zambia Zimbabwe
Consumption in SSA frontier markets is currently dominated by staples, which are typically the most affordable for consumers. Higher per capita incomes will mean that other food types will increase in affordability and this will lead to increased consumption of the product.
Tobacco
Like SSA Agricultures other sub-sectors, the tobacco sector will also benefit from the growing middle-class and their rising per capita incomes. Consumption per capita to increase on higher incomes As is the case with other consumable goods, cigarette consumption exhibits a strong relationship between consumption per capita and income per capita.
Consumption benefitting from higher incomes
140 120 100 80 60 9 000 8 000 7 000 6 000 5 000 4 000
3 000
9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 -
GDP (USD) per capita (RHS)
40 20 Zimbabwe
Botswana Kenya
2 000 1 000 Zambia

Namibia
Source: BMI
Tanzania
Whilst we see overall growth in food consumption per capita, we see a slowdown in the growth as utility from food consumption diminishes. SSA shows upside in meat consumption growth and livestock feed However, the diminished consumption per capita will not be observed across all food types.
Consumption per capita Index (RHS)
Cote d'Ivoire
South Africa
GDP per capita (USD)
Source: Tobacco Atlas & IAS
Ultimately, this suggests that consumers will generally consume more cigarettes if they become increasingly affordable. This is also one of the main reasons that
Uganda
Nigeria
Malawi
Ghana
anti-smoking policy has been centered around reducing the affordability of cigarettes.
Consumption (y) benefitting from higher incomes (x)
140 120
100 80 y = -2E-06x2 + 0.0294x - 2.1998 R = 0.7844
Excise tax and illicit trade share of consumption

60% 50% 40% 30% 20% 10% 0%
Kenya Zim babwe
Botswana Uganda
Zam bia
Nam ibia
Nigeria
Ghana
South Africa
60 40 20 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000
Excise tax
Illicit trade
We therefore find that in the more developed economies, which generally have higher GDP per capita accompanied by well developed regulatory bodies with adequate legal framework and enforcement structures, consumption begins to diminish or decline. The chart above shows such a decline. Unreasonably higher excise rates driving illicit trade...? In East Africa, Kenya and Uganda increased excise taxes in a bid to shore up fiscal revenues. In Kenya, a more simplified systems was implemented, moving away from a more complex one that made it difficult for the government to reduce consumption, predict revenue and control illicit trade. The new policy now charges a flat KES 1.20/stick or 35% on the retail selling price (RSP). In Uganda, where the illicit trade has controlled about 15% to 20% of total sticks consumed, the excise tax was increased by an average 42% in 2013. The increase had an adverse effect as a c.24% and 17% decline in volume sales and VAT, respectively was reported BAT Uganda. Furthermore, it is highly possible that a significant number of consumers switched to illicit brands to avoid paying higher prices.
Overall, whilst it is not fact that higher excise taxes would attract illicit trade, we have certainly observed the opposite. The balance ultimately is determined by income levels against the impact the excise taxes have on overall affordability. The less discerning consumer, and most like at the lower spectrum of the income scale, is vulnerable to consumption of illicit brands. However, this is not in the governments interest as it exposes its tax payers to an unregulated brand whilst deprives them of revenues through lost volume sales in the official market.
Cote d'Ivoire
Tanzania
Malawi
Equity Research BRVM December 2013 Agriculture

PALM CI is a palm plantation operator within the SIFCA group. The company produces c.280,000t of Crude Palm Oil (CPO) and c.19,000/t of Palm Kernel Oil (PKO), annually. The company previously purchased palm fruit from out-growers but has now entered into a toll agreement with sister company SANIA.
Recommendation Bloomberg Code Current Price (XOF) Current Price (Usc) Target Price (XOF) Target Price (Usc) Upside (%) Liquidity Market Cap (XOF m) Market Cap (USD m) Shares in issue (m) Free Float (%) Ave. daily vol - 1 yr. Price Performance Price, 12 months ago (XOF) Change (%) Price, 6 months ago (XOF) Change (%) Financials (XOF 'm) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings F2012 181 164 44 940 (3 405) 24 337 2013F 162 743 40 094 (1 571) 19 039 15 000 12.7 16 800 0.6 2014F 187 916 43 751 (1 204) 21 190 130 631 272 8 22.0 1 188.3 BUY PALC:BC 16 900 3 521 22 420 4 671 32.7
Being a pure palm oil play, PALM CI is not as volatile as its BRVM peers. PALM CI has managed to grow revenue, EBITDA and PAT at 5 year CAGRs of 17.7%, 11.5% and 15.2% to XOF 175.1bn, XOF 34.3bn and XOF 24.3bn and this has been reasonable given the currency is pegged to the euro.
FY 13 to post weaker numbers. With CPO and PKO prices 20.51% and 36.43% lower to USD 0.78/kg and USD 0.83/kg, respectively, in the current year, we expect EBITDA and EBIT (before exceptional items) to decline 10.78% and 22.26% to XOF 32.7bn and XOF 19.6bn, respectively. The reduced finance cost will see PBT and PAT decline 19.28% and 21.77% to XOF 25.4bn and XOF 19.0bn, respectively. Volume sales to double by FY 20. SIFCA plans to double CPO output to 600,000t by FY 20 through the planting of more trees and improved yields. Given this target, we see PALM CI increasing production, and volume sales, at a CAGR of 11.4% to FY 17. Given our CPO price inflation of c.3%, we see revenue growing at a CAGR of 16.03% from FY 13 to FY 17. EPS to grow at a CAGR of 11.65% to FY 17. Taking into account our outlook on CPO prices, we expect EBIT margins to recover from the 16.57% forecast for FY 13 to 20.02% in FY 17. We therefore expect EBIT and EPS growth to recover post FY 13 to grow at CAGRs of 19.74% and 22.04%, respectively. We recommend a BUY on PALM CI. Factoring in PALM CIs observed volatility, w e use a DCF and arrive at a target price of XOF 22,444, implying upside of 32.7%. We recommend BUY.
EPS (XOF) DPS (XOF) NAV/share (XOF) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) * TTM
3 149 1 600 11 078
2 463 1 252 11 941
2 741 1 508 13 431
16.5 31.6 24.8 Current 13.7 9.5 7.3 1.5 3.4
13.4 21.4 24.6 2013F 14.6 7.4 6.9 1.4 3.8
14.1 21.6 23.3 2014F 16.2 8.9 6.2 1.3 3.5
Share Price vs. S&P Africa Frontier (Rebased)

250 200 150 100
STRENGTHS CPO quoted in global markets; immunises XOF, and EUR weakness. Low cost producer Volume expansion by PALM CI has no impact on global prices OPPORTUNITIES Downside risk on CPO prices is limited given higher costs for majors. Higher NR prices or more likely SIFCA plans to double output by FY 20
WEAKNESSES CPO prices are volatile Expansion is driven mostly by purchases from outgrowers CPO has a 5 year gestation period THREATS
50 -
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
Dec-13
PALC BC (USD)
Deforestation concerns Development of greenfuel technology Lower CPO prices
Financial & Operational Review

Volume aside, PALM CI has least volatile revenue growth among its BRVM peers. PALM CIs revenue has grown at a 5 year CAGR of 20.06% to XOF 181.2bn (USD 362.3m) in the period to FY 12. Whilst the CPO and PKO price grew at a CAGR of 5.5% and 4.6% to USD 0.94/kg and USD 1.11/kg over that period, respectively, PALM CI grew its volume sales at a CAGR of 6.4% to 283,470t of CPO and at a CAGR of 5.0% to 19,069t of PKO.
Revenue growth driven by CPO price movement
200 160
120
In FY 12, depreciation actually surged 24.9% and EBIT declined 6.18% despite EBITDA growing by 15.69% as the decline in CPO prices was modest relative to that of NR. Eased capex and deleveraging enhance earnings growth. Behind the slow growth in depreciation was a 5 year CAGR growth in capex to XOF 14.1bn in FY 12, or 7.8% of turnover. The decline in capex intensity from FY 07 to FY 12 speaks to the industrys barriers to entry as a result of the increased scarcity of unutilised farmland. Organic expansion is mostly driven by increasing purchases from small-holder farmers which therefore limits capex requirements to factory capacity expansion and maintenance and logistics.
Capex and dividends paid out of operating cash flows (OCF)
35% 30% 25% 20% 15% 10% 5% 0% FY07
OCF
1 200
1 000
800 600
80 40 0
FY07 FY08 FY09 FY10 FY11 FY12 Revenue (XOF bn) CPO Price (USD/kg)
400
200 -
6.00 5.00 4.00 3.00 2.00

1.00
Source: Company filings
In FY 12, CPO and PKO prices declined 5.69% and 0.70% to USD 0.94/kg and USD 1.11/kg, respectively. Offsetting the decline in prices was an overall 11.7% increase in volume sales and revenue grew 6.3% over that period. EBITDA margin on a rising trend. Benefitting from an overall rise in palm oil prices, increased scale, rising yield per hectare and improved logistical efficiency, EBITDA and EBIT margins improved from 17.20% and 7.16% in FY 07 to a respective 24.18% and 19.14% in FY 12.
Palm Oil prices drive profitability
6 000 5 000 4 000 3 000 2 000 1 000 30% 25% 20% 15% 10% 5% 0%
FY08 FY09 FY10 FY11 FY12

Dividend + capex
Capex intensity
Net debt / EBITDA (RHS)
However, because of the working capital requirements in purchasing product from out-growers, PALM CI has had to rely on short term debt. PALM CI also issued a seven year bond at 7.0% in early 2010 in order, to finance its capex commitments of c.XOF 55bn through to FY 15. Nevertheless, PALM CI has gradually reduced its other debt balances. The companys net interest expenses have therefore declined at a 5 year CAGR of 3.72% to XOF 3.4bn. PBT grew at a 5 year CAGR of 49.7% to XOF 31.5bn in FY 12. The tax holiday ceased towards the end of FY 11 and the effective tax rate increased from 0.4% in FY 07 to 22.6% in FY 12. Robust earnings motivate dividends. Although PAT for FY 12 declined 17.07% to XOF 24.3bn, the growth over the 5 year period was a CAGR of 42.29%. Operating free cash generation was volatile over the 5 year period to FY 12 but remained robust in FY 11 and FY 12 during which the company declared dividends at 50.82% of NPAT.
FY07
FY08
FY09
FY10
FY11
FY12
CPO Price (XOF/kg)
EBITDA margin (RHS)
The drastic improvement in EBIT was largely due to depreciation charges growing at a 5 year CAGR of 5.38% over that period to XOF 14.4bn in FY 12 against 29.19% growth for EBITDA to XOF 44.9bn.
PALM CI/SANIA enter into toll agreement. At the start of FY 13, PALM CIs sister-company, and sole customer, SANIA, entered into a toll agreement with PALM CI. We are yet to confirm the terms of the agreement but we believe that this will reduce PALM CIs working capital requirements going forward.
Capex to remain benign. We expect PALM CI would have completed its XOF 55.0bn commitment by FY 13 and therefore expect capex intensity to decline further going forward especially as revenue continues to grow to FY 17. Capex will be limited to periodic factory capacity expansion, maintenance and upgrades. Toll agreement to reduce working capital requirements..? PALM CIs toll agreement with sistercompany SANIA covered 73% of PALM CIs production over H1 13, implying that PALM CI purchased less from out-growers than before. Given that those out-grower purchases were most likely cash intensive, we see the reduction in purchases freeing up cash flow. We also believe that this is the reason the companys net finance costs halved over H1 13.
Outlook
FY 13 to be weaker. In H1 13, CPO and PKO prices declined 20.51% and 36.43% to USD 0.78/kg and USD 0.83/kg, respectively and revenue for the company declined 11.13% to XOF 86.5bn. Mitigating the decline in prices was an 11.80% growth in volume sales to 184,672t of which 113,318t was under the toll agreement with SANIA. Based on the average price earned by PALM CI on its product, it seems the tolling fee in the toll agreement is similar to the prices earned through its normal sales. Volume sales for the full year are expected at 270,000t and at prevailing CPO prices, we expect revenue for FY 13 to decline 10.17% to XOF 162.7bn. The lower CPO price meant that EBIT margins narrowed by 527bps to 24.65% and EBIT for the interim declined 26.79% to XOF 21.3bn. Net finance costs declined 49.29% to XOF 926.0m, likely as a result of PALM CI taking advantage of its relaxed working capital requirements and deleveraging accordingly. PBT therefore declined 25.29% to XOF 20.4bn. The effective tax rate was a near-normalised 24.94%, 470bps higher than in H1 12 and PAT declined 29.67% to XOF 15.3bn. To FY 13, we expect EBITDA and EBIT (before exceptional items) to decline 10.78% and 22.26% to XOF 32.7bn and XOF 19.6bn, respectively. We anticipate that the reduced finance cost will see PBT and PAT decline 19.28% and 21.77% to XOF 25.4bn and XOF 19.0bn, respectively. Long term revenue outlook. With global consumption of palm oil on the rise, driven by food and increased usage of biodiesel, we expect global demand to increase at a CAGR of 7.0% to FY 17. On the other hand, Sifca, PALM CIs parent company which derives 80% of its CPO from PALM CI, given the relative abundance of un-utilised farmland in West Africa, targets to double production to c.600,000t by FY 20. Given our outlook on CPO prices of 6.00% growth over that period, largely driven by tightening supply, we see revenue growing at a 5 year CAGR of 8.58% to FY 17.
Valuation and Recommendation

