food_241114

EQUITY RESEARCH

Food Producers24th November 2014

Sub-Saharan Africa

South Africa

Food for Thought

BPI Capital Africa

Analysts

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

Carmen Luis Sitoe

[email protected]

Phone: +27 21 410 9014

2

Equity Research 4 Food Producers 4 November 2014

CONTENTS

3 Executive Summary

5 Key Investment Highlights

10 Key Growth Drivers in SSA Food Sector

12 Macro Economic Overview

15 Company Notes

17 Flour Mills of Nigeria

33 Innscor

41 Oceana

47 SeedCo

65 Tiger Brands

67 UAC of Nigeria

82 Zambeef

3


"Food for Thought"

Cape Town, 24th November 2014

An emerging middle class in Sub-Saharan Africa (SSA) is driving the demand for food

products. Most of the SSA economies continue to register strong economic fundamentals

(high GDP, populat ion growth, improved urbanisat ion and bottom-heavy

demographics). As a result, we have been witnessing the emergence of a more

sophisticated middle class of consumers that have been driving the demand for food

products on the African continent. These strong fundamentals have also attracted

multinationals to the region, while a number of large food producers, particularly from

South Africa (Tiger Brands, Oceana, Rainbow Chickens, Astral Foods, Clover, etc) are

also looking to tap into this growth theme and have adopted aggressive regional

expansion strategies. Overall, we see huge growth prospects in the SSA Food & Agriculture

sector.

Our report covers seven food producers in South Africa and SSA (ex-SA). We update our

valuations and recommendations on SeedCo (BUY, YE15PT USD1.40), UACN (BUY,

YE15PT NGN57.00), Oceana (BUY, YE15PT R104), Tiger Brands (HOLD, YE15PT

R406), Flour Mills (HOLD YE15PT NGN52.00), Zambeef (SELL, YE15 PT ZMW 2.70)

and Innscor (SELL, YE15 PT USD0.60).

In South Africa, our Top Pick is Oceana (BUY, YE15 PT R104.00). Oceana is a top quality

company, with a strong competitive position and excellent management team. Execution

has been high, despite ongoing hurdles (private consumption under pressure, unstable

fishing quotas in Namibia and volatility of the fishmeal business). We like Oceana's

strong cash flow generation, solid B/S and attractive dividend policy. We estimate

EBITDA and EPS to post a 13% and 15% CAGR14-18F and the stock is trading at P/E

15 of 16.0x (13.8x in FY16F) and EV/EBITDA 15 of 9.5x (8.2x in FY16F), which we find

attractive, given the sound earnings outlook.

Tiger Brands (HOLD, YE15 PT R406) also promises some good growth on the back of its

exposure in Africa. The company is a dominant player in the SA market and growing

fast in the rest of Africa, especially in East Africa, Zimbabwe and Nigeria (after paying

heavy school fees). We expect Tiger Brands to accelerate its earnings performance and

register FY13-17F revenue CAGR of 11%, EPS CAGR13-17F of 18% while generating

significant cash flow. However, we have downgraded the stock to a HOLD, after a

fantastic share price performance over the last few months.

In SSA (ex-SA) our preferred stock is SeedCo (BUY, YE15 PT USD1.40), for those who

can manage the Zim risk Limagrain (French-based company) is already the major

shareholder and is increasing its stake in the company at USD1.0921/share, 20%

above the current share price. The investment case is centred on (i) exposure to fast

growing SSA markets (Zimbabwe accounts for 42% of turnover), (ii) industry barriers

to entry, (iii) the Limagrain partnership; (iv) low capex requirements; and (v) de-

risking through M&A activity. In addition, growth will be driven by the increased

penetration in East Africa and an improved capacity and pricing in Malawi.

UACN (BUY, YE15 PT NGN57.00) is an exciting restructuring story. Management has

been reshuffling the company's portfolio in order to strengthen its competitive position.

