IAS_Agriculture Sector Report_04 December 2013

8/13/2019 IAS_Agriculture Sector Report_04 December 2013

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

Asset Management | Corporate Finance | Securities | Trust Services

IMARAINVESTINGIN AFRICA


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Table of Contents

Executive Summary................................................................................ 1Peer

Comparatives......................................................................................... 2Sector review...................................................................................... 3

Natural Rubber and Palm Oil........................................................................ 3 Food...................................................................................................... 4

Tobacco.................................................................................................. 5

Company coverage................................................................................ 7

PALM CI.................................................................................................. 7

SAPH CI................................................................................................... 11SOGB CI................................................................................................... 15

BAT Kenya............................................................................................... 19

BAT Uganda.............................................................................................. 23

BAT Zimbabwe.......................................................................................... 27

Colcom Holdings........................................................................................ 31

Seedco................................................................................................... 35

Zambeef .................................................................................................. 39

Analysts:

Kudakwashe Kadungure [email protected] m

Addmore Chakurira [email protected] Tonderai Maneswa [email protected]

Loyiso Hoza [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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

Palm Oil

Indonesia and Malaysia remain the price settersIndonesia and Malaysia currently produce 31.0Mt and19.0Mt of the worlds 58.1Mt of CPO production.

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Global production ('1000t) history

Indonesia Malaysia Africa Rest of Asia LATAM

Source: World Bank

Global production has grown at a CAGR of 6.8% overthe past decade and has largely been driven byproduction 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 producerbehind Malaysia then at 13.4Mt. However, as Malaysiaonly managed to grow its output at a CAGR of 3.5%over that period, it was therefore overtaken byIndonesia.

Asia is the largest consumer of CPOGlobal consumption of CPO has grown at a CAGR of6.8% to 55.9Mt, in line with production. With Asiasconsumption growing at a CAGR of 7.5% over the pastdecade to 36.0Mt in 2012, the region has been the mostinfluential market place for CPO demand.

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CPO consumption ('000t) by region

Asia EU SSA LATAM ME N. Africa N.America Other

Source: World Bank

Within Asia, the growth consumption drives were India,Indonesia and China were demand has grown at CAGRsof 9.8%, 8.2% and 6.3% to 8.4Mt, 7.8Mt and 6.3Mt,respectively. India and China have slowed down from11.6% and 9.5% to 8.0% and 3.2% over the latter half ofthe decade. Indonesia on the other hand has seengrowth accelerate to 11.6% over the latter half of thedecade from 4.8% over the former half.

CPO a key biodiesel feedstockPalm oil together with corn, rapeseed, soybean andsugar cane are viable feedstocks for use as firstgeneration biofuel. In terms of yield productivity, sugarcane 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 energycontent (30.53 MJ/l) than ethanol from sugarcane(24MJ/l).

Malaysia and Indonesias biodiesel reforms toincrease demandIndonesia is the top producer of palm oil and consumesabout 5.0m bbls of biodiesel a year, just over half of itstarget to consume 9.4m bbls its should consume undercurrent regulations. The new regulation, which raisesthe minimum bio content in diesel to 10%, up fromlevels of 3% -10%, and 20% for the power industry from

10%, targets consumption of 25.0m bbls, increasingconsumption of CPO in Indonesia by c.18.43%, andincrease global demand by 2.92%.

In Malaysia, the constitution of CPO in biodieselincreases by 40% to 7.0% and this alone will increasedomestic CPO consumption by 4.94%.

Overall, we would expect global stocks to come underpressure and therefore support global CPO prices.

Limited farmland and deforestation concerns torestrict supplyAs the worlds demand for palm oil increases,deforestation and the resulting release of carbondioxide emissions continue to be a concern. Palm oilhas become a lucrative business especially as the cropproduces a higher yield of edible oil compared to soyand grape seed. However, the huge demand for palmoil in the world marketplace has fuelled expansive landclearances, and most of this is done illegally, withoutthe consent of the local land owners. This hastherefore also become a human rights issues as thelikelihood of local communities and indigenous peoplesright to food is being threatened because of themassive expansions of the palm oil industry.


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A United Nations mandate created in 2001 called theRoundtable on Sustainable Palm Oil, or RSPO, wasdesigned to bring deforestation under control. Inaddition it established clear guidelines for the ethicaland ecological production of palm oil that membercompanies, which represent about 40% of the globalpalm trade, would adhere to.

Natural Rubber (NR)

Demand sensitive to economic shocksThe main consumer of rubber is the transportationindustry, of which tyre manufacturers alone absorb

about 65% of total NR consumption. As it is, NRcurrently constitutes about 24% of raw materials usedin Michelin tyres whilst SR constitutes about 22%.

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Global NR market ('000t)

Production Consumption Price (USD/kg)

Source: International Rubber Study & Bloomberg

NR competes with Synthetic Rubber (SR), a petroleumbased polymer and in 2012, 15.1Mt of SR wereconsumed against 11.4Mt of NR. The NR/SR ratio, infavour of SR, has been observed over the past decadedespite NR being generally the preferred rubber inputas it possesses superior physical qualities (betterresistance to heat and mechanical forces) which areparticularly useful for construction equipment,agricultural, aviation and logistics industries.

NR supply severely restrictedSupply of NR is restricted by the duration of thegestation period and the availability of land. Accordingto management, the establishment of a new, 10,000 haoperation in Cote dIvoire will take between 8 10years to develop. NR also has a 6 to 7 year gestationperiod, meaning that existing producers are not able torespond immediately to changes in demand. NRplantation yields can vary from 1.1t/ha to 2.0t/ha,with investment in R&D boosting yields in recent years.

However, with land as a finite resource, expansion ofthe resource is restricted, especially as there havebeen calls from international conservation bodiescalling for the protection of forests and inhabitants.

NR price more volatile than CPOOver the past decade, the price of NR has been 1.10xand 1.15x more volatile than that of BFO and CPO. Inthe past five years, NR was 8% more volatile thanbefore.

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10 Year price index (USD) history

BFO NR CPO

Source: Bloomberg

Behind the commoditys volatility, has been itsexposure to economic shocks compounded further bythe producers inability to adjust output.

This has rendered operators in the industry, especiallyNR producers, as relatively volatile entities.

Meat and grain

Given SSAs growing middle -class, we expect foodconsumption habits to favour meat, and less of grain

staples. However, we expect certain grains, which i)are used as livestock feed and ii) complement meatdishes to grow in line with consumption of meat.

Economic growth to drive consumptionWith SSAs markets expected to be some of the fastestgrowing economies, we expect the growth to morethan offset the growth in their respective populations.


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SouthAfrica

Nigeria Kenya Ghana Zam bia Zimbabwe

Food consumption (USD) per capita

2012 2007 GDP (USD) per capita (RHS)

Source: BMI

As shown above, South Africa with GDP per capita of

more than fourfold that of the next wealthiest,Nigeria, its consumers spend significantly more thanthose from its SSA peers. Owing to its reliance onimports, Ghana exhibits high expenditure of foodrelative to its GDP per capita. From this we expect tosee consumption per capita on food to grow along withper capita incomes (GDP per capita).

Expenditure on food per capita growth to diminish asGDP per capita increasesOnce again, comparing SSA frontier markets to SA, wesee that there is an inverse relationship betweenconsumption on food per capita against GDP per capita.

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Nigeria Kenya Ghana Zambia Zimbabwe

Food expenditure growth diminishes as GDP percapita increases

2012 2007 GDP (USD) per capita (RHS)

Source: BMI

Whilst we see overall growth in food consumption percapita, we see a slowdown in the growth as utility fromfood consumption diminishes.

SSA shows upside in meat consumption growth andlivestock feedHowever, the diminished consumption per capita willnot be observed across all food types.

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Pork Beef Poultry Wheat Maize

Consumption per capita (Q) relative to South Africa

South Africa Nigeria Kenya Ghana Zambia Zimbabwe

Source: BMI & IAS

Consumption in SSA frontier markets is currentlydominated by staples, which are typically the mostaffordable for consumers. Higher per capita incomeswill mean that other food types will increase inaffordability and this will lead to increasedconsumption of the product.

Tobacco

Like SSA Agricultures other sub -sectors, the tobaccosector will also benefit from the growing middle-classand their rising per capita incomes.

Consumption per capita to increase on higherincomesAs is the case with other consumable goods, cigaretteconsumption exhibits a strong relationship betweenconsumption per capita and income per capita.

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Consumption benefitting from higher incomes

Consumption per capita Index (RHS) GDP per capi ta (USD)

Source: Tobacco Atlas & IAS

Ultimately, this suggests that consumers will generallyconsume more cigarettes if they become increasinglyaffordable. This is also one of the main reasons that


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PALM CI is a palm plantation operator within the SIFCAgroup. 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 fruitfrom out-growers but has now entered into a tollagreement with sister company SANIA.

Being a pure palm oil play, PALM CI is not as volatileas its BRVM peers. PALM CI has managed to growrevenue, EBITDA and PAT at 5 year CAGRs of 17.7%,11.5% and 15.2% to XOF 175.1bn, XOF 34.3bn and XOF24.3bn and this has been reasonable given the currencyis pegged to the euro.

FY 13 to post weaker numbers. With CPO and PKOprices 20.51% and 36.43% lower to USD 0.78/kg and USD0.83/kg, respectively, in the current year, we expectEBITDA and EBIT (before exceptional items) to decline10.78% and 22.26% to XOF 32.7bn and XOF 19.6bn,respectively. The reduced finance cost will see PBT andPAT decline 19.28% and 21.77% to XOF 25.4bn and XOF19.0bn, respectively.

