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Monday, December 9, 2024

Delta Corporation faces headwinds from currency and supply challenges in Zimbabwe, Zambia

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Delta Corporation, Zimbabwe’s leading brewer and soft drinks manufacturer, has reported mixed results for its interim period ending September, reflecting the significant challenges posed by exchange rate volatility, electricity shortages, and fluctuating commodity prices such as platinum and copper.

The effects of these issues have been particularly pronounced in both Zimbabwe and Zambia, where the firm has operations and where economic conditions remain precarious.

Zimbabwe and Zambia are big producers of platinum and copper, respectively. Prices of the two metals have been volatile over the six month period to end September, impacting the earnings potential of the company.

Moreover, the two markets are undergoing severe electricity supply deficits while their respective domestic currencies have been volatile.

In Zimbabwe, Delta Corp said while the exchange rate for the Zimbabwe Gold unit had initially stabilised in the quarter to June after introduction in April, but “it depreciated sharply on the parallel market” in the second quarter.

“This led to pricing distortions in the formal markets, which resulted in reduced inflows of foreign currency from trading and banking channels,” said the company.

The company’s operations have been further hampered by a hefty sugar content surtax on beverages, costing over $16 million (R295m) during the review period.

This surtax not only increased the cost of Delta’s products but also enabled imports of cheaper alternatives from regional markets, coinciding with diminishing consumer spending linked to the general economic malaise.

The drought-induced decline in agricultural output, including crucial maize imports, has compounded these issues.

In Zambia, where Delta associate unit Natbrew operates, severe challenges arising from the current drought, lower copper prices and currency volatility affected earnings potential.

Power-supply disruptions in Zimbabwe and Zambia have escalated due to the reduced hydro-electricity generation, which also affects water supply.

Still in Zambia, Delta’s unit had been affected by the impact of high cost of imported materials due to a weaker Zambian Kwacha and removal of subsidies on the staple maize. This has had an impact on household incomes.

Over the half year under review, Delta Corp raised lager beer volumes by 9% over prior year despite the disruptions to supply arising from increased water and power outages. Soft drinks beverages volumes also grew by 10% for the half year, reflecting recovery in market share.

Analysts from IH Securities highlighted that while Delta has managed to grow its lager beer volumes and soft drinks over the past six months, the ongoing effects of a prolonged El Niño-induced drought could dampen future demand, particularly during the crucial festive spending period.

“We expect a clawback on some of the margin in the medium term. Management has said focus for the current financial year will be on exploiting activities that will prop demand for products,” added the analysts.

Despite the adversities, group revenue for the period under review rose by 11% to $389m, with pre-tax profits at $55.8m, while earnings before interest, tax, depreciation and amortisation settled at $64.8m.

In a show of strength and confidence, the company declared a 1 cent (USD) interim dividend, although the shifting landscape has caused additional pressure on pricing and profitability.

“The proportion of domestic sales undertaken in foreign currency declined from an average of 88% in the prior year to around 77% in the current period. This shift is largely attributed to the introduction of the ZiG currency, the strict enforcement of dual pricing regulations and increased sales to the formal retail sector which largely trades in local currency,” explained the company.

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