We use a DCF and arrive at a target price of XOF 22,444, implying a upside of 32.7%. BUY.
Target Scenario Base case Price
FY14 - exit PE Macro Outlook 9.0x Unchanged Rf and ERP remain
XOF 22444.09
Bull case
XOF 22411.76
over 8.9x unchaned +ve Rf and ERP trend lower
Bear case
XOF 20768.32
where 8.2x towards -ve Rf and ERP deteriorate marginally to
Financial Summary
XOF Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT Y-o-Y % Attr. NPAT Y-o-Y % Per Share data Basic EPS Y-o-Y % DPS Y-o-Y % NAV per Share Y-o-Y % Margin Performance 2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield Dividend yield 4.61% 24.83% 3.19% 0.00% 10.73% 48.16% 8.16% 0.00% 2.32% 9.16% 2.12% 0.00% 4.81% 16.93% 4.67% 0.00% 21.55% 54.59% 22.46% 5.33% 16.49% 31.60% 18.63% 9.47% 13.41% 21.40% 14.57% 7.41% 14.13% 21.61% 16.22% 8.92% 17.59% 24.63% 21.07% 11.59% 21.33% 27.03% 26.83% 14.75% 21.99% 27.95% 32.32% 17.78% 53.43% 17.20% 7.16% 5.75% 2008 50.82% 19.80% 11.47% 8.15% 2009 51.98% 11.86% 7.53% 2.95% 2010 65.17% 22.87% 11.11% 6.77% 2011 51.97% 22.80% 21.70% 17.22% 2012 53.27% 24.81% 19.14% 13.43% 2013 E 51.44% 24.64% 16.57% 11.70% 2014 E 50.98% 23.28% 15.68% 11.28% 2015 E 50.82% 24.67% 17.50% 12.61% 2016 E 50.68% 24.95% 18.17% 13.81% 2017 E 50.56% 25.24% 18.79% 14.32% 2 174 0 540 1 379 155.43% 0 NA 3 553 63.43% 358 -74.03% 0 NA 4 267 20.10% 789 120.35% 0 NA 5 056 18.49% 3 797 381.16% 900 NA 8 852 75.09% 3 149 -17.07% 1 600 77.78% 11 078 25.14% 2 463 -21.77% 1 252 -21.77% 11 941 7.79% 2 741 11.29% 1 508 20.45% 13 431 12.47% 3 561 29.91% 1 959 29.91% 15 484 15.29% 4 534 27.30% 2 494 27.30% 18 059 16.63% 5 463 20.49% 3 005 20.49% 21 029 16.44% 4 173 5 202 12 489 38 799 2007 72 621 2008 130 849 80.18% 66 497 71.39% 25 905 107.42% 15 010 188.55% 10 658 155.43% 2009 93 892 -28.24% 48 810 -26.60% 11 137 -57.01% 7 070 -52.90% 2 768 -74.03% 2010 90 068 -4.07% 58 699 20.26% 20 595 84.93% 10 011 41.59% 6 099 120.35% 2011 170 389 89.18% 88 556 50.86% 38 844 88.61% 36 969 269.30% 29 346 381.16% 2012 181 164 6.32% 96 502 8.97% 44 940 15.69% 34 683 -6.18% 24 337 -17.07% 2013 E 162 743 -10.17% 83 713 -13.25% 40 094 -10.78% 26 963 -22.26% 19 039 -21.77% 2014 E 187 916 15.47% 95 807 14.45% 43 751 9.12% 29 462 9.27% 21 190 11.29% 2015 E 218 292 16.16% 110 939 15.79% 53 844 23.07% 38 210 29.69% 27 528 29.91% 2016 E 253 690 16.22% 128 570 15.89% 63 302 17.57% 46 105 20.66% 35 044 27.30% 2017 E 294 953 16.27% 149 126 15.99% 74 434 17.59% 55 420 20.20% 42 226 20.49%
10

Soceite Africaine Plantation dHavea , (SAPH), is a natural rubber (NR) plantation operator producing 104,000t of NR. Of its total NR output in FY 12, c.77,000t was purchased from outgrowers whilst the remainder was grown from its own c.33,500 ha farms, of which c.21,500ha is being utilised.
Recommendation Bloomberg Code Current Price (XOF) Current Price (Usc) Target Price (XOF) Target Price (Usc) Upside (%) Liquidity Market Cap (XOF m) Market Cap (USD m) Shares in issue (m) Free Float (%) Ave. daily vol - 1 yr. Price Performance Price, 12 months ago (XOF) Change (%) Price, 6 months ago (XOF) Change (%) Financials (XOF 'm) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings F2012 175 084 34 271 405 21 156 2013F 171 733 29 932 (649) 16 722 36 100 -31.2 31 800 -21.9 2014F 186 768 25 827 (76) 13 385 127 009 265 5 44.0 24 794 BUY SPHC:BC 24 850 5 177 33 634 7 007 35.3
Like its palm and NR peers, SAPH is a highly volatile entity. SAPH has managed to grow revenue, EBITDA and PAT at 5 year CAGRs of 17.7%, 11.5% and 15.2% to XOF 175.1bn, XOF 34.3bn and XOF 21.2bn, respectively. This has been reasonable given the currency is pegged to the euro. However, as NR prices varied 36.6% over the past five years to FY 12, EBITDA and PAT were 2.1x and 3.0x as volatile.
Lower costs structure to ensure profitability despite NR price volatility. With land operated on a concession and wages costing an effective USD 200/ha in Ivory Coast, SAPH has one of the lowest cost structures amongst NR producers. Given that the global price of NR is determined by higher cost producers, SAPH profitability has leeway where NR price volatility is concerned. Revenue to double by FY 17. SAPH plans to i) upgrade its current factory and increase capacity by 16.7% to 140,000t/pa by mid FY 14, ii) utilise a further c.5,500ha to produce palm oil in the coming years and iii) add another NR factory with 100,000t/pa capacity by FY 16. Overall, we expect revenue to grow at 5 year CAGR of 20.5% to FY 17. EPS to grow at a CAGR of 17.1% to FY 17. We expect the increased scale and production efficiency post FY 14 and palm oil revenues to offset the impact of the rising contribution from out-growers. We therefore expect EBITDA and PAT to grow at 5 year CAGRs of 16.9% and 17.1%, respectively. We recommend the stock as a BUY. Factoring in SAPHs observed volatility, we use a DCF and arrive at a target price of XOF 33,634, implying upside of 35.3%. We maintain our BUY. Recommendation.
250 200 150 100
4 139 1 600 13 371
3 272 1 265 15 042
2 619 1 440 16 396
20.5 27.6 19.6 Current 14.9 6.4 6.7 1.9 4.0
16.7 23.0 17.4 2013F 13.2 5.1 7.6 1.7 4.5
12.3 16.7 13.8 2014F 10.5 5.8 9.5 1.5 5.3
STRENGTHS NR quoted in global markets; immunises XOF, and EUR weakness. Low cost producer Support from local government OPPORTUNITIES Downside risk on NR prices is limited given higher costs for NR majors. Higher NR prices or more likely
50 -
WEAKNESSES NR prices are highly volatile Expansion is limited to acquisition of existing operations or purchases from out-growers NR has a seven year gestation period THREATS
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
SPHC BC (USD)
Higher excise taxes Lower NR prices
11

Volatile revenue. SAPHs revenue has grown at a 5 year CAGR of 17.7% to XOF 175.1bn (USD 353.7m) to FY 12. The rubber producer grew volume sales at a CAGR of 4.98% to 104,000t with 77,000t being supplied by outgrowers.
Revenue growth driven by NR price movement
240
200
Gross margins decline on rising contribution from out-growers

80% 75%
70%
65%
60%
55%
50%
600
500
45% 40% FY07 FY08 FY09 FY10 FY11 FY12
160 120
80
400 300
200
Out-grower purchases
Gross margins
40 0
FY07 FY08 FY09 FY10 FY11 Price (USD/kg) FY12 Revenue (XOF bn)
100 -
With out-grower purchases yielding a fixed gross margin of 35%, the rising contribution of purchases from out-grower has seen SAPHs gross margins gradually decline from 57.63% in FY 07 to 52.00% in FY 12. Low costs NR producer. With land and wages costing an effective USD 200/ha and USD 1,000/t, respectively, in Ivory Coast, SAPH has one of the lowest cost structures amongst NR producers, who average EBITDA margins of 15.6% against 19.7% for SAPH, despite the latter incurring a 5% excise tax on revenue. Volatile NR prices result in even more volatile earnings growth. As a result of SAPHs already volatile top-line and stable gross margins, gross profit was also as volatile. The narrowing margins meant that gross profit grew at a slightly slow 5 year CAGR of 15.3% to XOF 91.1bn.
EBITDA more senstitive to NR price swings than revenue and gross porift
300% 250% 200% 150% 100% 50% 0% -50% -100%
FY08 FY09 FY10 Revenue FY11 Gross Profit FY12 EBITDA NR Price (XOF)
With volume growth being modest, revenue growth was mainly driven by a 5 year CAGR of 8.1% in NR prices to USD 3.37/t in FY 12. This translated to a 5 year CAGR of 11.6% in local currency terms. Being strongly linked to the oil price, the NR price has been volatile, varying c.49% around its average price over that five year period. In FY 12, NR prices declined 29.89% as revenue for that period declined 10.21%. Offsetting the decline in NR prices was a recovery in volumes from 85,FY 11 which in turn saw volumes decline 10.66% to 85,809t as a result of the post-election crisis which negatively impacted throughput at the port. In the current year, NR prices declined 19.54% over H1 13 to USD 3.03/t and revenue over that period was 4.59% lower at XOF 84.0bn. Production is said to have grown c.23% and we estimate volumes sales grew c.15% y-o-y. Gross margins on declining trend. In FY 12, c.75% of SAPHs output was product from out-growers acquired at an agreed 65% of the prevailing market price, and according to the companys accounting, the purchases constituted c.97% of SAPHs cost of sales in that period. The out-growers contribution to SAPHs output has risen from 59% in FY 07 as unutilised farmland has been hard to come by. SAPH has either had to acquire existing operations, such as SAIBE in FY 07, lease and operate and at the very least, improve planted area yields in order to grow its own output. Growth in volumes from its own farms has thus been near-flat whilst volumes purchased from out growers has grown at a 5 year CAGR of c.9% to FY 12.
Source: Company filings& IAS
With SAPHs conversion costs/t being relatively sticky downwards and growing at a 5 year CAGR of 13.61% to FY 12, EBITDA was nearly twice as volatile as revenue and gross profit. EBITDA margins narrowed from 25.67% in FY 07 to 19.57% in FY 12.
12
Adding to the deterioration in EBITDA margins, particular from FY 11 where they stood at 33.64%, was the introduction of a 5% levy on rubber revenue which led to a charge for the company of XOF 9.7bn in FY 12. EBITDA therefore grew at a 5 year CAGR of 11.5% to XOF 34.3bn, declining 47.76% in FY 12. Given that growth was being driven mostly by increased purchases from out-growers, SAPHs capex outlay has been minimal in recent years. As such, leverage levels have remained low as operations, capex and dividends have ultimately been funded from free cash flow. SAPH relied on leverage in FY 07 when acquiring SAIBE and in FY 09 and FY 12 when NR prices were depressed.
40%
30%
Capex to remain benign. A new 100,000t capacity factory is expected by FY 16 and thus we expect volume sales to grow at a CAGR of c.18.8% over that period. Management expects capex intensity to decline to the c.5.0% level in the long term as expenditure will essentially be driven by the maintenance and replacement of property, plant and equipment. We expect this to offset the likelihood of narrowing margins and drive free cash flow generation going forward. Diversifying into palm oil. Of its c.33,500ha, SAPH plans to utilise 5,000ha 6,000ha to produce palm oil. Given the yields of c.5t/ha of oil, 0.8t/ha of kernel and 0.3t/ha for kernel oil observed at SOGB, we believe SAPH can reach production of 30,000t per year of palm oil and 1,650/t of kernel and earn additional revenue of c.XOF 15.0bn from the plant. Whilst palm oil achieves gross margins similar to those of rubber (53.27% vs. 52.00% NR in FY 12), palm oil revenues do not attract the 5% levy rubber does, and this resulted in Palm CI achieving EBITDA margins of 24.81% in FY 12, against 19.57% for SAPH. Improved margins from new and more efficient capacity. SAPHs current factory is said to be c.10 years old with capacity of 125,000t p.a. This is expected to increase to 140,000t p.a. afterwards afterwards and we think that this will reduce total production costs/t and therefore improve profit margins. Furthermore, SAPH has been investing in R&D to improve quality and yield. SAPHs efforts have been successful and as such, its NR output has fetched it a slight premium to global prices.
0.40 0.30
0.20
20% 10% 0% FY07

OCF
0.10
-
-0.10 FY08 FY09 FY10 FY11 FY12

Dividend + capex
Capex intensity
Net debt / EBITDA (RHS)
Depreciation has therefore grown from XOF 3.1bn in FY 07 to XOF 4.0bn in FY 12 and EBIT grew at a CAGR of 12.6% to XOF 30.1bn over the same period, albeit with as much volatility as EBITDA. In FY 12, EBIT declined 50.81% to XOF 30.4bn. After net interest income of XOF 405.2m and other charges and fees of XOF 2.0bn, PBT and PAT declined 52.40% and 53.59% to XOF 28.7bn and XOF 21.2bn, respectively in FY 12. With NR prices depressed in the current year, H1 13 EBIT declined 28.74% to XOF 11.4bn. SAPH incurred net interest expenses of XOF 101.4m against net interest income of XOF 440.2m in the previous period. PBT was 31.27% lower at XOF 11.3bn and with the effective tax rate near-flat, PAT declined likewise to XOF 8.7bn.

We use a DCF, factoring in the growth in volume sales and entry into CPO production and arrive at a target price of XOF 33,634, implying upside of 16.8%. We recommend BUY.
Target
FY14 - exit PE M acro Outlook 14.4x Unchanged Rf and ERP remain
Outlook
Revenue outlook. Production is expected at 120,000t in FY 13 but growth is anticipated to be marginal in FY 14 as the factory is scheduled for an upgrade. The downtime is expected to take 4 months, and will coincide with SAPHs low-yield periods (throughput down to 20% of normal production) period. About USD 3.5m has been budgeted for the upgrade.
Scenario Base case
Price
XOF 33634.28
Bull case
XOF 34356.35
14.7x unc +ve haned over Rf and ERP trend lower
Bear case
XOF 27878.02
13
Financial Summary
XOF Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT Y-o-Y % Attr. NPAT Y-o-Y % Per Share data Basic EPS Y-o-Y % DPS Y-o-Y % NAV per Share Y-o-Y % Margin Performance 2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield Dividend yield 16.89% 24.02% 7.17% 9.83% 25.74% 35.79% 11.58% 4.12% 9.76% 13.18% 4.69% 7.02% 37.61% 50.03% 22.29% 27.02% 43.50% 56.35% 31.29% 27.02% 20.47% 27.61% 14.52% 5.61% 18.91% 26.51% 13.48% 5.21% 20.23% 27.52% 16.65% 9.16% 19.58% 26.06% 18.47% 10.16% 18.11% 23.96% 19.18% 10.55% 16.22% 21.68% 19.28% 10.60% 57.63% 25.67% 21.67% 13.46% 2008 56.53% 29.03% 24.92% 16.21% 2009 56.43% 18.46% 14.01% 9.13% 2010 55.13% 32.13% 30.48% 22.10% 2011 52.18% 33.64% 31.66% 23.38% 2012 52.00% 19.57% 17.34% 12.08% 2013 E 50.00% 18.34% 15.58% 10.72% 2014 E 50.40% 19.48% 16.73% 11.95% 2015 E 50.80% 18.97% 16.28% 11.97% 2016 E 51.20% 17.61% 14.97% 11.24% 2017 E 51.60% 15.95% 13.35% 10.22% 8 503 2 800 2 042 3 302 61.66% 1 174 -58.07% 9 949 17.01% 1 337 -59.49% 2 000 70.36% 10 344 3.97% 6 351 374.94% 7 701 285.00% 15 045 45.44% 8 918 40.41% 7 701 0.00% 16 610 10.40% 4 139 -53.59% 1 600 -79.22% 13 371 -19.50% 3 842 -7.17% 1 485 -7.17% 15 613 16.77% 4 744 23.48% 2 609 75.67% 18 872 20.87% 5 265 10.96% 2 896 10.96% 21 527 14.07% 5 467 3.84% 3 007 3.84% 24 098 11.94% 5 494 0.49% 3 022 0.49% 26 585 10.32% 10 438 16 807 19 906 44 697 2007 77 558 2008 104 103 34.23% 58 845 31.65% 30 216 51.80% 25 947 54.38% 16 875 61.66% 2009 74 862 -28.09% 42 243 -28.21% 13 817 -54.27% 10 485 -59.59% 6 835 -59.49% 2010 146 864 96.18% 80 959 91.65% 47 188 241.53% 44 758 326.89% 32 462 374.94% 2011 194 984 32.77% 101 740 25.67% 65 599 39.02% 61 735 37.93% 45 581 40.41% 2012 175 084 -10.21% 91 050 -10.51% 34 271 -47.76% 30 367 -50.81% 21 156 -53.59% 2013 E 183 197 4.63% 91 605 0.61% 33 603 -1.95% 28 535 -6.03% 19 638 -7.17% 2014 E 202 988 10.80% 102 313 11.69% 39 532 17.64% 33 965 19.03% 24 249 23.48% 2015 E 224 741 10.72% 114 176 11.59% 42 637 7.85% 36 597 7.75% 26 907 10.96% 2016 E 248 628 10.63% 127 306 11.50% 43 776 2.67% 37 212 1.68% 27 941 3.84% 2017 E 274 834 10.54% 141 823 11.40% 43 845 0.16% 36 702 -1.37% 28 079 0.49%
14