Volume sales to double by FY 20 . SIFCA plans to doubleCPO output to 600,000t by FY 20 through the planting ofmore trees and improved yields. Given this target, wesee PALM CI increasing production, and volume sales, at

a CAGR of 11.4% to FY 17. Given our CPO price inflationof 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 intoaccount our outlook on CPO prices, we expect EBITmargins to recover from the 16.57% forecast for FY 13 to20.02% in FY 17. We therefore expect EBIT and EPSgrowth to recover post FY 13 to grow at CAGRs of19.74% and 22.04%, respectively.

We recommend a BUY on PALM CI. Factoring in PALMCIs 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.

Equity ResearchBRVMDecember 2013Agriculture

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

PALC BC (USD) S&P AF

Recommendation BUYBloomberg Code PALC:BC

Current Price (XOF) 16 900 Current Price (Usc) 3 521 Target Price (XOF) 22 420 Target Price (Usc) 4 671 Upside (%) 32.7

LiquidityMarket Cap (XOF m) 130 631Market Cap (USD m) 272Shares in issue (m) 8Free Float (%) 22.0 Ave. daily vol - 1 yr. 1 188.3

Price PerformancePrice, 12 months ago (XOF) 15 000Change (%) 12.7Price, 6 months ago (XOF) 16 800Change (%) 0.6

Financials (XOF 'm) 31 Dec F2012 2013F 2014FTurnover 181 164 162 743 187 916 EBITDA 44 940 40 094 43 751 Net Finance Income (3 405) (1 571) (1 204) Attributable Earnings 24 337 19 039 21 190

EPS (XOF) 3 149 2 463 2 741 DPS (XOF) 1 600 1 252 1 508 NAV/share (XOF) 11 078 11 941 13 431

RatiosRoaA (%) 16.5 13.4 14.1 RoaE (%) 31.6 21.4 21.6 EBITDA Margin (%) 24.8 24.6 23.3

Valuation Ratios Current 2013F 2014FEarnings Yield (%) * 13.7 14.6 16.2 Dividend Yield (%) 9.5 7.4 8.9 PE (x) * 7.3 6.9 6.2 PBV (x) 1.5 1.4 1.3

EV/EBITDA (x) 3.4 3.8 3.5 * TTM

STRENGTHS CPO quoted in global

markets; immunises XOF, andEUR weakness.

Low cost producer Volume expansion by PALM CI

has no impact on globalprices

WEAKNESSES CPO prices are volatile Expansion is driven mostlyby purchases from out-growers

CPO has a 5 year gestationperiod

OPPORTUNITIES

Downside risk on CPO pricesis limited given higher costsfor majors. Higher NR pricesor more likely

SIFCA plans to double outputby FY 20

THREATS

Deforestation concerns Development of green-fuel technology

Lower CPO prices


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Volume aside, PALM CI has least volatile revenue

growth amon g its BRVM peers. PALM CIs revenue hasgrown at a 5 year CAGR of 20.06% to XOF 181.2bn (USD362.3m) in the period to FY 12. Whilst the CPO and PKOprice grew at a CAGR of 5.5% and 4.6% to USD 0.94/kgand USD 1.11/kg over that period, respectively, PALM CIgrew its volume sales at a CAGR of 6.4% to 283,470t ofCPO and at a CAGR of 5.0% to 19,069t of PKO.

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Revenue growth driven by CPO price movement

Revenue (XOF bn ) CPO Pr ice (USD /kg)

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% overthat period.

EBITDA margin on a rising trend. Benefitting from anoverall rise in palm oil prices, increased scale, risingyield per hectare and improved logistical efficiency,EBITDA and EBIT margins improved from 17.20% and7.16% in FY 07 to a respective 24.18% and 19.14% in FY12.

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Palm Oil prices drive profitability

CP O P rice (X OF/kg) EBITD A m ar gin (RHS )


The drastic improvement in EBIT was largely due todepreciation 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.

In FY 12, depreciation actually surged 24.9% and EBITdeclined 6.18% despite EBITDA growing by 15.69% asthe decline in CPO prices was modest relative to thatof NR.

Eased capex and deleveraging enhance earningsgrowth. Behind the slow growth in depreciation was a5 year CAGR growth in capex to XOF 14.1bn in FY 12,or 7.8% of turnover. The decline in capex intensityfrom FY 07 to FY 12 speaks to the industrys barriers toentry as a result of the increased scarcity of un-utilised farmland. Organic expansion is mostly drivenby increasing purchases from small-holder farmerswhich therefore limits capex requirements to factorycapacity expansion and maintenance and logistics.

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However, because of the working capital requirementsin purchasing product from out-growers, PALM CI hashad to rely on short term debt. PALM CI also issued aseven year bond at 7.0% in early 2010 in order, tofinance its capex commitments of c.XOF 55bn throughto FY 15. Nevertheless, PALM CI has gradually reducedits other debt balances. The companys net interestexpenses have therefore declined at a 5 year CAGR of3.72% to XOF 3.4bn.

PBT grew at a 5 year CAGR of 49.7% to XOF 31.5bn inFY 12. The tax holiday ceased towards the end of FY11 and the effective tax rate increased from 0.4% in FY07 to 22.6% in FY 12.

Robust earnings motivate dividends. Although PAT forFY 12 declined 17.07% to XOF 24.3bn, the growth overthe 5 year period was a CAGR of 42.29%. Operatingfree cash generation was volatile over the 5 yearperiod to FY 12 but remained robust in FY 11 and FY 12during which the company declared dividends at50.82% of NPAT.

Financial & Operational Review


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PALM CI/SANIA enter into toll agreement. At the startof FY 13, PALM CIs sister -company, and sole customer,

SANIA, entered into a toll agreement with PALM CI. Weare yet to confirm the terms of the agreement but webelieve that this will reduce PALM CIs working capitalrequirements going forward.

Outlook

FY 13 to be weaker. In H1 13, CPO and PKO pricesdeclined 20.51% and 36.43% to USD 0.78/kg and USD0.83/kg, respectively and revenue for the companydeclined 11.13% to XOF 86.5bn. Mitigating the declinein prices was an 11.80% growth in volume sales to184,672t of which 113,318t was under the tollagreement with SANIA. Based on the average priceearned by PALM CI on its product, it seems the tollingfee in the toll agreement is similar to the pricesearned through its normal sales.

Volume sales for the full year are expected at 270,000tand at prevailing CPO prices, we expect revenue for FY13 to decline 10.17% to XOF 162.7bn.

The lower CPO price meant that EBIT marginsnarrowed by 527bps to 24.65% and EBIT for the interimdeclined 26.79% to XOF 21.3bn. Net finance costsdeclined 49.29% to XOF 926.0m, likely as a result ofPALM CI taking advantage of its relaxed workingcapital requirements and deleveraging accordingly.PBT therefore declined 25.29% to XOF 20.4bn. Theeffective 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 (beforeexceptional items) to decline 10.78% and 22.26% toXOF 32.7bn and XOF 19.6bn, respectively. Weanticipate that the reduced finance cost will see PBTand PAT decline 19.28% and 21.77% to XOF 25.4bn and

XOF 19.0bn, respectively.Long term revenue outlook . With global consumptionof palm oil on the rise, driven by food and increasedusage of biodiesel, we expect global demand toincrease at a CAGR of 7.0% to FY 17. On the otherhand, Sifca, PALM CIs parent company which derives80% of its CPO from PALM CI, given the relativeabundance 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 overthat period, largely driven by tightening supply, wesee revenue growing at a 5 year CAGR of 8.58% to FY

17.

Capex to remain benign. We expect PALM CI wouldhave completed its XOF 55.0bn commitment by FY 13

and therefore expect capex intensity to declinefurther going forward especially as revenue continuesto grow to FY 17. Capex will be limited to periodicfactory capacity expansion, maintenance andupgrades.

Toll agreement to reduce working capitalrequirements..? PALM CIs toll agreement with sister -company SANIA covered 73% of PALM CIs productionover H1 13, implying that PALM CI purchased less fromout-growers than before. Given that those out-growerpurchases were most likely cash intensive, we see thereduction in purchases freeing up cash flow. We also

believe that this is the reason the companys netfinance costs halved over H1 13.

Valuation and Recommendation

We use a DCF and arrive at a target price of XOF22,444, implying a upside of 32.7%. BUY.

Scenario

Target

Price

FY14 - exit

PE Macro Outlook

Base case XOF 22444.0 9.0x Unchanged

Bull case XOF 22411.7 8.9x +ve

Bear case XOF 20768.3 8.2x -ve

Rf and ERP

remain

Rf and ERP

trend lower

Rf and ERP

deteriorate


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Soceite Africaine Plantation dHavea , (SAPH), is a naturalrubber (NR) plantation operator producing 104,000t of

NR. Of its total NR output in FY 12, c.77,000t waspurchased from outgrowers whilst the remainder wasgrown from its own c.33,500 ha farms, of whichc.21,500ha is being utilised.

Like its palm and NR peers, SAPH is a highly volatileentity. SAPH has managed to grow revenue, EBITDA andPAT at 5 year CAGRs of 17.7%, 11.5% and 15.2% to XOF175.1bn, XOF 34.3bn and XOF 21.2bn, respectively. Thishas been reasonable given the currency is pegged to theeuro. However, as NR prices varied 36.6% over the pastfive 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 concessionand wages costing an effective USD 200/ha in IvoryCoast, SAPH has one of the lowest cost structuresamongst NR producers. Given that the global price of NRis determined by higher cost producers, SAPHprofitability has leeway where NR price volatility isconcerned.

Revenue to double by FY 17. SAPH plans to i) upgradeits current factory a nd increase capacity by 16.7% to

140,000t/pa by mid FY 14, ii) utilise a further c.5,500hato produce palm oil in the coming years and iii) addanother NR factory with 100,000t/pa capacity by FY 16.Overall, we expect revenue to grow at 5 year CAGR of20.5% to FY 17.

EPS to grow at a CAGR of 17.1% to FY 17. We expectthe increased scale and production efficiency post FY 14and palm oil revenues to offset the impact of the risingcontribution from out-growers. We therefore expectEBITDA and PAT to grow at 5 year CAGRs of 16.9% and17.1%, respectively.

