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Zambeef's 44% discount to book value reeks of recovery upside

CONTRARIAN TIP OF THE YEAR: Getting mixed up with contaminated beef cost Zambeef dear, but its ‘farm-to-fork’ business model is just right for a frontier economy and the market looks like it is significantly under pricing its recovery potential.
January 2, 2014

Somehow, the tale of Zambeef (ZAM) in 2013 typifies the risks of investing in Africa. Even while praise was being lavished on the foods producer for the success of its ‘farm-to-fork’ model - and its chief executive, Francis Grogan, won Entrepreneur of the Year award at an all-Africa business jamboree - it released a profit warning that slaughtered its share price.

IC TIP: Buy at 35p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Vertically integrated business model
  • Share price far below net asset value
  • Macro-economic outlook for Zambia
  • Deal with Rainbow Chickens
Bear points
  • Damage to reputation may linger
  • Currency risk for UK investors

The price, which topped 60p in February and was still over 50p when the company reported healthy first-half profits in June, crumpled to 30p by November. Yet it is clear that the chief causes for the failure of 2012-13’s profits to meet City expectations were one-off and equally clear that Zambeef has much going for it; not just that vertically integrated model, but its potential to grow on the back of Zambia’s march out of poverty and the ability of its bosses to make the right deals for its success.

As to the farm-to-fork model, ever since it was founded in 1994 - by Mr Grogan, an Irish national who came to Zambia in 1991, and Carl Irwin, Zambeef’s development director - the company has been driven by the need to make deals that enhanced its operational independence. That’s vital because it’s a fact of business life in Zambia - as in most ‘frontier’ economies - that if a company needs something doing, it’s best to do it itself. Thus Zambeef made its first big acquisition in 1996 when it bought an abattoir to help the process the beef cattle that it raised. Next it bought lots of farm land to grow the grain that fattens the cattle. When it found cattle difficult to source it diversified into raising chickens. That meant more vertical integration - the acquisition of a soya farm to produce the necessary chicken feed.

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As a result of these - and other - moves, Zambeef now runs seven abattoirs with the capacity to slaughter 100,000 cattle a year and produces 5.3m chickens and 33m eggs. Its dairy farms produce 6m litres of milk a year and its tanneries can process 72,000 hides. Getting produce from farm towards the fork means Zambeef owns one of Zambia’s biggest trucking operations, including a fleet of 80 refrigerated vehicles and its own workshop to keep the fleet on the road. And - at the fork’s edge - it has 93 shops, eight fast-food outlets and runs the butcher’s concession in the 20 Zambian stores owned by Shoprite, a South African retailer.

Such a presence does not come cheaply. Zambeef is capital hungry and it got its London share quote largely because it needed new capital in 2011. It raised more last year from the sale of a 49 per cent stake in its chicken-processing operation to Rainbow Chickens, a South African specialist that may help Zambeef add value to its chicken business.

Zambeef (ZAM)
ORD PRICE:35pMARKET VALUE:£86.8m
TOUCH:35-36p12-MONTH HIGH:60pLOW: 30p
FWD DIVIDEND YIELD:1.5%FWD PE RATIO:8
NET ASSET VALUE:63pNET DEBT:45%

Year to 30 SepTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
201120710.595.100.80
20122553.061.16nil
20133004.111.05nil
2014*34614.205.200.75
2015*37719.707.100.83
% change+9+39+37+11

Normal market size: 5,000

Market makers: 7

Beta:0.40

WH Ireland estimates - underlying PTP and EPS figures not comparable with historic figures

£1 = $1.63

Yet such is the fall-out from last summer’s profit warning that Zambeef invested capital - most of it in land and buildings - now gets a stock market value far below the recently-revalued level in its books. As the table shows, the 35p share price compares with a net asset value of 62p, a massive 44 per cent discount.

Unless one believes the likely long-term returns from Zambeef’s assets have deteriorated radically - and clearly we don’t - the implication is that Zambeef’s share price has been too severely punished for the profit warning. True, there were fears of lasting damage to its reputation among Zambia’s increasingly-fussy middle class for selling contaminated beef it had imported from Europe. Footfall and sales were badly hit and slow to recover, though the company says turn-round signs are now materialising. Meanwhile, other factors that hit 2012-13’s profits - lower wheat prices, rising fuel and labour costs - were clearly one-off; not that fuel and labour costs will fall or wheat prices recover imminently.

Still, even rising costs have their benefits - they underline the notion that Zambia is getting wealthier and sufficiently stable for the government to axe fuel subsidies. In other words - and aided by a young population - Zambia is one of sub-Saharan Africa’s best-looking prospects. True, it’s not so good that Zambeef resisted the prospects - and assumed the risks - of diversifying into Ghana and Nigeria; nor so good that buying shares in a company whose revenues are mostly in Zambian kwacha is anything but a bear point for UK investors. And that appetite for capital - the company is set to double capital spending to $28.5m (£17.5m) this year - means Zambeef may not yet restore its dividend, though an adviser, broker WH Ireland thinks it will (see table).