Socit des Caoutchoucs de Grand-Brby (SOGB) is a Natural Rubber (NR) and Crude Palm Oil (CPO) plantation operator in Ivory Coast. The company produces c.37,000t of NR, of which c.48% is from its own farms, and about c.31,500t of CPO and c.1,650t of Palm Kernel Oil (PKO). SOGB has 16,700ha for NR of which 11,047ha is mature and 7,100ha of palm of which 6,000ha is mature.
Recommendation Bloomberg Code Current Price (XOF) Current Price (Usc) Target Price (XOF) Target Price (Usc) Upside (%) Liquidity Market Cap (XOF m) 97 208 203 2 15.0 240 Market Cap (USD m) Shares in issue (m) Free Float (%) Ave. daily vol - 1 yr. Price Performance Price, 12 months ago (XOF) 57 300 -21.5 50 500 -10.9 F2012 79 535 24 932 30 15 919 2013F 74 317 16 703 (263) 6 206 2014F 88 948 20 135 (1 439) 7 372 Change (%) Price, 6 months ago (XOF) Change (%) Financials (XOF 'm) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings HOLD SOGC:BC 45 000 9 375 45 380 9 454 0.8
Of its peers, SOGBs growth has been the slowest. SOGB has managed to grow revenue, EBITDA and PAT at 5 year CAGRs of 8.00%, 11.00% and 12.69% to XOF 79.5bn, XOF 24.9bn and XOF 15.9bn, which compares with 16.34%, 17.08% and 21.05% for the BRVM agriculture sector. NR volume growth an issue. SOGBs relatively slow growth is linked to the company having run out of land to expand its NR farms. Growth will be driven by rejuvenation of Planted land and trees and increased purchases from out-growers.
The company has historically superior margins but with medium volatility. Through a combination of its exposure to NR, which generally fetches higher profit margins than CPO, and other unique factors, SOGB has achieved higher EBITDA and PAT margins than its peers over the past 5 years to FY 12. Whilst NR pure-play SAPH has slightly lower margins than SOGB, SAPHs EBITDA and PAT growth has been 12% and 23% more volatile on account of SOGBs exposure to the less volatile CPO price. EPS to grow at a CAGR of 11.65% to FY17. Given our outlook on NR and CPO prices, we expect revenue to recover from the decline in FY 13 and achieve a CAGR of 18.41% to FY 17. EBITDA, EBIT and PAT are also expected to recover from FY 13 and achieve CAGRs of 24.65%, 34.08% and 34.96%, respectively. We recommend a HOLD on SOGB. Factoring in SOGBs observed volatility, our DCF arrives at a target price of XOF 45,379, implying upside of 0.8%. We therefore recommend a HOLD.
250 200 150 100
7 369 4 200 25 391
2 873 1 637 24 063
3 413 1 877 25 839
18.3 26.7 31.3 Current 9.0 9.3 11.1 1.8 4.7
9.2 11.6 22.5 2013F 6.4 3.6 15.7 1.9 7.0
12.9 13.7 22.6 2014F 7.6 4.2 13.2 1.7 5.8
STRENGTHS CPO quoted in global markets; immunises XOF, and EUR weakness. Diversified
50 -
Generally has highest profit margins amongst low cost producers

Feb-13 Apr-13 Jun-13 Aug-13
S&P AF
WEAKNESSES Limited growth prospects in NR Expansion is driven mostly by purchases from outgrowers CPO has a 5 year gestation period THREATS
Dec-12
Oct-13
Dec-13
SOGC BC (USD)
OPPORTUNITIES Downside risk on NR and CPO prices is limited given higher costs for majors. Higher NR prices or more likely
Deforestation concerns Development of greenfuel technology
15

Exposure to CPO driving top-line growth. SOGB earns about 57% of its revenue from NR and the remainder from palm oil. Because of limited expansion opportunities and declining yields in the area, NR output declined at a CAR of 2.42% to 37,142t in FY 12. With the gradual decline in volumes being accompanied by NR prices rising at a CAGR of 8.11%, we estimate NR revenue managed to grow at a CAGR of 6.9% over that period.
Revenue (XOF bn)
140 120
100 80
However, because of SOGBs modest top -line growth, EBITDA and EBIT only grew at 5 year CAGRs of 11.00% and 16.2% to XOF 24.9bn and XOF 18.1bn to end 2012. The latter benefitted from depreciation which increased at a CAGR of 1.80% over that period to XOF 6.8bn. After exceptional items, PBT has grown at a CAGR of 13.05% to XOF 20.9bn in FY 12. The effective tax rate has trended towards the corporate rate of 25%, rising from 22.5% in FY 07 to 23.7% in FY 12. PAT in turn grew at a CAGR of 12.69% to XOF 15.9bn. Note, FY 12 was a very poor period but SOGB still paid a dividend. SOGBs inability to grow NR volumes in order to smooth out earnings growth, especially when commodity prices decline, was emphasised in FY 12. Whilst NR and CPO prices declined 29.9% and 12.69% in that year, SOGB only managed to increase NR volumes by 3.05%. Revenue declined 17.27% over that period whilst the introduction of a 5% excise tax on NR revenues resulted in EBITDA and EPS declining 43.36% and 48.02%, respectively. Despite the decline in earnings, SOGB declared a dividend of XOF 4,200. Even though this was 63.71% lower than in the previous year, it is a historical yield of 9.3%. Eased capex follows limited growth in NR. Behind the slow growth in depreciation has been the low capex intensity, which in turn is a result of SOGBs NR operation having limited growth prospects. Capex has mostly been driven by the CPO operations. More recently, this involved upgrading the CPO factory.
SOGB comfortable with Debt / Equity ratio between 0.4x and 0.2x
50% 0.4
0.3
250 200
150
60 40 20 FY 07 NR FY 08 CPO FY 09 FY 10 NR Price Index FY 11 FY 12 CPO Price Index
100 50 -
Source: Company filings & IAS
CPO production on the other hand, being less mature and benefitting from rising yields, grew at a 5 year CAGR of 5.04% to 31,465t through to FY 12 of which c.95% was produced on SOGBs farms . The CPO price increased at a CAGR of 5.50% over that period to USD 0.94/kg in FY 12. We estimate that CPO revenue in turn achieved a 5 year CAGR of 7.4% to FY 12. EBITDA margin on a rising trend. Benefitting from an overall rise in NR and CPO prices and rising yields in CPO production, EBITDA and EBIT margins improved from 27.33% and 19.91% in FY 07 to a respective 31.35% and 26.06% in FY 12.
NR more influential on EBITDA margins
250 200
150
% of Revenue
40%
30%
20%
10%
0.2 0.1 FY07 FY08

OCF
50% 40%
30%
0% FY09 FY10 FY11 FY12

Dividend + capex
Capex intensity
Debt / Equity (RHS)
100 50 0
FY 07 FY 08 FY 09 FY 10 Weighted Price FY 11 NR FY 12 EBITDA Margin (RHS)
20% 10% 0%
CPO
Leverage recovers in favour of dividends. Leverage has generally varied between a debt/equity multiple of 0.2x and 0.4x. Initially, the ratio declined from FY 07x to FY 10 but increased as dividends grew significantly. This shows us that SOGB has a strong dividend paying culture.
16
Outlook
FY 13 earnings to decline 60.98%. In 9M 13, NR and CPO prices declined 23.34% and 19.26% to USD 2.87/kg and USD 0.76/kg, respectively, and revenue fell 8.68% to XOF 49.9bn. Mitigating the decline in prices was a 22.5% growth in NR volume sales whilst CPO grew a modest 1.9% as upgrading of the factory commenced. The lower NR and CPO prices meant that EBIT margins declined from 30.78% in 9M 12 to 14.65% in the current period and EBIT for the period dropped 55.92% to XOF 7.4bn. PAT for the period then declined 57.02% to XOF 57.02% to XOF 5.3bn.
(XOF m) Revenue EBIT PAT Margins EBIT PAT 14.86% 10.66% 30.78% 22.64% 9M 13 49 901 7 415 5 318 9M 12 54 650 16 824 12 374 % -8.69% -55.92% -57.02%
With the CPO capacity upgrade from 30t/hr to 45t/hr by the end of FY 13, we expect this to facilitate CPO volume sales growth at a 5 year CAGR of 14.18% to FY 17. Facing expansion challenges, growth in NR output will be achieved as the remaining 5,700ha of NR matures. We expect this to grow NR output at a 5 year CAGR of 11.42% to FY 17. Given our base case outlook on NR and CPO prices, we expect revenue to recover from the decline in FY 13 and achieve a CAGR of 18.41% to FY 17. Larger CPO contribution to stabilise margins. With CPO revenue rising in contribution from c.42.6% in FY 12 to 44.1% in FY 17, we expect SOGBs profit margins to become less volatile. Furthermore, as CPO does not attract the 5% excise tax that NR does, we see EBITDA margins recovering from the 22.47% expected in FY 13 to 27.60% in FY 17. EBITDA, EBIT and PAT are therefore expected to recover from FY 13 and achieve CAGRs of 24.65%, 34.08% and 34.96%, respectively. Capex to remain benign. SOGB has no major capex planned as it does not intend to add new capacity. With capacity utilisation for NR and CPO currently at 80% and 57% (the latter due to the downtime during capacity upgrade), respectively, SOGB has room to increase its NR and CPO output, more so for CPO which will have capacity of 45t/hr by the end of FY 13.
For the full year, with little change in NR and CPO prices, we expect the run-rate observed over 9M 13 to be maintained to FY 13. We expect revenue to decline 6.56% to XOF 74.3bn buoyed by the growth in NR volumes. In this regard, EBITDA, EBIT and EPS are expected to come in 33.01%, 56.70% and 60.98% lower y-o-y to XOF 16.7bn, XOF 9.0bn and XOF 2,875, respectively. We also expect SOGB to continue its dividend paying culture and declare a dividend of c.XOF 1,600. Long term outlook. According to management, NR production will remain fairly constant as i) the plantation is fairly mature and ii) there is no more land available in their concession for extension of NR. Palm on the other hand is still relatively young, having been planted in 2000, and therefore has higher upside on improvement of yields. Palm also still has room for extension within existing concession. SOGB therefore plans to increase production by i) rejuvenating plantations and increasing yields and ii) increasing capacity of existing factories and augmenting throughput via increased purchases from out-growers.

We use a DCF and arrive at a target price of XOF 45,379, implying upside of 0.8%. We recommend a HOLD on SOGB
Target Scenario Base case Price
XOF 45379.89
Bull case
XOF 46882.23
Bear case
XOF 34753.33
17
Financial Summary
XOF Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT Y-o-Y % Attr. NPAT Y-o-Y % Per Share data Basic EPS Y-o-Y % DPS Y-o-Y % NAV per Share Y-o-Y % Margin Performance 2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield Dividend yield 4.61% 24.83% 3.19% 0.00% 10.73% 48.16% 8.16% 0.00% 2.32% 9.16% 2.12% 0.00% 4.81% 16.93% 4.67% 0.00% 21.55% 54.59% 22.46% 5.33% 16.49% 31.60% 18.63% 9.47% 13.41% 21.40% 14.57% 7.41% 14.13% 21.61% 16.22% 8.92% 17.59% 24.63% 21.07% 11.59% 21.33% 27.03% 26.83% 14.75% 21.99% 27.95% 32.32% 17.78% 53.43% 17.20% 7.16% 5.75% 2008 50.82% 19.80% 11.47% 8.15% 2009 51.98% 11.86% 7.53% 2.95% 2010 65.17% 22.87% 11.11% 6.77% 2011 51.97% 22.80% 21.70% 17.22% 2012 53.27% 24.81% 19.14% 13.43% 2013 E 51.44% 24.64% 16.57% 11.70% 2014 E 50.98% 23.28% 15.68% 11.28% 2015 E 50.82% 24.67% 17.50% 12.61% 2016 E 50.68% 24.95% 18.17% 13.81% 2017 E 50.56% 25.24% 18.79% 14.32% 2 174 0 540 1 379 155.43% 0 NA 3 553 63.43% 358 -74.03% 0 NA 4 267 20.10% 789 120.35% 0 NA 5 056 18.49% 3 797 381.16% 900 NA 8 852 75.09% 3 149 -17.07% 1 600 77.78% 11 078 25.14% 2 463 -21.77% 1 252 -21.77% 11 941 7.79% 2 741 11.29% 1 508 20.45% 13 431 12.47% 3 561 29.91% 1 959 29.91% 15 484 15.29% 4 534 27.30% 2 494 27.30% 18 059 16.63% 5 463 20.49% 3 005 20.49% 21 029 16.44% 4 173 5 202 12 489 38 799 2007 72 621 2008 130 849 80.18% 66 497 71.39% 25 905 107.42% 15 010 188.55% 10 658 155.43% 2009 93 892 -28.24% 48 810 -26.60% 11 137 -57.01% 7 070 -52.90% 2 768 -74.03% 2010 90 068 -4.07% 58 699 20.26% 20 595 84.93% 10 011 41.59% 6 099 120.35% 2011 170 389 89.18% 88 556 50.86% 38 844 88.61% 36 969 269.30% 29 346 381.16% 2012 181 164 6.32% 96 502 8.97% 44 940 15.69% 34 683 -6.18% 24 337 -17.07% 2013 E 162 743 -10.17% 83 713 -13.25% 40 094 -10.78% 26 963 -22.26% 19 039 -21.77% 2014 E 187 916 15.47% 95 807 14.45% 43 751 9.12% 29 462 9.27% 21 190 11.29% 2015 E 218 292 16.16% 110 939 15.79% 53 844 23.07% 38 210 29.69% 27 528 29.91% 2016 E 253 690 16.22% 128 570 15.89% 63 302 17.57% 46 105 20.66% 35 044 27.30% 2017 E 294 953 16.27% 149 126 15.99% 74 434 17.59% 55 420 20.20% 42 226 20.49%
18
Equity Research Kenya December 2013 Agriculture