Food Stocks Coverage - Absolute

performance 3-months

Source: Bloomberg

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Key strategies have been (i) setting-up partnerships with strong SA players, namely

Tiger Brands, (UAC Foods), Famous Brands (Fast Food) and Imperial (logistics); (ii)

giving scale to Grand Cereals and the paint unit; and (ii) extracting value from its real

estate assets (UPDC). We believe that UACN should benefit from the recent partnerships,

increased production capacity, innovative products and a more benign consumer

environment. The stock is currently trading at P/E 15 of 13.8x (11.8x in FY16F) and

EV/EBITDA 15 of 4.8x (4.2x in FY16F), which we find attractive.

Food Stocks - Ratings and Price Targets

Mkt Cap ADV Current YE15 Upside

Rating (USDm) (USDk) Price PT Potential Risk Currency

South Africa

Oceana BUY 934 622 86 104 20% Medium ZAR

Tiger Brands HOLD 5 623 16 400 378 406 8% Medium ZAR

SSA

SeedCo BUY 186 51 0.9 1.4 56% High USD

UACN BUY 494 413 44.0 56.9 29% High NGN

FMN HOLD 678 228 48.7 51.8 7% High NGN

Zambeef SELL 111 47 2.9 2.7 -5% High ZMW

Innscor SELL 357 119 0.7 0.6 -10% High USD

Ranked by upside to price target.

Source: BPI Capital Africa/Bloomberg.

Food Stocks - Metrics based on our forecasts

P/E EV/EBITDA FY15F FY15F EPS CAGR

15 F 16F 15F 16F ROIC EBITDA Mg. 14-18F

South Africa

Tiger Brands 15.9 13.5 12.3 10.6 19% 16% 17%

Oceana 16.0 13.8 9.5 8.2 32% 19% 14%

SSA

SeedCo 12.2 9.8 6.3 6.1 13% 22% 24%

Innscor 12.7 10.1 6.6 5.9 3% 8% -9%

Zambeef 20.5 15.0 9.7 8.8 4% 9% 27%

UACN 13.8 11.8 4.8 4.2 12% 22% 11%

FMN 21.7 10.6 6.3 6.3 8% 10% 40%

Source: BPI Capital Africa.

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KEY INVESTMENT HIGHLIGHTS

In South Africa, our Top Pick is Oceana (BUY, YE15 PT R104). We believe the group is a

top quality company, with a strong competitive position and good management team.

Execution has been high, despite ongoing hurdles (private consumption under

pressure, unstable fishing quotas in Namibia and volatility of the fishmeal business).

We expect revenues to post a 12% CAGR14-18F, driven by (i) fish meal businesses;

and (ii) increased penetration of canned fish in SSA. We also expect EBITDA margin to

improve from 19.2% in FY14 to 19.6% in FY18F, helped by cost efficiencies. Our

forecasts imply a FY14-18F EPS CAGR of 15%, while cash flow generation (even after

dividends) will remain high. We also believe that dividend yield should continue to be

attractive. Positive triggers include faster penetration into SSA and improved margins

in the fish meal and strong prices in the oil business.

Tiger Brands (HOLD, YE15 PT R406) is a dominant player in the SA market and growing

fast in the rest of Africa, mainly in Nigeria and East Africa. Tiger Brands recently released

its FY14 results, indicating a 15% growth in HEPS from continuing operations (vs our

estimate of 18% growth). While the performance was slightly below our estimates, it is

above the street's expectations. The growth has largely been driven by an improvement

in the trading environment, particularly in SA, namely Grains and Groceries. SA is still

the biggest contributor to revenue (c75% of its revenues) and while the group has

reached maturity on the domestic market, the units are operating soundly. We expect

Tiger Brands to accelerate its earnings performance and register FY13-17F revenue

CAGR of 11%, EPS CAGR13-17F of 18% while generating significant cash flow. Trading

at 12.9x FY16F PER and 9.4x FY16F EV/EBITDA, the stock is trading at a premium to

its SA peers on the short-term but at a discount to EM peers. However, this is justifiable

given that Tiger Brands business model is more aligned to Multinational companies

that tend to have a strong focus on international expansion.