We recommend the stock as a BUY. Factoring in SAPHsobserved volatility, we use a DCF and arrive at a targetprice of XOF 33,634, implying upside of 35.3%. Wemaintain our BUY. Recommendation.


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SPHC BC (USD) S&P AF

Recommendation BUYBloomberg Code SPHC:BC

Current Price (XOF) 24 850 Current Price (Usc) 5 177

Target Price (XOF) 33 634

Target Price (Usc) 7 007

Upside (%) 35.3

Liquidity

Market Cap (XOF m) 127 009

Market Cap (USD m) 265

Shares in issue (m) 5

Free Float (%) 44.0

Ave. daily vol - 1 yr. 24 794

Price PerformancePrice, 12 months ago (XOF) 36 100

Change (%) -31.2

Price, 6 months ago (XOF) 31 800

Change (%) -21.9

Financials (XOF 'm) 31 Dec F2012 2013F 2014F

Turnover 175 084 171 733 186 768

EBITDA 34 271 29 932 25 827

Net Finance Income 405 (649) (76)

Attributable Earnings 21 156 16 722 13 385

EPS (XOF) 4 139 3 272 2 619 DPS (XOF) 1 600 1 265 1 440

NAV/share (XOF) 13 371 15 042 16 396

Ratios

RoaA (%) 20.5 16.7 12.3

RoaE (%) 27.6 23.0 16.7

EBITDA Margin (%) 19.6 17.4 13.8

Valuation Ratios Current 2013F 2014F

Earnings Yield (%) * 14.9 13.2 10.5

Dividend Yield (%) 6.4 5.1 5.8

PE (x) * 6.7 7.6 9.5

PBV (x) 1.9 1.7 1.5

EV/EBITDA (x) 4.0 4.5 5.3 * TTM

STRENGTHS

NR quoted in global markets;immunises XOF, and EURweakness.

Low cost producer Support from local

government

WEAKNESSES NR prices are highly volatile Expansion is limited toacquisition of existingoperations or purchasesfrom out-growers

NR has a seven yeargestation period

OPPORTUNITIES Downside risk on NR prices is

limited given higher costs forNR majors. Higher NR pricesor more likely

THREATS Higher excise taxes Lower NR prices


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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 whichled to a charge for the company of XOF 9.7bn in FY 12.EBITDA therefore grew at a 5 year CAGR of 11.5% toXOF 34.3bn, declining 47.76% in FY 12.

Given that growth was being driven mostly byincreased purchases from out- growers, SAPHs capexoutlay has been minimal in recent years. As such,leverage levels have remained low as operations,capex and dividends have ultimately been funded fromfree cash flow. SAPH relied on leverage in FY 07 whenacquiring SAIBE and in FY 09 and FY 12 when NR priceswere depressed.

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Depreciation has therefore grown from XOF 3.1bn in FY07 to XOF 4.0bn in FY 12 and EBIT grew at a CAGR of12.6% to XOF 30.1bn over the same period, albeit withas much volatility as EBITDA. In FY 12, EBIT declined50.81% to XOF 30.4bn. After net interest income ofXOF 405.2m and other charges and fees of XOF 2.0bn,PBT and PAT declined 52.40% and 53.59% to XOF28.7bn and XOF 21.2bn, respectively in FY 12.With NR prices depressed in the current year, H1 13EBIT declined 28.74% to XOF 11.4bn. SAPH incurrednet interest expenses of XOF 101.4m against netinterest income of XOF 440.2m in the previous period.PBT was 31.27% lower at XOF 11.3bn and with theeffective tax rate near-flat, PAT declined likewise toXOF 8.7bn.

Outlook

Revenue outlook . Production is expected at 120,000tin FY 13 but growth is anticipated to be marginal in FY14 as the factory is scheduled for an upgrade. Thedowntime is expected to take 4 months, and willcoincide with SAPHs low -yield periods (throughput

down to 20% of normal production) period. About USD3.5m has been budgeted for the upgrade.

Capex to remain benign. A new 100,000t capacityfactory is expected by FY 16 and thus we expect

volume sales to grow at a CAGR of c.18.8% over thatperiod. Management expects capex intensity todecline to the c.5.0% level in the long term asexpenditure will essentially be driven by themaintenance and replacement of property, plant andequipment. We expect this to offset the likelihood ofnarrowing margins and drive free cash flow generationgoing forward.

Diversifying into palm oil . Of its c.33,500ha, SAPHplans to utilise 5,000ha 6,000ha to produce palm oil.Given the yields of c.5t/ha of oil, 0.8t/ha of kerneland 0.3t/ha for kernel oil observed at SOGB, we

believe SAPH can reach production of 30,000t per yearof palm oil and 1,650/t of kernel and earn additionalrevenue of c.XOF 15.0bn from the plant. Whilst palmoil achieves gross margins similar to those of rubber(53.27% vs. 52.00% NR in FY 12), palm oil revenues donot attract the 5% levy rubber does, and this resultedin Palm CI achieving EBITDA margins of 24.81% in FY12, against 19.57% for SAPH.

Improved margins from new and more efficientcapacity. SAPHs current factory is said to be c.10years old with capacity of 125,000t p.a. This isexpected to increase to 140,000t p.a. afterwardsafterwards and we think that this will reduce totalproduction costs/t and therefore improve profitmargins. Furthermore, SAPH has been investing inR&D to improve quality and yield. SAPHs efforts havebeen successful and as such, its NR output has fetchedit a slight premium to global prices.


We use a DCF, factoring in the growth in volume salesand entry into CPO production and arrive at a targetprice of XOF 33,634, implying upside of 16.8%. Werecommend BUY.

Scenario

Target

Price

FY14 - exit

PE Macro Outlook

Base case XOF 33634.2 14.4x Unchanged

Bull case XOF 34356.3 14.7x +ve

Bear case XOF 27878.0 11.8x -ve

Rf and ERP

remain

Rf and ERP

trend lower

Rf and ERP

deteriorate


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Financial Summary

XOF Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 ERevenues 77 558 104 103 74 862 146 864 194 984 175 084 183 197 202 988 224 741 248 62

Y-o-Y % 34.23% -28.09% 96.18% 32.77% -10.21% 4.63% 10.80% 10.72% 10.63% 10.54%

Gross Profit 44 697 58 845 42 243 80 959 101 740 91 050 91 605 102 313 114 176 127 306Y-o-Y % 31.65% -28.21% 91.65% 25.67% -10.51% 0.61% 11.69% 11.59% 11.50% 11.40%

EBITDA 19 906 30 216 13 817 47 188 65 599 34 271 33 603 39 532 42 637 43 776Y-o-Y % 51.80% -54.27% 241.53% 39.02% -47.76% -1.95% 17.64% 7.85% 2.67% 0.16%

EBIT 16 807 25 947 10 485 44 758 61 735 30 367 28 535 33 965 36 597 37 212

Y-o-Y % 54.38% -59.59% 326.89% 37.93% -50.81% -6.03% 19.03% 7.75% 1.68% -1.37%

Attr. NPAT 10 438 16 875 6 835 32 462 45 581 21 156 19 638 24 249 26 907 27 941Y-o-Y % 61.66% -59.49% 374.94% 40.41% -53.59% -7.17% 23.48% 10.96% 3.84% 0.49%

Per Share data

Basic EPS 2 042 3 302 1 337 6 351 8 918 4 139 3 842 4 744 5 265 5 467Y-o-Y % 61.66% -59.49% 374.94% 40.41% -53.59% -7.17% 23.48% 10.96% 3.84% 0.49%

DPS 2 800 1 174 2 000 7 701 7 701 1 600 1 485 2 609 2 896 3 007 3Y-o-Y % -58.07% 70.36% 285.00% 0.00% -79.22% -7.17% 75.67% 10.96% 3.84% 0.49%

NAV per Share 8 503 9 949 10 344 15 045 16 610 13 371 15 613 18 872 21 527 24 098Y-o-Y % 17.01% 3.97% 45.44% 10.40% -19.50% 16.77% 20.87% 14.07% 11.94% 10.32%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 E

Gross Margin 57.63% 56.53% 56.43% 55.13% 52.18% 52.00% 50.00% 50.40% 50.80% 51

EBITDA margin % 25.67% 29.03% 18.46% 32.13% 33.64% 19.57% 18.34% 19.48% 18.97%EBIT margin% 21.67% 24.92% 14.01% 30.48% 31.66% 17.34% 15.58% 16.73% 16.28% 1

Net Income Margin % 13.46% 16.21% 9.13% 22.10% 23.38% 12.08% 10.72% 11.95% 11.97%

Ratios

ROaA 16.89% 25.74% 9.76% 37.61% 43.50% 20.47% 18.91% 20.23% 19.58% 18.1

ROaE 24.02% 35.79% 13.18% 50.03% 56.35% 27.61% 26.51% 27.52% 26.06% 23.9

Earning yield 7.17% 11.58% 4.69% 22.29% 31.29% 14.52% 13.48% 16.65% 18.47% 19.

Dividend yield 9.83% 4.12% 7.02% 27.02% 27.02% 5.61% 5.21% 9.16% 10.16% 10.5


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15

Socit des Caoutchoucs de Grand-Brby (SOGB) is aNatural Rubber (NR) and Crude Palm Oil (CPO) plantation

operator in Ivory Coast. The company producesc.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 KernelOil (PKO). SOGB has 16,700ha for NR of which 11,047hais mature and 7,100ha of palm of which 6,000ha ismature.

Of its peers, SOGBs growth has been the slowest.SOGB has managed to grow revenue, EBITDA and PAT at5 year CAGRs of 8.00%, 11.00% and 12.69% to XOF79.5bn, XOF 24.9bn and XOF 15.9bn, which compareswith 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 landto expand its NR farms. Growth will be driven byrejuvenation of Planted land and trees and increasedpurchases from out-growers.