A 60% owned subsidiary of British American Tobacco (BAT), BAT Kenya (BATK) was established in 1907 and currently controls c.90% of the local official market, making it East Africas largest supplier. The companys flagship, the Sportsman cigarette brand controls c.50% of the legal market. Illicit trade is said to supply c.10% of the total cigarette market.
Recommendation Bloomberg Code Current Price (KES) Current Price (Usc) Target Price (KES) Target Price (Usc) Upside (%) Liquidity Market Cap (KES m) Market Cap (USD m) Shares in issue (m) Free Float (%) Ave. daily vol - 1 yr. Price Performance Price, 12 months ago (KES) Change (%) Price, 6 months ago (KES) Change (%) Financials (KES 'm) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings F2012 19 409 5 657 (350) 3 271 2013F 20 351 5 830 (74) 3 559 450.00 18.0 570.00 -6.8 2014F 22 553 6 358 (38) 3 976 53 100 340 100 40.0 35 919 ACCUMULATE BATK:KN 531.00 340.38 593.32 380.33 11.7
BAT Kenya exhibits reasonably robust growth. Despite being a company operating in an industry said to have low growth prospects, BATK has managed to grow revenue, EBITDA and EPS at a 5yr CAGR of 15.6%, 17.3% and 18.7% to KES 19.4bn, KES 5.7bn and KES 32.71, respectively. Driving top-line growth in recent years have been exports particularly of cut-rag to Egypt.
Favourable business model. BATK has c.90% market share in Kenya and exports to neighbouring and regional countries which diversifies its market risk. From a supply perspective, BATK acquires 100% of its tobacco from contracted farmers which excludes it from exposure to farming related operational and investment risk. Further, when local supply has been hampered by a drought or disease, BATK can tap into the BAT Global Pool for tobacco leaf. Whilst this may mean narrower margins, it helps smooth out earnings growth. EPS to grow at a CAGR of 13.1% to FY 17. We expect top line growth at CAGR of 10.2% to FY 17 as BATKs volumes grow at a forecast CAGR of 5.0% and combine with y-o-y price inflation of 5.0% over that period. Increased labour productivity and efficiencies will help buoy operating margins against contracting gross margins. We therefore expect EBITDA and EPS CAGR of 11.0% and 13.1% from FY 12 to FY 17. Free cash flow is also expected to grow at a CAGR of 11.5% over that period. ACCUMULATE. We use a DCF and arrive at a target price of KES 593.32, implying upside of 11.8%. However, we note BATKs generous dividend history and outlook and recommend the counter as a ACCUMULATE.
EPS (KES) DPS (KES) NAV/share (KES) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) * TTM
32.71 32.50 71.21
35.59 33.81 74.30
39.76 37.77 64.86
22.6 48.3 29.1 Current 6.5 6.1 15.3 0.8 9.0
23.1 48.9 28.6 2013F 6.7 6.4 14.9 7.1 9.2
25.7 57.1 28.2 2014F 7.5 7.1 13.4 8.2 8.4

250 200 150 100
STRENGTHS Controls c.90% market share. Global tobacco pool ensures leaf supply during drought periods in Kenya or the region OPPORTUNITIES Success in efforts to combat illicit trade Higher disposable incomes to increase consumption
WEAKNESSES Product is highly regulated with local and international organisations seeking to curtail consumption THREATS
50 -
Higher excise taxes Increased Illicit trade
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
BATK KN (USD)
19

Exports drive top line growth. BATKs gross revenue has grown at a 5 year CAGR of 14.1% to KES 30.5bn (USD 350.9m) to FY 12. Over that period, gross revenue from local sales grew a CAGR of 12.0% to KES 20.7bn whilst VAT and excise taxes grew at 11.8% to KES 11.1bn, or 53.5% of local sales. With VAT at 16.0%, the effective excise tax on cigarettes was 37.5% in FY 12 from c.38.0% in FY 07. According to management, local volume sales grew at a CAGR of c.5.0% over that period.
Revenue (KES bn) contribtution per segment
25 20
15
Overall profitability increases despite narrowing gross margins. Despite gross margins declining from 49.10% in FY 07 to 43.17% in FY 12 as the high excise taxes restricted BATKs ability to pass on raw materia l costs to consumers without jeopardising volume growth, EBITDA and EBIT margins have improved from 26.99% and 22.45% in FY 07 to 29.15% and 26.30% in FY 12, respectively.
Rising trend in profitability
25 20 15 10 5 0 30% 29% 28% 27% 26% 25% 24% 23% 22%
10 5 FY07 FY08 FY09 Local Sales FY10 Exports FY11 FY12
FY07
FY08
FY09
FY10
FY11
FY12
H1 13
Revenue (KES bn)
EBITDA (KES bn)
EBITDA margin (RHS)
Aiding top-line growth were exports which grew at a CAGR of 19.5% to KES 9.8bn from FY 07 to FY 12. Cigarette exports, of which the majority were to East and Central Africa, grew at a CAGR of 11.0% to KES 6.7bn over that period. Driving total export growth were cut-rag exports to Egypt which commenced over the latter half of FY 10 and earned KES 921m in that year, KES 4.8bn in FY 11 and then KES 3.0bn in FY 12. The decline in FY 12 was due to the instability in Egypt. This combined with a benign 2.1% growth in cigarette exports and the increase in the excise duty from an effective 33.8% in FY 11 to 37.5% in FY 12. Overall, BATKs net revenue has grown at a respectable 5 year CAGR of 15.6% to KES 19.4bn in FY 12. For the interims to H1 13, net revenue was a marginal 0.15% softer to KES 9.0bn after VAT and excise tax increased 11.26% to KES 6.1bn. Despite local and export cigarette volume sales growing c.7.0%, gross revenue grew a modest 4.16% as cut-rag export revenue declined further. We estimate total exports declined 13.46% over the period.
Savings opportunities arose from staff costs which declined from 15.3% of turnover in FY 07 to 11.4% in FY 12 as production processes increased in efficiency. Whilst EBITDA and EBIT have grown at a 5 year CAGR of 17.3% and 19.3% to FY 12, PAT has grown at a rate of 18.7% to KES 3.3bn. BATKs net finance costs have grown at a 5 year CAGR to FY 12 of 40.0% to KES 350m, while PBT grew at a lower but still robust CAGR of 18.3% to KES 4.8bn. The effective tax rate fluctuated around 30% but essentially declined from 32.39% in FY 07 to 31.19% in FY 12. PAT therefore grew at a 5 year CAGR of 18.7% to KES 3.3bn in FY 12. In H1 13, the trend continued with gross profit declining 6.14% whilst EBIT grew 8.84% to KES 2.3bn. Net finance costs declined 35.0% to KES 78.0m and PBT, income tax and PAT all grew 11.46% to KES 2.2bn, KES 671.0m and KES 1.6bn, respectively.
20
Capex instensity on the decline

2.00 1.50 1.00 0.50 FY07 FY08 FY09 FY10 FY11 FY12 Capex (KES bn) Capex intensity 4%
12%
8%
0%
Higher excise taxes not in governments favour..? According to management, notably higher excise taxes would increase consumption of illicit trade cigarettes. Management points out that in markets with higher excise tax rates, such as the UK and Canada, illicit trade is said to make up 35% and 40% of domestic consumption, respectively, against c.9.0% in Kenya. In this regard, management is of the view that higher excise taxes will result in lower excise tax revenues for GOK and at the same time, expose Kenyas consumers to questionable and unregulated quality which could worsen health risks. VAT bill to pressure margins. The reintroduction of 16.0% VAT on fertiliser, a key implement in tobacco farming will lead to an increase in costs of operations for tobacco farmers. This is likely to also apply upward pressure on procurement costs for BATK which acquires 100% of its tobacco leaf from contracted farmers. Capex to remain benign. Management expects capex intensity to decline to the c.5.0% level in the long term as expenditure will essentially be driven by the maintenance and replacement of property, plant and equipment. We expect this to offset the likelihood of narrowing margins and drive free cash flow generation going forward.
Driving efficiency has been investment in new processing machinery, wastage reduction technology and the establishment of processes for the recycling of water and waste tobacco. Capex overall has grown at a CAGR of 10.08% over that period and capex intensity declined from 8.1% in FY 07 to 6.4% in FY 12.
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
FY07 OCF FY08 FY09 FY10 FY11 FY12 Dividend + capex Debt / Equity

We use a DCF and arrive at a target price of KES 593.32, implying upside of 11.8%. However, we note BATKs generous dividend history and outlook and recommend investors ACCUMULATE.
Given the industrys limited growth prospects, which makes long term borrowings riskier, BATKs model ensures that capex and dividends are easily financed out of operating cash flows. As such, debt was at a low 10.21% of equity in FY 12, declining from 17.29% in FY 07.
Target Scenario Base case Price KES 593.32
FY14 - exit PE
FCF 2nd Macro Outlook stage CAGR
15.0x +ve Rf and ERP trend lower 10.8%
Outlook
Top line growth trend to continue to FY 17. With Kenyas customer base at 4.0%, we expect volumes in FY 13 to grow c.8.0%. BATK has already exhibited a c.7.0% growth in volumes in the current year and we expect that to contract marginally over H2 13 as a result of the contraction in consumer spending power. Looking into the long term, we expect cigarette volumes to grow at CAGR of 5.0% to FY 17.
Bull case KES 613.03
where 18.0x towards +ve Rf and ERP trend lower 12.2%
Bear case
KES 453.88
where 13.1x towards -ve Rf and ERP deteriorate marginally to 9.5%
21
Financial Summary
KES Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT Y-o-Y % Attr. NPAT Y-o-Y % Per Share data Basic EPS Y-o-Y % DPS Y-o-Y % NAV per Share Y-o-Y % Margin Performance 2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield Dividend yield 14.9% 29.4% 2.4% 3.0% 17.4% 35.3% 3.0% 3.0% 14.2% 30.8% 2.6% 2.6% 16.3% 35.9% 3.1% 2.5% 24.8% 53.5% 5.4% 5.3% 22.6% 48.3% 5.7% 5.7% 23.8% 50.4% 6.4% 6.1% 26.0% 58.1% 7.1% 6.8% 28.5% 67.9% 8.0% 7.6% 30.4% 72.3% 9.2% 8.8% 32.1% 76.2% 10.5% 10.0% 49.10% 26.99% 22.45% 14.71% 2008 49.99% 29.45% 24.91% 16.54% 2009 48.84% 24.79% 20.02% 13.33% 2010 44.51% 26.17% 21.71% 13.05% 2011 43.78% 25.90% 23.15% 15.38% 2012 43.17% 29.15% 26.30% 16.85% 2013 E 41.17% 28.65% 25.80% 17.56% 2014 E 41.57% 27.79% 25.06% 17.44% 2015 E 41.97% 28.19% 25.56% 17.56% 2016 E 42.37% 28.59% 26.07% 17.97% 2017 E 42.77% 28.99% 26.56% 18.37% 47.2 17.00 13.86 17.00 22.7% 17.00 0.0% 49.2 4.2% 14.78 -13.1% 14.75 -13.2% 47.0 -4.5% 17.67 19.5% 14.50 -1.7% 51.4 9.4% 30.98 75.3% 30.50 110.3% 64.4 25.3% 32.71 5.6% 32.50 6.6% 71.2 10.7% 37.08 13.4% 35.23 8.4% 75.8 6.4% 41.06 10.7% 39.01 10.7% 65.6 -13.4% 46.16 12.4% 43.85 12.4% 70.4 7.2% 52.96 14.7% 50.32 14.7% 76.2 8.4% 60.64 14.5% 57.60 14.5% 82.9 8.8% 1 386 2 115 2 542 4 625 2007 9 419 2008 10 283 9.2% 5 140 11.1% 3 029 19.1% 2 562 21.2% 1 700 22.7% 2009 11 094 7.9% 5 418 5.4% 2 750 -9.2% 2 221 -13.3% 1 478 -13.1% 2010 13 539 22.0% 6 026 11.2% 3 543 28.8% 2 940 32.3% 1 767 19.5% 2011 20 138 48.7% 8 817 46.3% 5 216 47.2% 4 662 58.6% 3 098 75.3% 2012 19 409 -3.6% 8 379 -5.0% 5 657 8.5% 5 104 9.5% 3 271 5.6% 2013 E 21 111 8.8% 8 692 3.7% 6 048 6.9% 5 448 6.7% 3 708 13.4% 2014 E 23 544 11.5% 9 787 12.6% 6 543 8.2% 5 900 8.3% 4 106 10.7% 2015 E 26 292 11.7% 11 035 12.7% 7 411 13.3% 6 721 13.9% 4 616 12.4% 2016 E 29 480 12.1% 12 491 13.2% 8 428 13.7% 7 685 14.3% 5 296 14.7% 2017 E 33 015 12.0% 14 121 13.0% 9 572 13.6% 8 770 14.1% 6 064 14.5%
22
Equity Research Uganda December 2013 Agriculture

British American Tobacco Uganda (BATU) is the Ugandan subsidiary of BAT, which has a direct shareholding of 70%. BATU is into growing, processing, exporting and manufacturing of cigarettes. However, the company in H1 13 ceased its processing operation in Uganda. Locally manufactured brands are Sportsman, Safari, Crescent and Star. In a market consuming c.2.0bn sticks, of which c.400m are illicit, BATU has c.80% market share of the official market whilst its Sportsman brand alone accounts for c.70% of the official market.
Recommendation Bloomberg Code Current Price (UGX) Current Price (Usc) Target Price (UGX) Target Price (Usc) Upside (%) Liquidity Market Cap (UGX m) Market Cap (USD m) Shares in issue (m) Free Float (%) Ave. daily vol - 1 yr. Price Performance Price, 12 months ago (UGX) Change (%) Price, 6 months ago (UGX) Change (%) Financials (UGX 'm) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings F2012 180 042 31 998 (12 750) 12 196 2013F 259 215 55 666 (3 242) 15 942 2 100 90.5 2 500 60.0 2014F 282 840 59 570 (2 146) 38 236 196 320 78 49 25.0 40 913 SPEC BUY BATU:UG 4 000 159.30 5 967 238 49.2
Modest fundamentals growth since FY 07. BATU has managed to grow revenue, EBITDA and PAT at a 5 year CAGRs of 5.5%, 10.3% and 14.7% to UGX 180.0bn, UGX 32.0bn and UGX 12.2bn, which we view as modest given the depreciation of the UGX over that period of 8.7% yo-y. FY 13 showing operational recovery. Whilst EBIT declined 25.5% in FY 12 to UGX 29.8bn, H1 13 EBIT grew 127.2% to UGX 31.0bn. EBIT margins have expanded from 14.9% to 21.9%, showing an exceptional improvement in operational profitability.
The 42% increase in excise taxes a concern. Over H1 13, management report that local volume sales decline by 24% as a result of the 42% increase in excise taxes. We think this may harm BATUs growth prospects in the long term. Attractive forward multiples at FY 14. Given that we expect EPS to grow 30.7% to UGX 325 in FY 13, and 139.9% to UGX 779 in FY 14, we forecast a 2 year forward PER of 5.1x. Furthermore, given that BATU paid out a dividend payout ratio of 100% in good years, we see a generous dividend as highly likely at FY 14. We recommend BATU as a SPEC BUY. Given the observed recovery and its potential to payout a generous dividend, we recommend BATU as a SPEC BUY.
EPS (UGX) DPS (UGX) NAV/share (UGX) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) * TTM
248 141 263
325 309 588
779 740 689
6.2 68.3 17.8 Current 4.6 3.5 22.0 15.2 8.0
5.3 76.3 21.5 2013F 8.1 7.7 12.3 6.8 4.6
8.6 122.0 21.1 2014F 19.5 18.5 5.1 5.8 4.3

200
STRENGTHS Leading market share Support from BAT global pool
150
Strong brands locally and within the region
WEAKNESSES Anti-smoking drive High excise taxes increasing competition from illicit brands THREATS
100
50
OPPORTUNITIES Local and regional economic growth. Higher NR prices or more likely
Feb-13 Apr-13 Jun-13 Aug-13
S&P AF
Higher excise taxes Increased supply of illcit brands Weak economic growth
Dec-12
Oct-13
Dec-13
BATU UG (USD)
23

Leaf exports driving revenue growth. BATUs net revenue has grown at a CAGR of 5.47% over the past 5 years to UGX 180.0bn (USD 72.0m) in FY 12. Whilst excise taxes have increased considerably over the past three years, BATU managed to register impressive net revenue growth at H1 13.
Leaf exports driving revenue (UGX bn) growth
250
Gross and EBITDA margins increased from 27.9% and 14.2% in FY 07 to 49.5% and 25.6% in FY 11, respectively. The drastic expansion in gross margins shows that the contractual obligations with suppliers, such as imports from BAT group affiliates was very effective in protecting BATU from a local currency that depreciated c.30% over that period. However, in FY 12, BATUs margins came under pressure as a combination of the increased excise taxes and import duties. Gross and EBITDA margins therefore declined by 270bps and 780bps, respectively. Whilst gross profit grew a modest 1.7% to UGX 83.2bn in FY 12, EBITDA declined 24.5% to UGX 32.0bn. EBIT was 25.5% lower at UGX 29.8bn following a 7.0% decline in depreciation to UGX 2.2bn. FX related losses saw net finance costs increase 58.7% to UGX 12.8bn, or 42.75% of EBIT. PBT and PAT in turn declined 46.6% to UGX 17.1bn and UGX 12.2bn. BATU pulls FY 12 dividends on poor earnings. The company had began paying a series of dividends since FY 09 as it began to enjoy higher profit margins whilst capex remained low relative to revenue. However, BATU did not declare a dividend in FY 12 as a result of the poor performance.
BATU highly cash flow generative
30% 2.0
1.6 25%
200 150 100 50 FY 07 FY 08 FY 09 Local Sales FY 10 Exports FY 11 FY 12
Source: Company filings & IAS
The performance in top-line growth is largely owed to BATUs leaf exports which generated about 58.2% of the companys revenue in FY 12. In FY 12, following a 13% increase in excise taxes in the previous year, local revenue grew a modest 6.2% to UGX 137.7bn whilst exports grew 11.4% to UGX 104.8bn. VAT and excise taxes grew 6.9% and net revenue for that period grew 8.9% to UGX 180.0bn. EBITDA margin on a rising trend. Benefitting from risk hedging and maintenance of efficiencies through contractual obligations, BATU was able to increase its profitability.
Rising trend in profitability
200 180 160 140 120 100 80 60 40 20 0 30% 25% 20% 15% 10% 5% 0%
20% 15%
10%
1.2 0.8
0.4
5% 0% FY07 OCF Capex intensity FY08 FY09 FY10 FY11 FY12 Dividend + capex Net debt / EBITDA (RHS)
FY07
FY08
FY09
FY10
FY11
FY12
H1 13
Revenue (GHS m)
EBITDA (GHS m)
EBITDA margin
BATU leverages off supplier network to finance operations. Despite the decline in earnings, cash generated from operations grew 137.7% to UGX 35.3bn mainly as a result of its suppliers extending credit terms by 46 days. Whilst the increase in total debt raised UGX UGX 5.9bn, the extension from suppliers freed up UGX 25.5bn. This allowed BATU meet dividend and capex payments that increased 50.5% and 34.8% to UGX 22.1bn and UGX 10.7bn in that year.
The highest level of profitability over the past five years to FY 12 was achieved in FY 11.
24
Outlook
FY 13 earnings to decline 60.98%. At operating results were impressive, showing and 121% growth in net revenue and EBIT 141.6bn and UGX 31.0bn, respectively. Gross grew 35.4% driven by a 54.0% jump in exports. H1 13, a 54.1% to UGX revenue
For the full year, we expect the run-rate observed over H1 13 to maintain to FY 13 were exports are concerned. However, we anticipate a softer performance in the domestic market over H2 13 as the higher excise tax i) reduces affordability and ii) favours illicit cigarette consumption. Overall, we expect net revenue to grow 44.0% to UGX 259.2bn in FY 13. In this regard, we expect EBITDA to grow 74.0% to UGX 55.7bn in FY 13. With the once-off charges absent over H2 13, we expect EBIT to decline 11.7% to UGX 26.4bn. With the UGX 6.8% firmer against the USD in FY 13, BATU seems to have benefitted from some FX gains on payables balances on imported material. We think this will benefit PBT and PAT and thus forecast the two growing 35.3% and 30.7% to UGX 23.1bn and UGX 15.9bn, respectively. Long term outlook. We generally expect the growth in per capita incomes locally and in export markets to drive volume growth. On the other hand, we think that the excise tax hikes will have an adverse effect on consumption locally, an offset the income effect in the short to medium term.
However, the decommissioning of the leaf processing plant, and the settlement of a legal judgement that went against them saw the company incur exceptional costs of UGX 26.8bn. PBT, income tax and PAT therefore declined 39.9% to KES 6.9bn, KES 2.1bn and KES 4.9bn, respectively.
Financial Summary (UGX m) Gross revenue VAT & Excise duty Net revenue Cost of operations EBIT Financial charges PBT Income tax PAT Ratios EBIT margin PBT margin Effective tax rate 14.86% 12.67% 30.00% 21.91% 4.94% 30.00% H1 12 124 778 (32 895) 91 883 13 657 (2 015) 11 642 (3 493) 8 149 H1 13 168 938 (27 314) 141 624 31 030 % 35.4% -17.0% 54.1% 41.4% 127.2%
(78 226) (110 594)
2 776 -237.8% 6 994 -39.92% (2 098) -39.94% 4 896 -39.92%

We use a DCF and arrive at a target price of UGX 6,110, implying upside of 49.2%. We recommend a SPEC BUY as we believe that an attractive dividend yield is highly possible by FY 14. However, we keep a close eye on FY 13 to see and assess the impact of the excise tax increase on market dynamics.
The processing plant was 74 years old and would have required c.USD 75m (UGX 180.5bn) to replace. Given that the plant also had capacity to process 50,000t each year of leaf, whilst BATU only imported 15,000t a year, reinvestment in the plant could not be justified. The settlement is unknown to us as of yet but we do know that the farmers had originally demanded compensation of UGX 14.0bn for forgone payment on 3,000t of leaf.
Target Scenario Base case Price UGX 5966.59
Bull case
UGX 6244.5
Bear case
UGX 5581.75
25
Financial Summary
UGX Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT Y-o-Y % Attr. NPAT Y-o-Y % Per Share data Basic EPS Y-o-Y % DPS Y-o-Y % NAV per Share Y-o-Y % Margin Performance 2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield Dividend yield 6.9% -233.1% 3.1% 0.0% 3.2% -320.6% 1.7% 0.0% 5.7% 174.3% 4.1% 1.4% 9.7% 126.7% 7.8% 5.7% 13.5% 115.6% 11.2% 11.2% 6.2% 68.3% 6.2% 3.5% 5.3% 76.3% 8.1% 7.7% 8.6% 122.0% 19.5% 18.5% 8.2% 119.9% 22.0% 20.9% 8.7% 118.7% 24.7% 23.4% 9.2% 116.8% 27.2% 25.9% 27.9% 14.2% 10.9% 4.5% 2008 30.6% 17.1% 14.1% 2.4% 2009 41.2% 19.6% 16.3% 7.2% 2010 41.4% 22.3% 20.1% 9.3% 2011 49.5% 25.6% 24.2% 13.4% 2012 46.2% 17.8% 16.6% 6.8% 2013 E 44.2% 21.5% 10.2% 6.2% 2014 E 44.6% 21.1% 20.1% 13.5% 2015 E 45.0% 21.5% 20.4% 14.0% 2016 E 45.4% 21.9% 20.8% 14.4% 2017 E 45.8% 22.3% 21.2% 14.6% -54 0 125 66 -47.2% 0 NA 12 -123.2% 164 148.1% 57 NA 176 1313.1% 310 89.1% 228 302.0% 314 78.6% 450 45.1% 450 97.3% 465 48.1% 248 -44.8% 141 -68.7% 263 -43.3% 325 30.7% 309 118.8% 588 123.3% 779 139.9% 740 139.9% 689 17.1% 881 13.1% 837 13.1% 781 13.4% 987 12.0% 937 12.0% 881 12.7% 1 088 10.3% 1 034 10.3% 983 11.7% 6 141 15 036 19 591 38 506 2007 137 968 2008 135 189 -2.0% 41 363 7.4% 23 126 18.0% 19 017 26.5% 3 244 -47.2% 2009 111 783 -17.3% 46 092 11.4% 21 896 -5.3% 18 191 -4.3% 8 050 148.1% 2010 163 432 46.2% 67 724 46.9% 36 459 66.5% 32 905 80.9% 15 223 89.1% 2011 165 317 1.2% 81 770 20.7% 42 370 16.2% 40 034 21.7% 22 081 45.1% 2012 180 042 8.9% 83 184 1.7% 31 998 -24.5% 29 824 -25.5% 12 196 -44.8% 2013 E 259 215 44.0% 114 580 37.7% 55 666 74.0% 26 346 -11.7% 15 942 30.7% 2014 E 282 840 9.1% 126 155 10.1% 59 570 7.0% 56 769 115.5% 38 236 139.9% 2015 E 308 488 9.1% 138 828 10.0% 66 181 11.1% 63 062 11.1% 43 247 13.1% 2016 E 336 317 9.0% 152 697 10.0% 73 488 11.0% 70 021 11.0% 48 419 12.0% 2017 E 366 498 9.0% 167 866 9.9% 81 558 11.0% 77 713 11.0% 53 421 10.3%
26
Equity Research Zimbabwe December 2013 Agriculture

BATZ processes tobacco products mainly for the domestic market. The company manufactures c1.5bn cigarettes, commanding a market share of approximately 73%. BATZ markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 68% of volumes. Premium brands constitute up to 25% of sales volumes. BATZ has a strong countrywide distribution network operating out of five depots with outlying areas being serviced by third parties. Dominant position. BATZ holds a dominant market share estimated at 73% of the Zimbabwean market. This is largely due to the prohibitive set-up costs of production, marketing and distribution functions strong brand loyalty from consumers. Non-cash items negatively impacted H1 13 performance. The performance for H1 2013 was negatively impacted by once off items relating to share payments. Operating margins shrunk from 30.5% to 10.4% due to share based payment expenses of USD 10.6m, representing the fair value of share awards made to employees as part of the companys compliance with indigenisation and economic empowerment legislation. Strong cash flows. Cash generation was strong with net operating cash flows of USD 11.6m, up 188% yo-y and representing a cash interest cover of 83.5x. Net gearing significantly improved to -37.5% from 16.7%. Ratings are undemanding; we maintain our BUY recommendation. Return on shareholder funds and asset utilisation were impressive at 109% and 37%, respectively. The company has a generous dividend policy. In our view, these factors warrant above average ratings. Ratings are not demanding at PER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of 18.1x and EV/EBITDA 11.5x for our comparative sample. We maintain our BUY recommendation.
400
Bloomberg Recommendation Current Price (USc) Target Price (USc) Upside (%) Liquidity Market Cap (USD m) Shares (m) Free Float (%) Ave. daily vol ('000) Price Performance Price, 12 months ago Change (%) Price, 6 months ago Change (%) Financials (USD '000) 31 Dec Turnover EBITDA Net Finance Income Attributable Earnings EPS (USD) DPS (USD) NAV/Share (USD) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Volume (m) Earnings Yield (%) Dividend Yield (%) PE (x) PBV (x) EV/EBITDA (x) 53.8 109.3 35.9 Current 1,469 588.4 542.1 17.0 14.9 16.1 60.1 85.3 38.6 2013F 1,451 723.1 233.1 13.8 0.1 12.7 F2012 51,853 18,628 (734) 12,262 70.55 65.00 80.33 2013F* 61,527 23,724 (548) 16,479 86.70 27.95 129.81
BATZL:ZH BUY 1,199.0 1,500.0 25.1
247.4 20.6 17.4 2.7
215.0 457.7 366.0 227.6 2014F 70,353 28,616 (263) 20,227 98.03 93.13 124.48
62.9 80.3 40.7 2014F 1,480 817.6 776.7 12.2 0.1 10.5
* excludes USD 10.6m non-recurring costs
350
300 250 200 150
STRENGTHS Market leader Strong brand Cash generative Expansive distribution Strong management OPPORTUNITIES New products Economic recovery
WEAKNESSES Low disposable incomes Energy disruptions
Commodities driven economy

THREATS
100
50
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
Dec-13
BAT ZH (USD)
Increased excise duties Not a dominant manufacturer locally Well established completion Increased regulation on tobacco
27
Nature of business
BAT Zimbabwe processes tobacco products mainly for the domestic market with exports being cut rag tobacco. The company manufactures c1.5bn cigarettes, commanding a market share of approximately 70% of the smoking population in a market estimated to consume approximately 2.5bn sticks a year. BATZs main competitor, Savanna is the largest manufacturer of cigarettes although the bulk of its production is exported. Local cigarette demand has fallen from a peak of 3.0bn sticks recorded in 1980.
Madison is the crown jewel
Dunhill &Newbury 5% Berkley 1%
Main stream brand, Madison, maintained its pole position contributing 68% to overall sales volumes. Exports of cut rag to Mozambique were discontinued as the company focused on more viable sales of manufactured cigarettes.
Sales and national tobbaco crop
National Tobacco crop kgs (m) 200 150 100 50 2008 2009 2010 2011 2012 2013f 2014f
BATZ Cigarettes (m) 1,800