The company has historically superior margins butwith medium volatility. Through a combination of itsexposure to NR, which generally fetches higher profitmargins than CPO, and other unique factors, SOGB hasachieved higher EBITDA and PAT margins than its peers

over the past 5 years to FY 12. Whilst NR pure-playSAPH has slig htly lower margins than SOGB, SAPHsEBITDA and PAT growth has been 12% and 23% morevolatile on account of SOGBs exposure to the lessvolatile CPO price.

EPS to grow at a CAGR of 11.65% to FY17. Given ouroutlook on NR and CPO prices, we expect revenue torecover from the decline in FY 13 and achieve a CAGR of18.41% to FY 17. EBITDA, EBIT and PAT are alsoexpected to recover from FY 13 and achieve CAGRs of24.65%, 34.08% and 34.96%, respectively.

We recommend a HOLD on SOGB. Factoring in SOGB sobserved volatility, our DCF arrives at a target price ofXOF 45,379, implying upside of 0.8%. We thereforerecommend a HOLD.


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Share Price vs. S&P Africa F rontier (Rebased)

SOGC BC (USD) S&P AF

Recommendation HOLD

Bloomberg Code SOGC:BC

Current Price (XOF) 45 000 Current Price (Usc) 9 375

Target Price (XOF) 45 380

Target Price (Usc) 9 454

Upside (%) 0.8

Liquidity

Market Cap (XOF m) 97 208



Free Float (%) 15.0

Ave. daily vol - 1 yr. 240

Price PerformancePrice, 12 months ago (XOF) 57 300

Change (%) -21.5

Price, 6 months ago (XOF) 50 500

Change (%) -10.9

Financials (XOF 'm) 31 Dec F2012 2013F 2014F

Turnover 79 535 74 317 88 948

EBITDA 24 932 16 703 20 135

Net Finance Income 30 (263) (1 439)


EPS (XOF) 7 369 2 873 3 413 DPS (XOF) 4 200 1 637 1 877

NAV/share (XOF) 25 391 24 063 25 839

Ratios

RoaA (%) 18.3 9.2 12.9

RoaE (%) 26.7 11.6 13.7

EBITDA Margin (%) 31.3 22.5 22.6


Earnings Yield (%) * 9.0 6.4 7.6


PE (x) * 11.1 15.7 13.2

PBV (x) 1.8 1.9 1.7 EV/EBITDA (x) 4.7 7.0 5.8 * TTM

STRENGTHS

CPO quoted in globalmarkets; immunises XOF, andEUR weakness.

Diversified Generally has highestprofit margins amongstlow cost producers

WEAKNESSES Limited growth prospects inNR

Expansion is driven mostlyby purchases from out-growers

CPO has a 5 year gestationperiod

OPPORTUNITIES Downside risk on NR and CPO

prices is limited given highercosts for majors.

Higher NR prices or morelikely

THREATS Deforestation concerns Development of green-fuel technology


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Exposure to CPO driving top-line growth. SOGB earnsabout 57% of its revenue from NR and the remainderfrom palm oil. Because of limited expansion

opportunities and declining yields in the area, NRoutput declined at a CAR of 2.42% to 37,142t in FY 12.With the gradual decline in volumes being accompaniedby NR prices rising at a CAGR of 8.11%, we estimate NRrevenue managed to grow at a CAGR of 6.9% over thatperiod.

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FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Revenue (XOF bn)

NR CPO NR Price Index CPO Price Index

Source: Company filings & IAS

CPO production on the other hand, being less matureand benefitting from rising yields, grew at a 5 yearCAGR of 5.04% to 31,465t through to FY 12 of whichc.95% was produced on SOGBs farms . The CPO priceincreased at a CAGR of 5.50% over that period to USD0.94/kg in FY 12. We estimate that CPO revenue in turnachieved a 5 year CAGR of 7.4% to FY 12.

EBITDA margin on a rising trend. Benefitting from anoverall rise in NR and CPO prices and rising yields in CPOproduction, EBITDA and EBIT margins improved from27.33% and 19.91% in FY 07 to a respective 31.35% and26.06% in FY 12.

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NR more influential on EBITDA margins

EBITDA Margin (RHS) Weighted Price NR CPO


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 whichincreased at a CAGR of 1.80% over that period to XOF6.8bn.

After exceptional items, PBT has grown at a CAGR of13.05% to XOF 20.9bn in FY 12. The effective tax ratehas trended towards the corporate rate of 25%, risingfrom 22.5% in FY 07 to 23.7% in FY 12. PAT in turngrew at a CAGR of 12.69% to XOF 15.9bn.

Note, FY 12 was a very poor period but SOGB stillpaid a dividend. SOGBs inability to grow NR volumesin order to smooth out earnings growth, especiallywhen commodity prices decline, was emphasised in FY12. Whilst NR and CPO prices declined 29.9% and12.69% in that year, SOGB only managed to increaseNR volumes by 3.05%. Revenue declined 17.27% overthat period whilst the introduction of a 5% excise taxon NR revenues resulted in EBITDA and EPS declining43.36% and 48.02%, respectively. Despite the declinein earnings, SOGB declared a dividend of XOF 4,200.Even though this was 63.71% lower than in the previousyear, it is a historical yield of 9.3%.

Eased capex follows limited growth in NR. Behind theslow growth in depreciation has been the low capexintensity, which in turn is a result of SOGBs NRoperation having limited growth prospects. Capex hasmostly been driven by the CPO operations. Morerecently, this involved upgrading the CPO factory.

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SOGB comfortable with Debt / Equity ratiobetween 0.4x and 0.2x


Capex intensity Debt / Equity (RHS)


Leverage recovers in favour of dividends. Leveragehas generally varied between a debt/equity multipleof 0.2x and 0.4x. Initially, the ratio declined from FY07x to FY 10 but increased as dividends grewsignificantly. This shows us that SOGB has a strong

dividend paying culture.



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Financial Summary

XOF Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 E

Revenues 72 621 130 849 93 892 90 068 170 389 181 164 162 743 187 916 218 292 253Y-o-Y % 80.18% -28.24% -4.07% 89.18% 6.32% -10.17% 15.47% 16.16% 16.22% 16.27%

Gross Profit 38 799 66 497 48 810 58 699 88 556 96 502 83 713 95 807 110 939 128 5Y-o-Y % 71.39% -26.60% 20.26% 50.86% 8.97% -13.25% 14.45% 15.79% 15.89% 15.99%

EBITDA 12 489 25 905 11 137 20 595 38 844 44 940 40 094 43 751 53 844 63 30Y-o-Y % 107.42% -57.01% 84.93% 88.61% 15.69% -10.78% 9.12% 23.07% 17.57% 17.59%

EBIT 5 202 15 010 7 070 10 011 36 969 34 683 26 963 29 462 38 210 46 105Y-o-Y % 188.55% -52.90% 41.59% 269.30% -6.18% -22.26% 9.27% 29.69% 20.66% 20.20%

Attr. NPAT 4 173 10 658 2 768 6 099 29 346 24 337 19 039 21 190 27 528 35 044Y-o-Y % 155.43% -74.03% 120.35% 381.16% -17.07% -21.77% 11.29% 29.91% 27.30% 20.49%

Per Share data

Basic EPS 540 1 379 358 789 3 797 3 149 2 463 2 741 3 561 4 534Y-o-Y % 155.43% -74.03% 120.35% 381.16% -17.07% -21.77% 11.29% 29.91% 27.30% 20.49%

DPS 0 0 0 0 900 1 600 1 252 1 508 1 959 2 494 3 005

Y-o-Y % NA NA NA NA 77.78% -21.77% 20.45% 29.91% 27.30% 20.49%

NAV per Share 2 174 3 553 4 267 5 056 8 852 11 078 11 941 13 431 15 484 18 059Y-o-Y % 63.43% 20.10% 18.49% 75.09% 25.14% 7.79% 12.47% 15.29% 16.63% 16.44%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 E

Gross M argin 53.43% 50.82% 51.98% 65.17% 51.97% 53.27% 51.44% 50.98% 50.82%

EBITDA margin % 17.20% 19.80% 11.86% 22.87% 22.80% 24.81% 24.64% 23.28% 24.67%

EBIT margin% 7.16% 11.47% 7.53% 11.11% 21.70% 19.14% 16.57% 15.68% 17.50%Net Income Margin % 5.75% 8.15% 2.95% 6.77% 17.22% 13.43% 11.70% 11.28% 12.61%

Ratios

ROaA 4.61% 10.73% 2.32% 4.81% 21.55% 16.49% 13.41% 14.13% 17.59% 21

ROaE 24.83% 48.16% 9.16% 16.93% 54.59% 31.60% 21.40% 21.61% 24.63% 27

Earning yield 3.19% 8.16% 2.12% 4.67% 22.46% 18.63% 14.57% 16.22% 21.07% 2

Dividend yield 0.00% 0.00% 0.00% 0.00% 5.33% 9.47% 7.41% 8.92% 11.59% 14


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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 companysflagship, the Sportsman cigarette brand controls c.50% ofthe legal market. Illicit trade is said to supply c.10% ofthe total cigarette market.

BAT Kenya exhibits reasonably robust growth. Despitebeing a company operating in an industry said to havelow growth prospects, BATK has managed to growrevenue, 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 regionalcountries which diversifies its market risk. From asupply perspective, BATK acquires 100% of its tobaccofrom contracted farmers which excludes it fromexposure to farming related operational and investmentrisk. Further, when local supply has been hampered by adrought or disease, BATK can tap into the BAT GlobalPool for tobacco leaf. Whilst this may mean narrowermargins, it helps smooth out earnings growth.