1,500
1,200
900
600
300 -
Everest 15%
National tobacco crop 'kgs m LHS BATZ Cigarettes sold ('m) RHS
Source: IES, Company report
Kingsgate 11%

Madison 68%
Source IES, company reports
The company markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 68% of volumes and commands domestic market share of approximately 75%. Premium brands constitute up to 25% of sales volumes. BATZ has a strong countrywide distribution network operating out of five depots in Harare, Bulawayo, Gweru, Mutare and Masvingo, with outlying areas being serviced by third parties. Should really be captured on page 1, coz basically repeating most of the overview there. The sourcing should be on left not right to keep standardised, also font 7, bold italics.
Improved production efficiencies, price reviews, cost management, the change in the sales mix and discontinued cut rag exports to Mozambique aided margins as GP margins expanded to 69% from 58%, while adjusted operating margins widened to 40.3% from 30.5%, resulting in adjusted EBIT increasing 32.7% y-o-y to USD 9.3m. Costs were well contained, despite the company having increased marketing initiatives marketing to revenue vs historical trend. Overall opex declined by 2.5% to USD 6.7m as selling and marketing costs increased 15.3% to USD 2.2m off set by the 9.3% decline in admin expenses to USD 4.5m.
EBITDA, USDm 35
EBITDA and margin
EBITDA margin, %
30
25
20
15
H1 2013 Review
Financial
and
Operational
10
5
45 40 35 30 25 20 15 10 5 0
BATZ released a flat set of results showing a 0.5% increase in revenue to USD 23.1m. The company effected price increases of approximately 30% in December 2012 following the hike in excise duty by 50% to USD 15 per 1,000 sticks. Trading volumes were thus 16% lower to 636m sticks across the local brand portfolio, negatively affected by the successive increases in excise duty and retail selling prices as well as the slowdown in GDP growth. The situation was also compounded by the coinage constraints. Nonetheless, sales volumes of premium brand, Dunhill grew strongly by 44% to 3.7m sticks albeit from a small but growing consumer base.
2009
2010
2011
2012
2013e
2014f
2015f
EBITDA USD' m
EBITDA margin %
Source: IES, company reports
Reported EBIT declined 65.7% to USD 2.4m, negatively impacted by the USD 1.6m share based payment expense which was partly offset by a USD 3.3m credit of accounts payables that were forgiven by BAT Plc
28
for management fees accrued during the hyperinflation period. Net finance charges declined by 50% to USD 0.1m, due to reduced borrowings. The effective tax rate spiked to 163.5% from 24.9% and all this resulted in the company posting a loss of USD 1.4m for the period. Cash generation remained strong, with net cash generated from operations up 188% y-o-y to USD 11.6m, representing a cash interest cover of 83.5x. The 188% growth in net cash from operations was ahead of operating cash flow due to the liquidation of tobacco leaf inventories worth USD 4.6m of cut rag. Capex amounted to USD 0.3m from USD 0.2m mainly related to maintenance. Total balance sheet assets declined by 3% to USD 29.8m due to a reduction in inventories and other intangible assets. The net asset value (NAV) was 59% lower to USD 5.7m from USD 14.0m due to a significant reduction in retained earnings which dropped from USD 8.4m to USD 0.1m. The reduction in inventories to USD 7.9m was due to a USD 4.6m stock liquidation following the discontinuation of cut rag exports to Mozambique. Trade and other payables reduced from USD 8.9m to USD 6.3m following the above mentioned forgiveness of USD 3.3m worth of payables. Increases in provisions from USD 1.4m to USD 11.2m represented the recognition of the ESOT liability of USD 10.2m. Net gearing significantly improved to minus 37.5% from 16.7%.
Owing to the prohibitive set-up costs of production, marketing and distribution functions we see BATZ maintaining its market share. Excise taxes to rise...? Excise duties in Zimbabwe makes up approximately 30% of the retail price (at USD 15 per 1,000 sticks), a high for a developing country, and with Government revenue inflows remaining under pressure, are unlikely to be reduced in the foreseeable future. BATZ likely to maintain strong pricing power. Although demand for cigarettes is fairly inelastic, the segment is not equipped to absorb 40%+ price hikes yo-y, in our view. The increase in awareness of the health risks associated with smoking has resulted in a decline in cigarette consumption in the developed world while statistics from W.H.O have shown that the opposite is true for most developing nations in Southern Africa. The tolerant attitude of Zimbabweans in general towards smoking, brand loyalty, considerable barriers to entry and the habit-forming nature of cigarette smoking are all factors that help insulate the industry. Management cautious of future prospects The company remains cautious in light of liquidity constraints (pressure on disposable incomes) and slower than anticipated economic growth. For FY 13 volumes are expected to be slightly lower than 2012 volumes. Management expects Dunhill and Newbury (premium brands) to contribute approximately 10% of sales volume by FY 2014 from 5% achieved in 2012. Generous dividend payout Given the limited capex requirements (USD 1.2m over the next two years) against relatively higher cash flow generation (USD 13.0m in FY 12), the generous dividend payout is likely to be maintained.
Outlook
Input cost increases are a particular concern. Leaf tobacco makes up approximately 40% of the non-excise cost of production. Local leaf auction floor prices rose strongly at approximately 28% in the 2011/12 season with the full effects to be felt in FY 2013 (there is a 12 months lag). We believe that margins can be sustained at current levels as BATZ works on a cost plus mark up basis whereby the absolute margins are maintained and volatility in raw material prices is passed on to the consumer. BATZ, being the market leader is able to command margins. The company effected a price adjustment in December 2012 of approximately 30% following the hike in excise duty by 50% to USD 15 per 1,000 sticks. Going forward we expect BATZ to maintain its EBIT margin at approximately 40%, mainly anchored by improved production efficiencies and effective distribution. Market dominance to be maintained. The company intends to concentrate on improving the quality of its packaging and promotion in an effort to boost volumes.

Cigarette demand is closely linked to GDP levels, and BATZs long term growth is therefore dependent on economic growth. We believe that BATZ is well placed to benefit from the steady increase in consumption expenditure likely to emanate from a young population in a growing economy. BATZ is a well managed, strong cash generating company operating in one of the most profitable sectors in the economy as well as having strong brands and a solid distribution network. Furthermore, the company has a generous dividend policy. In our view, these factors warrant above average ratings. We maintain our BUY recommendation.
29
Financial Summary
USD Thousands Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT/Operating Profit, exlc exceptionals Y-o-Y % Attributable Net Income/Profit After Tax Y-o-Y % Per Share data Attributable Diluted EPS Y-o-Y % Dividend Per share (DPS) Y-o-Y % NAV/Basic Share Y-o-Y % NA NA NA 1.62 NA 0.00 NA 35.4 NA -2.87 -277.6% 0.00 NA 30.8 -13.0% 28.09 -1078.6% 26.00 NA 48.8 58.4% 70.55 151.1% 65.00 150.0% 80.3 64.7% 86.70 22.9% 27.95 -57.0% 129.8 61.6% 98.03 13.1% 93.13 233.2% 124.5 -4.1% NA NA NA NA NA 2007 2008 2009 15,141 NA 7,599 NA 1,248 NA 364 NA 281 NA 2010 22,854 50.9% 6,996 -7.9% 1,205 -3.4% 184 -49.5% -499 -277.6% 2011 39,784 74.1% 18,368 162.6% 8,343 592.4% 7,334 3885.9% 4,883 -1078.6% 2012 51,853 30.3% 29,891 62.7% 18,628 123.3% 17,760 142.2% 12,262 151.1% 2013 E 61,527 18.7% 36,178 21.0% 23,724 27.4% 33,274 87.4% 16,479 34.4% 2014 E 70,353 14.3% 42,212 16.7% 28,616 20.6% 27,413 -17.6% 20,227 22.7%
Margin Performance
2007 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield on current price Dividend yield current price 0.0% 0.0% 0.0% 0.0% 3.7% 9.1% 0.1% 0.0% 0.7% -8.7% -0.2% 0.0% 22.5% 70.6% 2.3% 2.2% 53.8% 109.3% 5.9% 5.4% 60.1% 85.3% 7.2% 2.3% 62.9% 80.3% 8.2% 7.8% NA NA NA NA 2008 NA NA NA NA 2009 50.2% 8.2% 2.4% 1.9% 2010 30.6% 5.3% 0.8% -2.2% 2011 46.2% 21.0% 18.4% 12.3% 2012 57.6% 35.9% 34.3% 23.6% 2013 E 58.8% 38.6% 54.1% 26.8% 2014 E 60.0% 40.7% 39.0% 28.7%
30

Colcom Holdings Limited is a long established meatprocessing company which was formed in Zimbabwe in 1943. It originated from a farmer-owned cooperative established in 1943, with the aim of marketing the sale of pigs. The Cold Storage Commission (CSC) was Colcoms agent until 1961, when the co-operatives initial processing factory was built in Harare. Colcom Holdings listed on the Zimbabwe Stock Exchange in 1993, which transformed the business from a cooperative to become Colcom Holdings Limited. Colcom entered into an associate venture with Freddy Hirsch Group, which manufactures and supplies natural and synthetic sausage casings, butchery equipment, ingredients supporting the meat industry, and provides training for persons in the meat industry. Margins compression due aging equipment Colcom was bleeding due to frequent equipment failure which was increasing the expenses of the company through down time and associated costs. The company invested USD 2.7m in trying to address this issue and we expect margins to improve going forward. Valuation A PER of 30x looks demanding from an ordinary eye however the USD 4m of non-recurring expenses reduced earnings significantly. We dont expect Colcom to declare a dividend next year due to the need to invest in upgrading the plant and equipment at the company. We believe the worst is behind us and recommend investors SPECULATIVELY BUY.
Bloomberg Code Current Price (USc) Target Price (USc) Upside (%) Liquidity Market Cap (USD 000) Shares (000) Free Float (%) Ave. daily vol ('000) Price Performance Price, 12 months ago Change (%) Price, 6 months ago Change (%) 25.0 4.0 35.0 -25.7 41,351 159,041 15% 9.0 Colc:ZH 26.0 32.2 23.8
Financials (USD 000) 31 June Turnover EBITDA Net Finance Income Attributable Earnings Financials (USD 000) 31 June EPS (USD) DPS (USD) NAV/Share (USD) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Earnings Yield (%) Dividend Yield (%) PE (x) PBV (x) EV/EBITDA (x)
Current 60,782 10,238 (16) 1,379 FY2010 0.01 0.17
2014F 66,861 9,361 (99) 5,672 2014F 0.04 0.19
2015F 71,541 10,016 (87) 5,976 2015F 0.04 0.01 0.22
5.6 5.2 16.8 Current 3.3 30.0 1.5 3.6
18.7 19.8 14.0 2014F 13.7 7.3 1.4 3.9
16.6 18.3 14.0 2015F 14.5 4.3 6.9 1.2 3.6

200
150
100
STRENGTHS Market leader Quality products Strategic partnerships Strong parent company Strong management OPPORTUNITIES Recovery play on Zimbabwe Entry to lower end of the market Regional exports
WEAKNESSES Weak corporate governance structure Aging PPE
Elitist perception in weak economy

THREATS
50
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
Dec-13
Economic slow down Competition from new entrants Feedstock shortage
COLC ZH (USD)
31
FY 13 Financial & Operational Reviews

A brief history In 1998, a vertical integration took place to form a joint venture with Triple C Pigs, which currently supplies Colcom with more than 1,000 pigs per week. Triple C became wholly owned by Colcom in 2004. Colcom went on to acquire Danmeats in 2001, which has modern meat processing facilities, cold rooms and a reputation for quality processed products. Colcom has developed a reputation with Danmeats in export markets in central and southern Africa. Colcom offers pig based products which include fresh pork, hams, bacon, fresh and cooked sausages, pies, cold meats, polonies and canned products. The Value Brand group of products was developed to expand the market of pork products. The company also produces a range of fresh and processed beef based products. Its wholesale and retail outlets sell other meat protein foods. Innscor Africa has a majority shareholding in Colcom with a stake of 79.27%. Financial Review Colcom reported a mixed set of results showing a 15% growth in revenue to USD 60.7m with significant contributions from low-margin product lines. Despite the higher growth in revenue the company was affected by raw material price increases which it could not pass on to the consumer. The Triple C Pigs livestock division delivered 57,646 pigs (compared to 56,721 in 2012), a 6% increase from prior year. Operating profit was down 33% from USD 7.2m to USD 4.8m. Depreciation also increased from USD 1.2m to USD 1.6m due to the acquisition of new equipment. The company embarked on a number of initiatives after a compromised governance structure in 2012. Operations were also affected by increased down time due to equipment failure that occurred within the core pork operation. Cost provisions of USD 1.1m mainly emanating from stock write off and retrenchment charges were recorded in the second half in addition to the USD 1.3m reported H1. Staff overheads went up 8%, mainly due to the aforementioned retrenchment costs, while other overheads went up 31% due to increases in utility costs, rentals and bad debts written off. A loss of USD 1.6m on impairment and de-recognition of fixed assets was recorded. Attributable profit was down 66% to USD 1.6m compared to USD 4.8m in the prior year. Headline earnings were down 43% to US 1.63 cents compared with US 2.87 cents in the prior period due to higher operating costs. Total assets grew by 4% to USD 37.3m from USD 35.8m due to modest growth in biological assets and accounts Current assets grew by 13% to USD 18.8m from USD 16.8m, while current liabilities grew faster than current assets at 21% due to the increase in short term borrowings from USD 0.4m to USD 1.4m during the period. Investment in working capital is high at USD 11.8m and this represents an opportunity to free up cash going forward especially on the debtors book. Accounts payable also increased from USD 4.7m to USD 5.4m. The current ratio declined slightly but remained healthy at 1:2.5 from 1:2.7 in the prior period. Cash generation remains positive with an operating cash flow of USD 3.7m, down 39% from USD 6m in the prior year. The company invested USD 2.7m compared to USD 2.6m in FY 12. Of the USD 2.7m in capex, USD 2.4m was expansionary capex and the small balance was for maintaince. Cash generated as a percentage of EBITDA at 61% was lower compared to prior years 67%, but we expect it to remain at healthy levels going forward. Associated Meat Packers (AMP) growing volumes AMP, which is a joint venture, achieved 57% volume growth primarily through growth in retail sales resulting in a 74% increase in revenue to USD 13.8m. Profitability also responded positively growing by 19% to USD 0.9m, limited by the pre-operating costs of expanding the operations retail footprint. Colcom opened three new Texas Meats shops in Nelson Mandela Avenue (Harare), Letombo and Chivu. The Letombo shop is a combined Texas Beef, Texas Pork and Texas Chicken Shop. AMP launched its first new Texas Chicken shop at the Colcom complex in Coventry Road and plans are advanced to add more shops in the coming financial year. Product Rationalisation Colcom has a reputation for producing premium products targeted at the top end of the market. However, the current economic malaise has seen the company embarking on product re-engineering with the intention of capturing the lower end. To this end, Colcom continues to invest in research and development of new products priced for the mass market with an ongoing commitment to quality. Thus rationalisation of the operations product offering has allowed for better product offering including products in the Danmeats and Oscars range. Currently Colcom is selling 75% of its product to the Top end and 25% to the mass market segment. However, after the product re-engineering, the company is targeting a 60% mass market and 40% top-end split with the EBITDA margin expected at 15%. The company expect to compensate the decline in margins on top-end products through increased volume on mass products. Colcom appointed a new distributor called FMCG as it looks to grow its share of the hospitality market with new product offerings.
32
Group Restructure After a widely reported corporate governance breach at Colcom and the subsequent results of the forensic audit, the board and shareholders of Colcom embarked on a groupwide overhaul. One measure instituted by the board among others was to change some senior managers and board members including the Finance Manager, Mr K. Horonga, and T.W. Brown, a nonexecutive director. Besides this issue, Colcom was also suffering from increased expenses and frequent down time due to ageing factory equipment and increased provisions for stock obsolescence and doubtful debts. The company responded to these issues through termination of a number of employee contracts, corrective action on obsolete stocks, doubtful debts and impairment of assets.
the company is in the process of introducing Tastee Beef Polony and Tastee Pork Polony. Four new AMP shops carrying the Texas brand are under development and there are additional sites under investigation to increase the footprint of Texas Meats shops.

The procurement of new equipment to capacitate Colcom will go a long way in lowering the cost of production and we expect this to positively impact margins going forward. The re-engineering of products to suit current market trends will also assist the company to gain market share especially at the lower end of the food chain. Management is working on plans to expand their factory at AMP as they have identified that the factorys capacity is unable to accommodate future growth. AMP expects to open Texas shops on Mbuya Nehanda Street and at the AMC complex, by end of December. The trend of volumes and turnover growth is expected to continue at about 14% over the prior year and that profitability will be improved by managing all operational costs downwards in a declining margins environment. Colcom is slowly turning around but an unforgiving operating environment, underlined by weakening demand across all protein and other products, will continue to erode margins and curtail revenue growth. We remain cautiously optimistic on Colcom to turnaround by the first half of FY 14 and recommend investors SPECULATIVELY BUY the stock.
Outlook
Due to high demand for stock feed at Triple C, Colcom secured adequate maize up to November 2013 and plans are in place to secure stocks up to next harvest. Furthermore, investments are being committed towards the genetic renewal programme to increase yield per beast at Triple C. There is also an on-going phased installation of automatic feeding systems at the main breeding site at Triple C to enhance efficient utilisation of feed and increase growth rates. At the manufacturing division, demand for adequate steaming was putting pressure on the aging boilers which necessitated investment in an 8 tonne boiler which was recently commissioned. A double chamber vacuum packing machine has been acquired with the ability to vacuum pack in bulk and this will double vacuum packing capacity. A high capacity emulsifier has been ordered alongside a new cooker and smoker with an intensive cooling system and these were commissioned in October. The challenges of operating an ageing facility have been addressed in part through investments made in 2012 and the commitment of a further USD 1.4m this year for factory equipment, expected to be commissioned before December 2013. A further commitment to modernise the Colcom pie facility has been made. The overhaul of the factory has also necessitated the rationalisation and reengineering of products which has resulted in the company introducing the Tastee Chicken Polony and
33
Financial Summary
Key Financials US$ Thousands Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT/Operating Profit, exlc exceptionals Y-o-Y % Attributable Net Income/Profit After Tax Y-o-Y % Per Share data Attributable Diluted EPS Y-o-Y % Dividend Per share (DPS) Y-o-Y % NAV/Basic Share Y-o-Y % NA 0.10 NA 0.01 NA 0.03 453.3% NA 0.13 24.4% 0.03 11.0% NA 0.15 12.6% 0.03 -8.2% NA 0.16 12.3% 0.01 -69.8% NA 0.17 2.9% 0.04 311.4% NA 0.19 14.2% 0.04 5.4% 0.011 NA 0.22 14.1% 0.04 1.7% 0.011 1.7% 0.25 12.6% 0.04 0.8% 0.012 0.8% 0.27 11.3% 0.04 1.1% 0.012 1.1% 0.30 10.3% 0.04 1.4% 0.012 1.4% 0.33 9.5% 2009 15,630 NA 6,997 NA 1,796 NA 1,671 NA 2,514 NA 2010 41,986 168.6% 20,750 196.5% 9,891 450.6% 5,650 238.2% 4,474 78.0% 2011 46,200 10.0% 22,982 10.8% 10,422 5.4% 5,638 -0.2% 4,964 11.0% 2012 52,848 14.4% 25,877 12.6% 11,362 9.0% 5,968 5.9% 4,558 -8.2% 2013 60,782 15.0% 25,635 -0.9% 10,238 -9.9% 2,032 -66.0% 1,379 -69.8% 2014 E 66,861 10.0% 29,419 14.8% 9,361 -8.6% 7,712 279.5% 5,672 311.4% 2015 E 71,541 7.0% 31,478 7.0% 10,016 7.0% 8,109 5.1% 5,976 5.4% 2016 E 75,833 6.0% 33,367 6.0% 10,617 6.0% 8,436 4.0% 6,076 1.7% 2017 E 79,625 5.0% 35,035 5.0% 11,148 5.0% 8,680 2.9% 6,124 0.8% 2018 E 83,606 5.0% 36,787 5.0% 11,705 5.0% 8,935 2.9% 6,190 1.1% 2019 E 87,787 5.0% 38,626 5.0% 12,290 5.0% 9,204 3.0% 6,276 1.4%
Margin Performance
2009 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield on current price Dividend yield current price 13.3% 30.4% 2.0% 0.0% 20.6% 24.1% 10.8% 0.0% 18.1% 22.7% 12.0% 0.0% 17.5% 18.6% 11.0% 0.0% 5.6% 5.2% 3.3% 0.0% 18.7% 19.8% 13.7% 0.0% 16.6% 18.3% 14.5% 4.3% 15.0% 16.4% 14.7% 4.4% 13.7% 14.8% 14.8% 4.4% 12.6% 13.5% 15.0% 4.5% 11.7% 12.4% 15.2% 4.6% 44.8% 11.5% 10.7% 16.1% 2010 49.4% 23.6% 13.5% 10.7% 2011 49.7% 22.6% 12.2% 10.7% 2012 49.0% 21.5% 11.3% 8.6% 2013 42.2% 16.8% 3.3% 2.3% 2014 E 44.0% 14.0% 11.5% 8.5% 2015 E 44.0% 14.0% 11.3% 8.4% 2016 E 44.0% 14.0% 11.1% 8.0% 2017 E 44.0% 14.0% 10.9% 7.7% 2018 E 44.0% 14.0% 10.7% 7.4% 2019 E 44.0% 14.0% 10.5% 7.1%
34

Seed Co is a developer and marketer of certified seed, concentrating mainly on maize hybrids but with varieties for wheat, barley, cotton, soya, sorghum and groundnuts. The company has a dominant market share in the hybrid maize seed market controlling around 80% of the Zimbabwean market. Seed Co has a research collaboration agreement with Syngenta, a European based global agribusiness involved in seed and crop protection. Quton is the only cotton seed producer in Zimbabwe with production base of about 10,000t a year and about 20 seed varieties. Seed production is equally split between Zimbabwe and the region. Annual regional production amounts to 50,000t, and the groups total capacity is about 70,000t. Proposed Strategic Technical-equity Partnership with Vilmorin & Cie Seed Co recently ratified an agreement with Vilmorin and Cie to enter into a technical equity partnership with Vilmorin& Cie. The main rationale for the proposed strategic technical-equity partnership is to increase Seed Cos breeding, research, training and development expertise while also availing fresh and appropriately priced capital to finance growth in new and existing markets, particularly in East and West Africa. Solid regional operations Regional operations continued to grow with Zambia recording a good season and earnings responded positively. Zambia remains a tax haven in the group given that the corporate tax rate in Zambia for agricultural entities is a maximum 10%. Volumes in Malawi were slightly up and the company is in the process of installing a new plant with a target for completion of 12 months. In Kenya the highland varieties are starting to gain a strong foothold. Valuation The reduction in the average cost of borrowings will significantly improve pre-tax margin and gross margins are expected improve on price adjustments. The Ratings are undemanding at an EV/EBITDA of 7.7x and PER of 10.9x compared to peers that are trading at an average EV/EBITDA of 11.3x and PER of 21x. BUY.
200
Bloomberg Code Current Price (USc) Target Price (USc) Upside (%) Liquidity Market Cap (USD'000) Shares ('000) Free Float (%) Ave. daily vol ('000) Price Performance Price, 12 months ago Change (%) Price, 6 months ago Change (%) Financials (USD 000) 31 March Turnover EBITDA Net Finance Income Attributable Earnings Financials (USD 000) 31 March EPS (USD) DPS (USD) NAV/Share (USD) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Earnings Yield (%) Dividend Yield (%) PE (x) PBV (x) EV/EBITDA (x) Current 110,642 19,973 (7,200) 12,610 Current 0.06 0.43 Current 14.3 15.2 18.1 Current 7% 0.0% 13.9 2.1 8.4 2014F 118,387 27,229 (3,733) 16,380 2014F 0.08 0.44 2014F 16.7 19.3 23.0 2014F 9% 0.0% 10.7 2.0 8.0
Seed :ZH 90.0 122.1 35.6
174,936 194,373 32 56
85.0 5.9 80.0 12.5 2015F 126,082 29,629 (2,776) 18,695 2015F 0.10 0.01 0.60 2015F 17.8 18.4 23.5 2015F 11% 1.6% 9.4 1.5 7.3
150
STRENGTHS Significant market share Strong brands Established SSA presence Strong R&D Hybrids protected by patents OPPORTUNITIES Recovery plan for Zimbabwe Growth in West and East Africa Opening up to GMO varieties
WEAKNESSES Dependence of gvt sales Aggressive competition DuPoint Pioneer
Over reliance on maize seed

THREATS
100
50
Droughts Lower aid inflows Fertiliser & fuel shocks
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
S&P AF
Oct-13
Dec-13
SEED ZH (USD)
35
H1 2014 Results & Operational Review

As is tradition with Seed Co results, the first half recorded a loss of USD 12.8m compared to USD 8.9m in the prior year. Revenue for the six months at USD 17m was 30% higher than prior year on the back of a 34% increase in winter cereals and a 17% increase in maize seed. Gross margins at 39% were marginally higher then prior years achievement 36%. Management indicated that gross margins are expected to further improve as the selling season picks up in the second half of the financial. The increase in the loss position was due to a USD 3m impairment of deposits at Interfin Bank which was put under curatorship and an increase in the general provision for bad debts by another USD 1m to take account of slow moving retail debtors from previous years. Without these once off costs the operating cost were lower than in the prior year Accounts receivables reduced by 31% to USD 44m on the back of payments from both private players and governments. A total of USD 8m was received from the governments of Zambia and Zimbabwe after cut off for the first half. Due to the seasonal procurement of maize seed inventories were up 49% to 26,100 mt (Maize 16,500mt and Soya 9,600mt). Overall, total current assets were at USD 119m 3% higher than the prior period. The cash flow position of the group looks weak after reporting a loss in the first half; we expect this position to unwind during the second half. The company closed the period with a negative cash flow position of USD 64.7m compared to USD 57m in the prior period. The liquidation of inventory from 37,000 mt to 19,000 mt by end of the year is expected to release cash on the balance sheet and this will improve the liquidity position of the group. Further the equity injection of USD 40m from Vilmorin Cie expected by January 2014 will significant increase the capital position of the business. Seed Co expects to save close to USD 3m annually on interest cost after receipt of the capital injection from Vilmorin and Cie with the bulk of these saving expected in FY2014/15. released 11 new seed varieties, 5 maize hybrids while 4 were soya beans and 2 were sugar beans. Seed production has been reduced especially in Zimbabwe where there was significant carryover stock and Seed Co hopes to end FY 14 with a stock carryover of approximately 16,000t. This will reduce borrowings as cash was tied in stock for the past three years due to increased production from breeders. The regional expansion has benefited the group as Tanzania and Kenya contributed approximately USD 2.0m to the bottom line. The floating of the Malawi kwacha will have a positive impact on the business going forward. The introduction of e-voucher system is also likely to aid Seed Cos volumes as farmers will have the choice on which seed brand to buy in Malawi and Zambia. Management is upbeat about the prospects of the business as the demand for seed in the region remains firm. Proposed Strategic Technical-equity Partnership with Vilmorin & Cie Seed Co approved at an EGM held in October 2013 to implement the proposed strategic technical-equity partnership with Vilmorin & Cie, a NYSE Euronext Paris Stock Exchange listed company which is a world leader in vegetable seeds and top player in field seeds. Accompanied by its reference shareholder, Limagrain, an international agriculture co-operative group, Vilmorin & Cle is currently the fourth largest seed company in the world. In order to consummate this proposed transaction, Seed Co would be looking to: 1. Issue for cash up to 37,662,481 new ordinary shares to Vilmorin & Cle 2. Enter into collaborative agreements with Vilmorin and Cie, including A research and collaboration agreement A Germplasm exchange agreement Technical assistance agreements Technology licence agreements Purchase agreements Production/commercialisation agreement Lease agreements 3. Allocate board seats to Vilmorin & Cie pro rata their shareholdings post the proposed placement i.e. 2 seats on conclusion of Tranche I and another seat on conclusion of Tranche II.
Outlook
The company continue to make investments locally and in the region and during H1 2014 the company spend USD 4m compared to USD 3.3m last year the budget for the year is at USD 7.5m. During the year Seed Co
36
Mechanics of the proposed Placement Tranche I Placement and AICO sale by 31 December 2013 10,273,048 Ordinary shares, representing 5% of Seed Cos issued shares post Tranche I placement and the AICO sale, are being offered for cash to the strategic Global Partner at a subscription price per share of USD 0.9925 to raise equity amounting to USD 10.2m. Concurrently with Seed Cos Tranche I Placement, AICO will sell a portion of its Seed Co ordinary shares being 20,546,096 shares, representing 10% of Seed Cos issued shares post Tranche I placement and the AICO sale at a price similar to the Tranche I placement subscription price. On conclusion of the Tranche I placement and the AICO sale, the strategic Global Partner will control approximately 15% of the issued share capital of Seed Co. Tranche II by December 2014 Seed Co will, on the same date of issuing Tranche I placement shares, grant the Strategic Global Partner a call option to purchases up to 27,389,433 ordinary shares within 12 months of concluding the Tranche I placement at a price per share of USD 1.0921 to inject equity amounting to USD 29,912,000 into Seed Co. As a premium for the call option above, the Strategic Global Partner will pay a nonrefundable deposit of USD 2,991,200 being 10% of the total consideration payable under Tranche II. The above deposit will be fully deductible from the total subscription amount for ordinary shares under Tranche II and it is not refundable on failure to exercise the call options. On fully exercising the call option in respect of the Tranche II placement and following the AICO sale, the strategic Global Partner will control approximately 25% of the issued share capital of Seed Co. Conditions precedent The proposed transaction is subject to the following conditions precedent: Approval by the members of AICO in a general meeting of the proposed sale by AICO of a portion of its shareholding in Seed Co to Vilmorin & Cle, and waiver of pre-emptive rights for the
dilution of that will come with the proposed placement by Seed Co. Exchange control authority being granted by RBZ for the placement with Vilmorin & Cle and for Vilmorin & Cle to hold 58,208,577 ordinary shares in the company. Since AICO, Seed Cos parent company, is an interested party in the proposed transaction, it was not allowed to vote at the Seed Co EGM. Rationale for the proposed Transaction and Use of Transaction proceeds The main rationale for the proposed strategic technical-equity partnership is to increase Seed Cos breeding, research, training and development expertise while also availing fresh and appropriately priced capital to finance growth in new and existing markets, particularly in East and West Africa. Furthermore, the funds will address the short and medium term financial needs as follows: Reducing expensive debt in the Zimbabwean operation which saw the interest bill for the 31 March 2013 financial year amounting to USD 7.0m. The planned USD 6.0m acquisition of a farm for own production in Zambia USD 6.0m construction of own factory, warehouse and offices in Malawi. At the moment Seed Co Malawi is operating from rented premises at a cost of around USD 0.4m/annum. USD 8.0m for equipping further afield operations in Ethiopia and West Africa. It is not commercially viable to export to these far off markets because of distance hence the need to construct facilities at point of entry.
Application Tranche I Placement (USD) 8,788,056 Tranche II Placement (USD) 12,554,378 Total (USD)
Debt Retirement Capital Expenditure Corporate action levy Professional & other transaction expenses Total
21,342,434
4,000,000
14,000,000
18,000,000
10,196
29,912
40,108
388,948
336,510
725,458
13,187,200
26,920,800
40,108,000
37
Financial Summary
Key Financials USD Thousands Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT/Operating Profit, exlc exceptionals Y-o-Y % Attributable Net Income/Profit After Tax Y-o-Y % Per Share data Attributable Diluted EPS Y-o-Y % Dividend Per share (DPS) Y-o-Y % NAV/Basic Share Y-o-Y % 0.07 NA NA 0.28 NA 0.07 -1.2% NA 0.31 9.1% 0.09 35.6% NA 0.36 17.6% 0.10 9.5% 0.02 0.42 16.6% 0.06 -34.6% 0.43 1.9% 0.10 56.1% NA 0.53 23.4% 0.14 34.8% NA 0.67 24.8% 0 0 0 0 2008 0 2009 53,850 NA 27,610 NA 12,060 NA 17,362 NA 12,938 NA 2010 76,990 43.0% 33,367 20.9% 16,438 36.3% 18,425 6.1% 12,823 -0.9% 2011 97,826 27.1% 49,737 49.1% 21,748 32.3% 25,426 38.0% 17,435 36.0% 2012 117,708 20.3% 53,036 6.6% 23,691 8.9% 26,854 5.6% 19,159 9.9% 2013 110,642 -6.0% 50,873 -4.1% 19,973 -15.7% 22,735 -15.3% 12,610 -34.2% 2014 E 117,834 6.5% 54,203 6.5% 27,102 35.7% 27,102 19.2% 19,678 56.1% 2015 E 123,725 5.0% 60,625 11.8% 34,643 27.8% 34,643 27.8% 26,739 35.9%
NA -100.0%
Margin Performance
2008 Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield on current price Dividend yield current price 0.0% 0.0% 0.0% 0.0% 40.6% 47.7% 7.5% 0.0% 21.1% 22.6% 7.4% 0.0% 24.0% 26.9% 10.1% 0.0% 19.2% 25.2% 11.0% 1.8% 14.3% 15.2% 7.2% 0.0% 21.5% 21.0% 11.2% 0.0% 35.6% 22.8% 15.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2009 51.3% 22.4% 32.2% 24.0% 2010 43.3% 21.4% 23.9% 16.7% 2011 50.8% 22.2% 26.0% 17.8% 2012 45.1% 20.1% 22.8% 16.3% 2013 46.0% 18.1% 20.5% 11.4% 2014 E 46.0% 23.0% 23.0% 16.7% 2015 E 49.0% 28.0% 28.0% 21.6%
38
Equity Research Zambia December 2013 Agriculture