EPS to grow at a CAGR of 13.1% to FY 17. We expecttop line growth at CAGR of 10.2% to FY 17 as BATKsvolumes grow at a forecast CAGR of 5.0% and combinewith y-o-y price inflation of 5.0% over that period.Increased labour productivity and efficiencies will helpbuoy operating margins against contracting grossmargins. We therefore expect EBITDA and EPS CAGR of11.0% and 13.1% from FY 12 to FY 17. Free cash flow isalso expected to grow at a CAGR of 11.5% over thatperiod.

ACCUMULATE. We use a DCF and arrive at a target priceof KES 593.32, implying upside of 11.8%. However, we

note BATKs generous dividend history and outlook andrecommend the counter as a ACCUMULATE.

Equity ResearchKenyaDecember 2013Agriculture

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Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13

Share Price vs. S&P Africa Fr ontier (Rebased)

BATK KN (USD) S&P AF

Recommendation ACCUMULATEBloomberg Code BATK:KN

Current Price (KES) 531.00 Current Price (Usc) 340.38

Target Price (KES) 593.32

Target Price (Usc) 380.33

Upside (%) 11.7

Liquidity

Market Cap (KES m) 53 100



Free Float (%) 40.0


Price Performance

Price, 12 months ago (KES) 450.00

Change (%) 18.0

Price, 6 months ago (KES) 570.00

Change (%) -6.8

Financials (KES 'm) 31 Dec F2012 2013F 2014FTurnover 19 409 20 351 22 553

EBITDA 5 657 5 830 6 358

Net Finance Income (350) (74) (38)


EPS (KES) 32.71 35.59 39.76

DPS (KES) 32.50 33.81 37.77 NAV/share (KES) 71.21 74.30 64.86

Ratios

RoaA (%) 22.6 23.1 25.7

RoaE (%) 48.3 48.9 57.1

EBITDA Margin (%) 29.1 28.6 28.2


Earnings Yield (%) * 6.5 6.7 7.5


PE (x) * 15.3 14.9 13.4

PBV (x) 0.8 7.1 8.2

EV/EBITDA (x) 9.0 9.2 8.4 * TTM

STRENGTHS Controls c.90% market share. Global tobacco pool ensures

leaf supply during droughtperiods in Kenya or the region

WEAKNESSES Product is highly regulatedwith local andinternational organisationsseeking to curtailconsumption

OPPORTUNITIES Success in efforts to combat

illicit trade

Higher disposable incomes toincrease consumption

THREATS Higher excise taxes Increased Illicit trade


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0%

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Capex instensity on the decline

Cape x (KES bn ) Cap ex in te nsity


Driving efficiency has been investment in newprocessing machinery, wastage reduction technologyand the establishment of processes for the recycling ofwater and waste tobacco. Capex overall has grown ata CAGR of 10.08% over that period and capex intensitydeclined from 8.1% in FY 07 to 6.4% in FY 12.

0%5%

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OCF Dividend + capex Debt / Equity

Given the industrys limited growth prospects, whichmakes long term borrowings riskier, BATKs modelensures that capex and dividends are easily financedout of operating cash flows. As such, debt was at a low10.21% of equity in FY 12, declining from 17.29% in FY07.

Outlook

Top line growth trend to continue to FY 17 . WithKenyas customer base at 4.0%, we expect volumes inFY 13 to grow c.8.0%. BATK has already exhibited ac.7.0% growth in volumes in the current year and weexpect that to contract marginally over H2 13 as aresult of the contraction in consumer spending power.Looking into the long term, we expect cigarette

volumes to row at CAGR of 5.0% to FY 17.

Higher excise taxes not in governments favour..? According to management, notably higher excise

taxes would increase consumption of illicit tradecigarettes. Management points out that in marketswith higher excise tax rates, such as the UK andCanada, illicit trade is said to make up 35% and 40% ofdomestic consumption, respectively, against c.9.0% inKenya. In this regard, management is of the view thathigher excise taxes will result in lower excise taxrevenues for GOK and at the same time, exposeKenyas consumers to questionable and unregulatedquality which could worsen health risks.

VAT bill to pressure margins . The reintroduction of16.0% VAT on fertiliser, a key implement in tobacco

farming will lead to an increase in costs of operationsfor tobacco farmers. This is likely to also applyupward pressure on procurement costs for BATK whichacquires 100% of its tobacco leaf from contractedfarmers.

Capex to remain benign. Management expects capexintensity to decline to the c.5.0% level in the longterm as expenditure will essentially be driven by themaintenance and replacement of property, plant andequipment. We expect this to offset the likelihood ofnarrowing margins and drive free cash f low generationgoing forward.


We use a DCF and arrive at a target price of KES593.32, implying upside of 11.8%. However, we noteBATKs generous dividend history and outlook andrecommend investors ACCUMULATE.

Scenario

Target

Price

FY14 - exit

PE Macro Outlook

FCF 2nd

stage CAGR

Base case KES 593.32 15.0x +ve

10.8%

Bull case KES 613.03 18.0x +ve

12.2%

Bear case KES 453.88 13.1x -ve

9.5%

Rf and ERP

trend lower

Rf and ERP

trend lower

Rf and ERP

deteriorate


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Financial Summary

KES Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 ERevenues 9 419 10 283 11 094 13 539 20 138 19 409 21 111 23 544 26 292 29 480

Y-o-Y % 9.2% 7.9% 22.0% 48.7% -3.6% 8.8% 11.5% 11.7% 12.1% 12.0%

Gross Profit 4 625 5 140 5 418 6 026 8 817 8 379 8 692 9 787 11 035 12 491 14Y-o-Y % 11.1% 5.4% 11.2% 46.3% -5.0% 3.7% 12.6% 12.7% 13.2% 13.0%

EBITDA 2 542 3 029 2 750 3 543 5 216 5 657 6 048 6 543 7 411 8 428 9Y-o-Y % 19.1% -9.2% 28.8% 47.2% 8.5% 6.9% 8.2% 13.3% 13.7% 13.6%

EBIT 2 115 2 562 2 221 2 940 4 662 5 104 5 448 5 900 6 721 7 685 8 7

Y-o-Y % 21.2% -13.3% 32.3% 58.6% 9.5% 6.7% 8.3% 13.9% 14.3% 14.1% Attr. NPAT 1 386 1 700 1 478 1 767 3 098 3 271 3 708 4 106 4 616 5 296 6

Y-o-Y % 22.7% -13.1% 19.5% 75.3% 5.6% 13.4% 10.7% 12.4% 14.7% 14.5%

Per Share data

Basic EPS 13.86 17.00 14.78 17.67 30.98 32.71 37.08 41.06 46.16 52.96 60Y-o-Y % 22.7% -13.1% 19.5% 75.3% 5.6% 13.4% 10.7% 12.4% 14.7% 14.5%

DPS 17.00 17.00 14.75 14.50 30.50 32.50 35.23 39.01 43.85 50.32 57.6Y-o-Y % 0.0% -13.2% -1.7% 110.3% 6.6% 8.4% 10.7% 12.4% 14.7% 14.5%

NAV per Share 47.2 49.2 47.0 51.4 64.4 71.2 75.8 65.6 70.4 76.2 82.9Y-o-Y % 4.2% -4.5% 9.4% 25.3% 10.7% 6.4% -13.4% 7.2% 8.4% 8.8%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 2017 E

Gross Margin 49.10% 49.99% 48.84% 44.51% 43.78% 43.17% 41.17% 41.57% 41.97% 42.3

EBITDA margin % 26.99% 29.45% 24.79% 26.17% 25.90% 29.15% 28.65% 27.79% 28.19% 2

EBIT margin% 22.45% 24.91% 20.02% 21.71% 23.15% 26.30% 25.80% 25.06% 25.56% 26.

Net Income Margin % 14.71% 16.54% 13.33% 13.05% 15.38% 16.85% 17.56% 17.44% 17.56% 17

Ratios

ROaA 14.9% 17.4% 14.2% 16.3% 24.8% 22.6% 23.8% 26.0% 28.5% 30.4%

ROaE 29.4% 35.3% 30.8% 35.9% 53.5% 48.3% 50.4% 58.1% 67.9% 72.3%

Earning yield 2.4% 3.0% 2.6% 3.1% 5.4% 5.7% 6.4% 7.1% 8.0% 9.2%

Dividend yield 3.0% 3.0% 2.6% 2.5% 5.3% 5.7% 6.1% 6.8% 7.6% 8.8%


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British American Tobacco Uganda (BATU) is the Ugandansubsidiary of BAT, which has a direct shareholding of

70%. BATU is into growing, processing, exporting andmanufacturing of cigarettes. However, the company inH1 13 ceased its processing operation in Uganda. Locallymanufactured brands are Sportsman, Safari, Crescentand Star. In a market consuming c.2.0bn sticks, of whichc.400m are illicit, BATU has c.80% market share of theofficial market whilst its Sportsman brand alone accountsfor c.70% of the official market.

Modest fundamentals growth since FY 07. BATU hasmanaged to grow revenue, EBITDA and PAT at a 5 yearCAGRs of 5.5%, 10.3% and 14.7% to UGX 180.0bn, UGX32.0bn and UGX 12.2bn, which we view as modest giventhe depreciation of the UGX over that period of 8.7% y-o-y.

FY 13 showing operational recovery. Whilst EBITdeclined 25.5% in FY 12 to UGX 29.8bn, H1 13 EBIT grew127.2% to UGX 31.0bn. EBIT margins have expandedfrom 14.9% to 21.9%, showing an exceptionalimprovement in operational profitability.

The 42% increase in excise taxes a concern. Over H113, management report that local volume sales declineby 24% as a result of the 42% increase in excise taxes.We think this may harm BATUs growth prospects in thelong term.

Attractive forward multiples at FY 14. Given that weexpect EPS to grow 30.7% to UGX 325 in FY 13, and139.9% to UGX 779 in FY 14, we forecast a 2 yearforward PER of 5.1x. Furthermore, given that BATU paidout a dividend payout ratio of 100% in good years, wesee a generous dividend as highly likely at FY 14.

We recommend BATU as a SPEC BUY. Given theobserved recovery and its potential to payout agenerous dividend, we recommend BATU as a SPEC BUY.

Equity ResearchUgandaDecember 2013Agriculture

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BATU UG (USD) S&P AF

Recommendation SPEC BUY

Bloomberg Code BATU:UGCurrent Price (UGX) 4 000

Current Price (Usc) 159.30

Target Price (UGX) 5 967

Target Price (Usc) 238

Upside (%) 49.2

Liquidity

Market Cap (UGX m) 196 320



Free Float (%) 25.0


Price Performance

Price, 12 months ago (UGX) 2 100Change (%) 90.5

Price, 6 months ago (UGX) 2 500

Change (%) 60.0

Financials (UGX 'm) 31 Dec F2012 2013F 2014F

Turnover 180 042 259 215 282 840

EBITDA 31 998 55 666 59 570

Net Finance Income (12 750) (3 242) (2 146)


EPS (UGX) 248 325 779

DPS (UGX) 141 309 740

NAV/share (UGX) 263 588 689

Ratios

RoaA (%) 6.2 5.3 8.6

RoaE (%) 68.3 76.3 122.0

EBITDA Margin (%) 17.8 21.5 21.1


Earnings Yield (%) * 4.6 8.1 19.5


PE (x) * 22.0 12.3 5.1

PBV (x) 15.2 6.8 5.8

EV/EBITDA (x) 8.0 4.6 4.3 * TTM

STRENGTHS Leading market share Support from BAT global pool Strong brands locally andwithin the region

WEAKNESSES Anti-smoking drive High excise taxes increasingcompetition from illicitbrands

OPPORTUNITIES Local and regional economic

growth. Higher NR prices or more

likely

THREATS Higher excise taxes Increased supply of illcitbrands

Weak economic growth


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Leaf exports driving revenue growth. BATUs netrevenue has grown at a CAGR of 5.47% over the past 5

years to UGX 180.0bn (USD 72.0m) in FY 12. Whilstexcise taxes have increased considerably over the pastthree years, BATU managed to register impressive netrevenue growth at H1 13.

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FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Leaf exports driving revenue (UGX bn) growth

Local Sale s Exports

Source: Company filings & IAS

The performance in top-line growth is largely owed toBATUs leaf exports which generated about 58.2% of thecompanys revenue in FY 12. In FY 12, following a 13%increase in excise taxes in the previous year, localrevenue grew a modest 6.2% to UGX 137.7bn whilst

exports grew 11.4% to UGX 104.8bn. VAT and excisetaxes grew 6.9% and net revenue for that period grew8.9% to UGX 180.0bn.

EBITDA margin on a rising trend. Benefitting from riskhedging and maintenance of efficiencies throughcontractual obligations, BATU was able to increase itsprofitability.

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Revenue (GHS m) EBITDA (GHS m) EBITDA margin


The highest level of profitability over the past five yearsto FY 12 was achieved in FY 11.

Gross and EBITDA margins increased from 27.9% and14.2% in FY 07 to 49.5% and 25.6% in FY 11,

respectively. The drastic expansion in gross marginsshows that the contractual obligations with suppliers,such as imports from BAT group affiliates was veryeffective in protecting BATU from a local currency thatdepreciated c.30% over that period.

However, in FY 12, BATUs margins came underpressure as a combination of the increased excisetaxes and import duties. Gross and EBITDA marginstherefore declined by 270bps and 780bps,respectively. Whilst gross profit grew a modest 1.7% toUGX 83.2bn in FY 12, EBITDA declined 24.5% to UGX32.0bn.

EBIT was 25.5% lower at UGX 29.8bn following a 7.0%decline in depreciation to UGX 2.2bn. FX related lossessaw net finance costs increase 58.7% to UGX 12.8bn, or42.75% of EBIT. PBT and PAT in turn declined 46.6% toUGX 17.1bn and UGX 12.2bn.

BATU pulls FY 12 dividends on poor earnings. Thecompany had began paying a series of dividends sinceFY 09 as it began to enjoy higher profit margins whilstcapex remained low relative to revenue. However,BATU did not declare a dividend in FY 12 as a result ofthe poor performance.

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BATU highly cash flow generative




BATU leverages off supplier network to financeoperations. Despite the decline in earnings, cashgenerated from operations grew 137.7% to UGX 35.3bnmainly as a result of its suppliers extending creditterms by 46 days. Whilst the increase in total debtraised UGX UGX 5.9bn, the extension from suppliersfreed up UGX 25.5bn. This allowed BATU meetdividend and capex payments that increased 50.5% and34.8% to UGX 22.1bn and UGX 10.7bn in that year.



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Outlook

FY 13 earnings to decline 60.98%. At H1 13,operating results were impressive, showing a 54.1%and 121% growth in net revenue and EBIT to UGX141.6bn and UGX 31.0bn, respectively. Gross revenuegrew 35.4% driven by a 54.0% jump in exports.

However, the decommissioning of the leaf processingplant, and the settlement of a legal judgement thatwent against them saw the company incur exceptionalcosts of UGX 26.8bn. PBT, income tax and PATtherefore declined 39.9% to KES 6.9bn, KES 2.1bn andKES 4.9bn, respectively.

Financial Summary (UGX m) H1 12 H1 13 %

Gross revenue 124 778 168 938 35.4%

VAT & Excise duty (32 895) (27 314) -17.0%

Net revenue 91 883 141 624 54.1%

Cost of operations (78 226) (110 594) 41.4%

EBIT 13 657 31 030 127.2%

Financial charges (2 015) 2 776 -237.8%

PBT 11 642 6 994 -39.92%

Income tax (3 493) (2 098) -39.94%

PAT 8 149 4 896 -39.92%

Ratios

EBIT margin 14.86% 21.91%

PBT margin 12.67% 4.94%

Effective tax rate 30.00% 30.00%


The processing plant was 74 years old and would haverequired c.USD 75m (UGX 180.5bn) to replace. Giventhat the plant also had capacity to process 50,000teach year of leaf, whilst BATU only imported 15,000t ayear, reinvestment in the plant could not be justified.

The settlement is unknown to us as of yet but we doknow that the farmers had originally demandedcompensation of UGX 14.0bn for forgone payment on3,000t of leaf.

For the full year, we expect the run-rate observedover H1 13 to maintain to FY 13 were exports are

concerned. However, we anticipate a softerperformance in the domestic market over H2 13 as thehigher excise tax i) reduces affordability and ii)favours illicit cigarette consumption. Overall, weexpect net revenue to grow 44.0% to UGX 259.2bn inFY 13.

In this regard, we expect EBITDA to grow 74.0% toUGX 55.7bn in FY 13. With the once-off chargesabsent over H2 13, we expect EBIT to decline 11.7% toUGX 26.4bn.

With the UGX 6.8% firmer against the USD in FY 13,

BATU seems to have benefitted from some FX gains onpayables balances on imported material. We think thiswill benefit PBT and PAT and thus forecast the twogrowing 35.3% and 30.7% to UGX 23.1bn and UGX15.9bn, respectively.

Long term outlook . We generally expect the growthin per capita incomes locally and in export markets todrive volume growth. On the other hand, we thinkthat the excise tax hikes will have an adverse effecton consumption locally, an offset the income effect inthe short to medium term.


We use a DCF and arrive at a target price of UGX6,110, implying upside of 49.2%. We recommend aSPEC BUY as we believe that an attractive dividendyield is highly possible by FY 14. However, we keep aclose eye on FY 13 to see and assess the impact of theexcise tax increase on market dynamics.

ScenarioTargetPrice

FY14 - exitPE Macro Outlook

Base case UGX 5966.59 8.5x Unchanged

Bull case UGX 6244.5 8.9x +ve

Bear case UGX 5581.75 7.9x -ve

Rf and ERP

remain

Rf and ERP

trend lower

Rf and ERP

deteriorate


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Financial Summary

UGX Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 201

Revenues 137 968 135 189 111 783 163 432 165 317 180 042 259 215 282 840 308 488 3Y-o-Y % -2.0% -17.3% 46.2% 1.2% 8.9% 44.0% 9.1% 9.1% 9.0% 9.0%

Gross Profit 38 506 41 363 46 092 67 724 81 770 83 184 114 580 126 155 138 828 15Y-o-Y % 7.4% 11.4% 46.9% 20.7% 1.7% 37.7% 10.1% 10.0% 10.0% 9.9%

EBITDA 19 591 23 126 21 896 36 459 42 370 31 998 55 666 59 570 66 181 73Y-o-Y % 18.0% -5.3% 66.5% 16.2% -24.5% 74.0% 7.0% 11.1% 11.0% 11.0%

EBIT 15 036 19 017 18 191 32 905 40 034 29 824 26 346 56 769 63 062 70 0Y-o-Y % 26.5% -4.3% 80.9% 21.7% -25.5% -11.7% 115.5% 11.1% 11.0% 11.0%

Attr. NPAT 6 141 3 244 8 050 15 223 22 081 12 196 15 942 38 236 43 247 48 4Y-o-Y % -47.2% 148.1% 89.1% 45.1% -44.8% 30.7% 139.9% 13.1% 12.0% 10.3%

Per Share data

Basic EPS 125 66 164 310 450 248 325 779 881 987 1Y-o-Y % -47.2% 148.1% 89.1% 45.1% -44.8% 30.7% 139.9% 13.1% 12.0% 10.3%

DPS 0 0 57 228 450 141 309 740 837 937 1 034Y-o-Y % NA NA 302.0% 97.3% -68.7% 118.8% 139.9% 13.1% 12.0% 10.3%

NAV per Share -54 12 176 314 465 263 588 689 781 881Y-o-Y % -123.2% 1313.1% 78.6% 48.1% -43.3% 123.3% 17.1% 13.4% 12.7% 11.7%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E 2015 E 2016 E 201

Gross Margin 27.9% 30.6% 41.2% 41.4% 49.5% 46.2% 44.2% 44.6% 45.0%

EBITDA margin % 14.2% 17.1% 19.6% 22.3% 25.6% 17.8% 21.5% 21.1% 21.5%EBIT margin% 10.9% 14.1% 16.3% 20.1% 24.2% 16.6% 10.2% 20.1% 20.4%

Net Income Margin % 4.5% 2.4% 7.2% 9.3% 13.4% 6.8% 6.2% 13.5% 14.0%

Ratios

ROaA 6.9% 3.2% 5.7% 9.7% 13.5% 6.2% 5.3% 8.6% 8.2% 8.7%

ROaE -233.1% -320.6% 174.3% 126.7% 115.6% 68.3% 76.3% 122.0% 119.9%

Earning yield 3.1% 1.7% 4.1% 7.8% 11.2% 6.2% 8.1% 19.5% 22.0% 24.