Zambeef Products PLC is a Zambia-based company that, along with its subsidiaries, is active in cropping operations, as well as the production, processing and retailing of beef, chicken, pork, milk, dairy products, eggs, edible oils, stock feed, flour and bread. Zambeef is also involved in the feedlot, slaughter, processing and retailing of meat products, as well as running a leather tannery, shoe plant, edible oil plant and bakery operations. Zambeef subsidiaries included Master Meat & Agro Prod Co oF Nigeria and Master Meats (GHANA) Ltd, and wholly owned Zambeef Retailing Ltd, Zamleather Ltd, Zampalm Ltd, Master Pork Ltd and Zamanita Ltd. The meat scandal that rocked the company forcing it to dispose of all its imported beef meat stock, has been a major set-back and was the major cause of low beef segment revenue and the company is likely to experience a slow recovery for this division going forward. It will also need to manage the spill-over reputational risk that has impacted the overall Zambeef brand. Zambian meat consumption has strong growth prospects based on a buoyant economy that is currently exhibiting a 6% GDP growth rate. The changing consumption patterns that are associated with a growing middle class are a bonus factor. Diversification and vertical integration are the key facets of Zambeefs business model, as this allows it greater control of all aspects of the business from production to retail, which theoretically enables it to control margins better. We have included Zambeef in the report for comparative purposes, as we will be re-initiating coverage following a change of analyst.
STRENGTHS Owns all factors of its operations well integrated. Limited entry point and replication for a competitor. Reputable Brand OPPORTUNITIES Consistent JV partnerships with reputable players in the industry Regional growth in demand driven by strong economic activity.
WEAKNESSES High investment with relatively low returns. Poor efficiencies in noncore areas of the business THREATS High risk exposure in tarnishing of the brand due to poor quality in noncore activities.
39
FY 13 Financial and Operational review

FY 13 revenues gained an impressive 23% to ZMW 1.6bn from ZMW 1.2bn buoyed by cropping revenue gains which accounted for 21% of total revenue. The highest revenue contributors in the companys operations are cropping, edible oils and beef. Beef revenue declined by 5% due to the aforementioned meat scandal, which accounted for 17% of total revenue. Cost of sales increased by 21.42% y-o-y to ZMW 1.0bn, leaving the gross profit margin at 34.66% from 34.39% previously. Administrative expenses went up by 22.19% to ZMW 474.2m caused primarily by a statutory increase in the minimum wages, and the removal of the fuel subsidy. The operating profit at ZMW 79.1m was 29.1% higher y-o-y. Due to the weakness in the domestic currency the company experienced foreign currency translation losses of ZMW 15.7m which were 16.9% lower compared to last year. Financial costs increased by 52.5% to ZMW 40.8m due to an increase in borrowings. Despite the increase in finance costs, PBT managed to increase to ZMW 21.8m, a 40.3% hike for the year after the tax provision taken in the FY 12 accounts. The effective tax charge increased by 172% to ZMW 5.7m as the tax rate went to 27% compared to FY 12s 14%. Net profit increased by 19.4% y-o-y to ZMW 16.0m from ZMW 13.4m. On the balance sheet, non-current assets increased by 61% to ZMW 1.4bn driven mostly by an increase of 61.9% in PP&E to ZMW 1.3bn. There was a plantation development expenditure increase of 40.9% to ZMW 51.3m where a processing plant expansion and upgrade occurred. Biological assets and inventories which make up a majority of the current assets decreased by 4.8% to ZMW 113.8m and 6.37% to ZMW 119.5m, respectively. On the other half of the balance sheet, share capital and share premium remained flat y-o-y, with reserves sky rocketing 235.8% to ZMW 827.2m from ZMW 246.3m, boosted by the profit on sale from Zamchick that was taken to equity. Shareholders equity closed at ZMW 1.3bn. Non-current Interest bearing liabilities fell by 2% to ZMW 335.2m while current short-term loans increased by 11% to ZMW 210.3m. Trade and other payable were reduced by 19.14% to ZMW 155.3m from ZMW 192.2m.
40
Outlook
Zambeef has proven the sustainability of its vertical integration strategy, from running crop farms, breeding cattle and other live-stock, having abattoirs and mills with processing plants all the way to distribution and retailing of its products. It has done several acquisitions over the years to strengthen that value chain. The company sold 49% of its holding in Zamchick to South African company Rainbow Chicken, a prominent player in the industry during the year. It has subsequently embarked on the setting up of a JV company with Rainbow Chicken, called Zamhatch, which will supply one day old chicks to the group and third parties. Zamhatch is expected to start operating in 12- 18 months time. The group also has an arrangement with Shoprite, another South African company, were the butcheries in Shoprite stores in Zambia and West Africa are operated by Zambeef. As Shoprite expands across the rest of Africa this will provide an additional avenue of growth for Zambeef, particularly given the population dynamics in the likes of West Africa. With all the expansion, as well as the impact of once of events in recent years, namely the tax issue and the meat scandal, Zambeef has not performed as well as it might have, with returns to shareholders being somewhat subdued. The recent meat scandal showed the level of risk the company is exposed to regarding third party procurement and the high impact this can have on sales. While this has been addressed with the company looking to curtail imports and become reliant on home grown produce, this would present possible shortage risks while there will also be a need to ensure that meat purchased from scale farmers will be of the required standard. As the current Zambian populations spending patterns change in conjunction with the buoyant 6% GDP growth rate, there is still relative growth in the meat sector for Zambeef since Zambia is still trailing in the consumption of meat per capita of 12.3 kg relative to other developing countries i.e. South Africa of 58.6kg and the world meat consumption average of 41.9 kg according to the Food and Agriculture Organisation (FAO). The other divisions also have solid growth prospects, with the West African foray providing the potential blue sky. However, a year of no woes, and sustained strong growth in cashflows would be a breath of fresh air.
41
Financial Summary
ZMW Millions Revenues Y-o-Y % Gross Profit Y-o-Y % EBITDA Y-o-Y % EBIT/Operating Profit Y-o-Y % Attributable Net Income Y-o-Y % Per Share data Attributable Diluted EPS Y-o-Y % Dividend Per share (DPS) Y-o-Y % NAV/Basic Share Y-o-Y % Margin Performance Gross Margin EBITDA margin % EBIT margin% Net Income Margin % Ratios ROaA ROaE Earning yield on current price Dividend yield current price 0.07 NA 0.25 NA 1.88 NA 0.08 25.0% 0.15 -40.5% 1.97 4.5% 0.19 125.0% 0.07 -52.7% 3.18 61.7% 0.05 -71.1% 0.20 178.9% 3.23 1.5% 0.07 23.1% 0.22 9.1% 5.80 79.7% 2009 2010 2011 697 771 983 NA 10.5% 27.6% 219 240 318 NA 9.3% 32.7% 16 31 52 NA 88.0% 68.4% 37 58 102 NA 56.7% 74.1% 16 20 45 NA -(25.0%) 125.0% 2012 1 296 31.9% 436 37.1% 48 -8.0% 103 1.8% 13 -71.1% 2013 1 595 23.0% 550 26.3% 76 59.2% 129 25.1% 16 23.1%
31.4% 2.4% 5.3% 2.3%
31.1% 4.0% 7.6% 2.6%
32.3% 5.3% 10.3% 4.6%
33.6% 3.7% 8.0% 1.0%
34.5% 4.8% 8.1% 1.0%
5.0% 3.6% 1.7% 6.5%
7.2% 4.3% 2.1% 3.8%
9.5% 7.3% 4.8% 1.8%
6.7% 1.7% 1.4% 5.1%
6.2% 1.5% 1.7% 5.5%
42
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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara S.P. Reid (Pty) Ltd, (Imara) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together Group Companies), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. Imara S.P. Reid (Pty) Ltd.
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IMARA INVESTING IN AFRICA

IAS - Agriculture Sector Report - 04 December 2013

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IAS SSA Agriculture Sector Report | December 2013 High Yields/ha

Asset Management | Corporate Finance | Securities | Trust Services

IMARA INVESTING IN AFRICA

Equity Research SSA December 2013 SSA Agriculture Sector

Natural Rubber (NR) & Palm Oil (CPO) plantations

10 000 2003 2004 2005 2006 2007

Source: World Bank

Source: World Bank

Natural Rubber (NR)

100 Dec-07 Dec-12 Apr-06

6 000 5 000 4 000

Source: International Rubber Study & Bloomberg

Meat and grain

Food consumption (USD) per capita

Consumption per capita (Q) relative to South Africa

GDP (USD) per capita (RHS)

Source: BMI & IAS

9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 -

GDP (USD) per capita (RHS)

2 000 1 000 Zambia

Consumption per capita Index (RHS)

GDP per capita (USD)

Source: Tobacco Atlas & IAS

Excise tax and illicit trade share of consumption

60 40 20 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000

Source: Tobacco Atlas & IAS

Source: Tobacco Atlas & IAS

Equity Research BRVM December 2013 Agriculture

3 149 1 600 11 078

2 463 1 252 11 941

2 741 1 508 13 431

16.5 31.6 24.8 Current 13.7 9.5 7.3 1.5 3.4

13.4 21.4 24.6 2013F 14.6 7.4 6.9 1.4 3.8

14.1 21.6 23.3 2014F 16.2 8.9 6.2 1.3 3.5

Share Price vs. S&P Africa Frontier (Rebased)

Deforestation concerns Development of greenfuel technology Lower CPO prices

Financial & Operational Review

6.00 5.00 4.00 3.00 2.00

Source: Company filings

FY08 FY09 FY10 FY11 FY12

Net debt / EBITDA (RHS)

CPO Price (XOF/kg)

EBITDA margin (RHS)

Source: Company filings

Valuation and Recommendation

Target Scenario Base case Price

FY14 - exit PE Macro Outlook 9.0x Unchanged Rf and ERP remain

over 8.9x unchaned +ve Rf and ERP trend lower

where 8.2x towards -ve Rf and ERP deteriorate marginally to

Equity Research BRVM December 2013 Agriculture

4 139 1 600 13 371

3 272 1 265 15 042

2 619 1 440 16 396

20.5 27.6 19.6 Current 14.9 6.4 6.7 1.9 4.0

16.7 23.0 17.4 2013F 13.2 5.1 7.6 1.7 4.5

12.3 16.7 13.8 2014F 10.5 5.8 9.5 1.5 5.3

Higher excise taxes Lower NR prices

Financial & Operational Review

Gross margins decline on rising contribution from out-growers

45% 40% FY07 FY08 FY09 FY10 FY11 FY12

Source: Company filings

Source: Company filings

Source: Company filings& IAS