Dividend yield 0.0% 0.0% 1.4% 5.7% 11.2% 3.5% 7.7% 18.5% 20.9% 23


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BATZ processes tobacco products mainly for thedomestic market. The company manufactures c1.5bn

cigarettes, commanding a market share of approximately73%. BATZ markets both Global Drive Brands (e.g. Dunhill & Newbury ) and local brands like Madison , Everest ,Kingsgate and Berkeley . Madison is the flagship brandcontributing about 68% of volumes. Premium brandsconstitute up to 25% of sales volumes. BATZ has a strongcountrywide distribution network operating out of fivedepots with outlying areas being serviced by thirdparties.

Dominant position. BATZ holds a dominant marketshare estimated at 73% of the Zimbabwean market.This is largely due to the prohibitive set-up costs of

production, marketing and distribution functionsstrong brand loyalty from consumers.

Non-cash items negatively impacted H1 13performance. The performance for H1 2013 wasnegatively impacted by once off items relating toshare payments. Operating margins shrunk from30.5% to 10.4% due to share based paymentexpenses of USD 10.6m, representing the fair valueof share awards made to employees as part of thecompanys compliance with indigenisation andeconomic empowerment legislation.

Strong cash flows. Cash generation was strong withnet operating cash flows of USD 11.6m, up 188% y-o-y and representing a cash interest cover of 83.5x.Net gearing significantly improved to -37.5% from16.7%.

Ratings are undemanding; we maintain our BUYrecommendation. Return on shareholder funds andasset utilisation were impressive at 109% and 37%,respectively. The company has a generous dividendpolicy. In our view, these factors warrant aboveaverage ratings. Ratings are not demanding atPER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of18.1x and EV/EBITDA 11.5x for our comparativesample. We maintain our BUY recommendation .

Equity ResearchZimbabweDecember 2013Agriculture

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BAT ZH (USD) S&P AF

Bloomberg BATZL:ZHRecommendation BUY

Current Price (USc) 1,199.0 Target Price (USc) 1,500.0 Upside (%) 25.1

LiquidityMarket Cap (USD m) 247.4Shares (m) 20.6Free Float (%) 17.4Ave. daily vol ('000) 2.7

Price PerformancePrice, 12 months ago 215.0Change (%) 457.7

Price, 6 months ago 366.0Change (%) 227.6

Financials (USD '000) 31 Dec F2012 2013F* 2014FTurnover 51,853 61,527 70,353 EBITDA 18,628 23,724 28,616 Net Finance Income (734) (548) (263) Attributable Earnings 12,262 16,479 20,227

EPS (USD) 70.55 86.70 98.03 DPS (USD) 65.00 27.95 93.13 NAV/Share (USD) 80.33 129.81 124.48

RatiosRoaA (%) 53.8 60.1 62.9 RoaE (%) 109.3 85.3 80.3 EBITDA Margin (%) 35.9 38.6 40.7

Valuation Ratios Current 2013F 2014FVolume (m) 1,469 1,451 1,480 Earnings Yield (%) 588.4 723.1 817.6 Dividend Yield (%) 542.1 233.1 776.7 PE (x) 17.0 13.8 12.2PBV (x) 14.9 0.1 0.1EV/EBITDA (x) 16.1 12.7 10.5

* excludes USD 10.6m non-recurring costs

STRENGTHS

Market leader Strong brand Cash generative Expansive distribution Strong management

WEAKNESSES Low disposable incomes Energy disruptions Commodities driveneconomy

OPPORTUNITIES New products Economic recovery

THREATS Increased excise duties Not a dominantmanufacturer locally

Well establishedcompletion

Increased regulation ontobacco


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BAT Zimbabwe processes tobacco products mainly for

the domestic market with exports being cut ragtobacco. The company manufactures c1.5bn cigarettes,commanding a market share of approximately 70% ofthe smoking population in a market estimated toconsume approximately 2.5b n sticks a year. BATZsmain competitor, Savanna is the largest manufacturerof cigarettes although the bulk of its production isexported. Local cigarette demand has fallen from apeak of 3.0bn sticks recorded in 1980.

Madison is the crown jewel

Madison 68%

Berkley1%Everest 15%

Kingsgate 11%

Source IES, company reports

Dunhill &Newbury5%


The company markets both Global Drive Brands (e.g.Dunhill & Newbury) and local brands like Madison,Everest, Kingsgate and Berkeley. Madison is the flagshipbrand contributing about 68% of volumes and commandsdomestic market share of approximately 75%. Premiumbrands constitute up to 25% of sales volumes. BATZ hasa strong countrywide distribution network operating outof five depots in Harare, Bulawayo, Gweru, Mutare andMasvingo, with outlying areas being serviced by thirdparties. Should really be captured on page 1, cozbasically repeating most of the overview there. Thesourcing should be on left not right to keepstandardised, also font 7, bold italics.

H1 2013 Financial and OperationalReview

BATZ released a flat set of results showing a 0.5%increase in revenue to USD 23.1m. The companyeffected price increases of approximately 30% inDecember 2012 following the hike in excise duty by 50%to USD 15 per 1,000 sticks. Trading volumes were thus16% lower to 636m sticks across the local brandportfolio, negatively affected by the successiveincreases in excise duty and retail selling prices as wellas the slowdown in GDP growth. The situation was alsocompounded by the coinage constraints. Nonetheless,sales volumes of premium brand, Dunhill grew stronglyby 44% to 3.7m sticks albeit from a small but growingconsumer base.

Main stream brand, Madison, maintained its poleposition contributing 68% to overall sales volumes.Exports of cut rag to Mozambique were discontinued asthe company focused on more viable sales ofmanufactured cigarettes.

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BATZ Cigarettes(m)

National To baccocrop kgs (m)

Sales and national tobbaco crop

National tobacco crop 'kgs m LHSBATZ Cigarettes sold ('m) RHS Source: IES, Company report


Improved production efficiencies, price reviews, costmanagement, the change in the sales mix anddiscontinued cut rag exports to Mozambique aidedmargins 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, despitethe company having increased marketing initiativesmarketing to revenue vs historical trend. Overall opexdeclined by 2.5% to USD 6.7m as selling and marketingcosts increased 15.3% to USD 2.2m off set by the 9.3%decline in admin expenses to USD 4.5m.

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EBITDA, USDm EBITDA and margin

EBITDA USD' m EBITDA margin %Source: IES, company reports


Reported EBIT declined 65.7% to USD 2.4m, negativelyimpacted by the USD 1.6m share based payment

expense which was partly offset by a USD 3.3m creditof accounts payables that were forgiven by BAT Plc

Nature of business


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for management fees accrued during thehyperinflation period. Net finance charges declined by

50% to USD 0.1m, due to reduced borrowings. Theeffective tax rate spiked to 163.5% from 24.9% and allthis resulted in the company posting a loss of USD 1.4mfor the period.

Cash generation remained strong, with net cashgenerated from operations up 188% y-o-y to USD11.6m, representing a cash interest cover of 83.5x.The 188% growth in net cash from operations wasahead of operating cash flow due to the liquidation oftobacco leaf inventories worth USD 4.6m of cut rag.Capex amounted to USD 0.3m from USD 0.2m mainlyrelated to maintenance.

Total balance sheet assets declined by 3% to USD29.8m due to a reduction in inventories and otherintangible assets. The net asset value (NAV) was 59%lower to USD 5.7m from USD 14.0m due to a significantreduction in retained earnings which dropped fromUSD 8.4m to USD 0.1m. The reduction in inventories toUSD 7.9m was due to a USD 4.6m stock liquidationfollowing the discontinuation of cut rag exports toMozambique. Trade and other payables reduced fromUSD 8.9m to USD 6.3m following the above mentionedforgiveness of USD 3.3m worth of payables. Increasesin provisions from USD 1.4m to USD 11.2m represented

the recognition of the ESOT liability of USD 10.2m. Netgearing significantly improved to minus 37.5% from16.7%.

Outlook

Input cost increases are a particular concern. Leaftobacco makes up approximately 40% of the non-excisecost of production. Local leaf auction floor prices rosestrongly at approximately 28% in the 2011/12 seasonwith the full effects to be felt in FY 2013 (there is a 12months lag). We believe that margins can be sustainedat current levels as BATZ works on a cost plus mark up

basis whereby the absolute margins are maintainedand volatility in raw material prices is passed on to theconsumer. BATZ, being the market leader is able tocommand margins. The company effected a priceadjustment in December 2012 of approximately 30%following the hike in excise duty by 50% to USD 15 per1,000 sticks. Going forward we expect BATZ tomaintain its EBIT margin at approximately 40%, mainlyanchored by improved production efficiencies andeffective distribution.

Market dominance to be maintained. The companyintends to concentrate on improving the quality of its

packaging and promotion in an effort to boostvolumes.

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 Zimbabwemakes up approximately 30% of the retail price (atUSD 15 per 1,000 sticks), a high for a developingcountry, and with Government revenue inflowsremaining under pressure, are unlikely to be reducedin the foreseeable future.

BATZ likely to maintain strong pricing power.Although demand for cigarettes is fairly inelastic, thesegment is not equipped to absorb 40%+ price hikes y-o-y, in our view.

The increase in awareness of the health risksassociated with smoking has resulted in a decline incigarette consumption in the developed world whilestatistics from W.H.O have shown that the opposite istrue for most developing nations in Southern Africa.The tolerant attitude of Zimbabweans in generaltowards smoking, brand loyalty, considerable barriersto entry and the habit-forming nature of cigarettesmoking are all factors that help insulate the industry.

Management cautious of future prospectsThe company remains cautious in light of liquidityconstraints (pressure on disposable incomes) andslower than anticipated economic growth. For FY 13volumes are expected to be slightly lower than 2012volumes. Management expects Dunhill and Newbury(premium brands) to contribute approximately 10% ofsales volume by FY 2014 from 5% achieved in 2012.

Generous dividend payoutGiven the limited capex requirements (USD 1.2m overthe next two years) against relatively higher cash flowgeneration (USD 13.0m in FY 12), the generousdividend payout is likely to be maintained.


Cigarette demand is closely linked to GDP levels, andBATZs long term growth is therefore dependent oneconomic growth. We believe that BATZ is well placedto benefit from the steady increase in consumptionexpenditure likely to emanate from a youngpopulation in a growing economy. BATZ is a wellmanaged, strong cash generating company operatingin one of the most profitable sectors in the economyas well as having strong brands and a solid distributionnetwork. Furthermore, the company has a generousdividend policy. In our view, these factors warrantabove average ratings. We maintain our BUYrecommendation .


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Financial Summary

USD Thousands 2007 2008 2009 2010 2011 2012 2013 E 2014 ERevenues 15,141 22,854 39,784 51,853 61,527 70,353

Y-o-Y % NA NA 50.9% 74.1% 30.3% 18.7% 14.3%

Gross Profit 7,599 6,996 18,368 29,891 36,178 42,212Y-o-Y % NA NA -7.9% 162.6% 62.7% 21.0% 16.7%

EBITDA 1,248 1,205 8,343 18,628 23,724 28,616Y-o-Y % NA NA -3.4% 592.4% 123.3% 27.4% 20.6%

EBIT/Operating Profit, exlc exceptionals 364 184 7,334 17,760 33,274 27,413Y-o-Y % NA NA -49.5% 3885.9% 142.2% 87.4% -17.6%

Attributable Net Income/Profit After Tax 281 -499 4,883 12,262 16,479 20,227Y-o-Y % NA NA -277.6% -1078.6% 151.1% 34.4% 22.7%

Per Share data

Attributable Diluted EPS 1.62 -2.87 28.09 70.55 86.70 98.03Y-o-Y % NA NA -277.6% -1078.6% 151.1% 22.9% 13.1%

Dividend Per share (DPS) 0.00 0.00 26.00 65.00 27.95 93.13Y-o-Y % NA NA NA NA 150.0% -57.0% 233.2%

NAV/Basic Share 35.4 30.8 48.8 80.3 129.8 124.5Y-o-Y % NA NA -13.0% 58.4% 64.7% 61.6% -4.1%

Margin Performance2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin NA NA 50.2% 30.6% 46.2% 57.6% 58.8% 60.0%EBITDA margin % NA NA 8.2% 5.3% 21.0% 35.9% 38.6% 40.7%

EBIT margin% NA NA 2.4% 0.8% 18.4% 34.3% 54.1% 39.0%Net Income Margin % NA NA 1.9% -2.2% 12.3% 23.6% 26.8% 28.7%

Ratios

ROaA 3.7% 0.7% 22.5% 53.8% 60.1% 62.9%

ROaE 9.1% -8.7% 70.6% 109.3% 85.3% 80.3%Earning yield on current price 0.0% 0.0% 0.1% -0.2% 2.3% 5.9% 7.2% 8.2%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 2.2% 5.4% 2.3% 7.8%


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Colcom Holdings Limited is a long established meat-processing company which was formed in Zimbabwe in

1943. It originated from a farmer-owned cooperativeestablished in 1943, with the aim of marketing the saleof pigs. The Cold Storage Commission (CSC) wasColcoms agent until 1961, when the co -operativesinitial processing factory was built in Harare. ColcomHoldings listed on the Zimbabwe Stock Exchange in1993, which transformed the business from a co-operative to become Colcom Holdings Limited. Colcomentered into an associate venture with Freddy HirschGroup, which manufactures and supplies natural andsynthetic sausage casings, butchery equipment,ingredients supporting the meat industry, and providestraining for persons in the meat industry.

Margins compression due aging equipmentColcom was bleeding due to frequent equipmentfailure which was increasing the expenses of thecompany through down time and associated costs.The company invested USD 2.7m in trying to addressthis issue and we expect margins to improve goingforward.

Valuation

A PER of 30x looks demanding from an ordinary eyehowever the USD 4m of non-recurring expensesreduced earnings significantly. We dont expectColcom to declare a dividend next year due to theneed to invest in upgrading the plant and equipmentat the company. We believe the worst is behind usand recommend investors SPECULATIVELY BUY.

Equity ResearchZimbabweDecember 2013Agriculture

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COLC ZH (USD) S&P AF

Bloomberg Code Colc:ZH

Current Price (USc) 26.0

Target Price (USc) 32.2 Upside (%) 23.8

Liquidity

Market Cap (USD 000) 41,351

Shares (000) 159,041

Free Float (%) 15

Ave. daily vol ('000) 9.0

Price Performance

Price, 12 months ago 25.

Change (%) 4.

Price, 6 months ago 35.

Change (%) -25.

Financials (USD 000) 31 June Current 2014F 2015

Turnover 60,782 66,861 71,541

EBITDA 10,238 9,361 10,016 Net Finance Income (16) (99) (87

Attributable Earnings 1,379 5,672 5,976

Financials (USD 000) 31 June FY2010 2014F 2015

EPS (USD) 0.01 0.04 0.04 DPS (USD) - - 0.01

NAV/Share (USD) 0.17 0.19 0.22

Ratios

RoaA (%) 5.6 18.7 16.6

RoaE (%) 5.2 19.8 18.3 EBITDA Margin (%) 16.8 14.0 14.0

Valuation Ratios Current 2014F 2015

Earnings Yield (%) 3.3 13.7 14.5

Dividend Yield (%) - - 4.3 PE (x) 30.0 7.3 6.

PBV (x) 1.5 1.4 1.

EV/EBITDA (x) 3.6 3.9 3.

STRENGTHS Market leader Quality products Strategic partnerships Strong parent company Strong management

WEAKNESSES Weak corporate governancestructure

Aging PPE Elitist perception inweak economy

OPPORTUNITIES Recovery play on Zimbabwe Entry to lower end of the

market

Regional exports

THREATS Economic slow down Competition from newentrants

Feedstock shortage


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A brief history

In 1998, a vertical integration took place to form a jointventure with Triple C Pigs, which currently suppliesColcom with more than 1,000 pigs per week. Triple Cbecame wholly owned by Colcom in 2004. Colcom wenton to acquire Danmeats in 2001, which has modernmeat processing facilities, cold rooms and a reputationfor quality processed products. Colcom has developed areputation with Danmeats in export markets in centraland southern Africa. Colcom offers pig based productswhich include fresh pork, hams, bacon, fresh andcooked sausages, pies, cold meats, polonies and cannedproducts. The Value Brand group of products wasdeveloped to expand the market of pork products. The

company also produces a range of fresh and processedbeef based products. It s wholesale and retail outletssell other meat protein foods. Innscor Africa has amajority shareholding in Colcom with a stake of 79.27%.

Financial ReviewColcom reported a mixed set of results showing a 15%growth in revenue to USD 60.7m with significantcontributions from low-margin product lines. Despitethe higher growth in revenue the company was affectedby raw material price increases which it could not passon to the consumer. The Triple C Pigs livestock divisiondelivered 57,646 pigs (compared to 56,721 in 2012), a6% increase from prior year. Operating profit was down33% from USD 7.2m to USD 4.8m. Depreciation alsoincreased from USD 1.2m to USD 1.6m due to theacquisition of new equipment. The company embarkedon a number of initiatives after a compromisedgovernance structure in 2012. Operations were alsoaffected by increased down time due to equipmentfailure that occurred within the core pork operation.Cost provisions of USD 1.1m mainly emanating fromstock write off and retrenchment charges wererecorded in the second half in addition to the USD 1.3mreported H1. Staff overheads went up 8%, mainly due tothe aforementioned retrenchment costs, while otheroverheads went up 31% due to increases in utility costs,rentals and bad debts written off. A loss of USD 1.6m onimpairment and de-recognition of fixed assets wasrecorded. Attributable profit was down 66% to USD 1.6mcompared to USD 4.8m in the prior year. Headlineearnings were down 43% to US 1.63 cents comparedwith US 2.87 cents in the prior period due to higheroperating costs.

Total assets grew by 4% to USD 37.3m from USD 35.8mdue to modest growth in biological assets and accountsCurrent assets grew by 13% to USD 18.8m from USD16.8m, while current liabilities grew faster than currentassets at 21% due to the increase in short termborrowings from USD 0.4m to USD 1.4m during theperiod.

Investment in working capital is high at USD 11.8m andthis represents an opportunity to free up cash goingforward especially on the debtors book.

Accounts payable also increased from USD 4.7m to USD5.4m. The current ratio declined slightly but remainedhealthy at 1:2.5 from 1:2.7 in the prior period.

Cash generation remains positive with an operatingcash flow of USD 3.7m, down 39% from USD 6m in theprior year. The company invested USD 2.7m comparedto USD 2.6m in FY 12. Of the USD 2.7m in capex, USD2.4m was expansionary capex and the small

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IAS_Agriculture Sector Report_04 December 2013