In SSA (ex-SA), we remain positive on SeedCo (BUY, YE15 PT USD1.40). Limagrain

which is already the major shareholder is increasing its stake in the company and the

deal should be concluded by December 2014 at USD1.0921. The investment case is

centred on (i) its exposure to high growth SSA markets, (ii) industry barriers to entry,

(iii) the Limagrain partnership, (iv) low capex demands and (v) de-risking through

M&A activity are positive factors for the stock. In addition, growth will be driven by the

increased penetration in East Africa and an improved capacity and pricing in Malawi.

We estimate FY14-18F revenue CAGR of 12%, and increase in EBIT margin from 15%

in FY14 to 23% by FY18F. While short term multiples seem rather high, reflecting the

dilution impact of the Limagrain transaction, the risk profile and future growth

opportunities of SeedCo are set to improve. SeedCo's FY16F PER and EV/EBITDA of

9.8x and 6.1x is at a discount to global seed major averages of 12.5x and 7.6x,

respectively.

UACN (BUY, YE15 PT NGN57) is an exciting restructuring story. The company been

transforming its business model in order to strengthen its competitive position. Key

strategies have been (i) setting-up partnerships with strong SA players, namely Tiger

Brands, (UAC Foods), Famous Brands (Fast Food) and Imperial (logistics); (ii) giving

scale to Grand Cereals and the lucrative paint unit and (ii) extracting value from its real

estate assets (UPDC). Management execution has been visible both in terms of revenues

and margins, but recent numbers were hit by slow private consumption, rising

competition and security concerns (Boko Haram and Ebola). Overall, UACN should

benefit from the recent partnerships, increased production capacity, innovative

6


products and a more benign consumer environment. In addition, the exposure to real

estate is unique and should benefit from the large deficit of residential and commercial

real estate in Nigeria.

Flour Mills of Nigeria (HOLD, YE15 PT NGN 52) is the largest wheat flour producer in

Nigeria. The company has been expanding rapidly (revenue FY10-14 CAGR of 13%)

and its diversification and expansion strategy has revolved around its port concession

(via imported products). However, growth has been debt-funded with net gearing

reaching 162% in FY14. Finance costs have been a strain on the earnings

performances. More recently, FMN was involved in the M&A wave that Lafarge and

Holcim are spearheading in Africa. FMN will be disposing its 30% stake in Unicem

and liquidating a NGN11.5bn loan it advanced to Unicem. Overall, we view this

transaction positively as it allows some deleverage, generates a capital gain and simplifies

the company's structure (exit from the cement sector). Net gearing should fall from

169% in FY14 to 87% in FY15F as a result of the deal. Meanwhile, we estimate FMN

to post a revenue and EBIT CAGR14-18F of 9% and 16%, respectively. The stock is

now trading at FY16F PER of 10.6x and FY16F EV/EBITDA of 5.9x, which look cheap vs

its peers. However, we remain wary on the group's aggressive capex (particularly in

green-field agricultural projects), limited cash flow generation and high debt level.

Zambeef (SELL, YE15 PT ZMW 2.70) has been posting volatile earning performances,

reflecting key risks of its business model. While Zambia has been on the radar of many

investors into Africa on the back of strong macro-fundaments (historic average GDP

growth of 6.5% and forecasted GDP growth of 5.0% in the outlook period), Zambeef

has not crystallised this opportunity into positive returns. Management has however

put in place a blue-print to turnaround the fortunes of the company. The turnaround

strategies include (i) driving exports growth in SADC, (ii) fostering strategic partnerships

and (iii) realising value from the sale of real assets. Our concerns around Zambeef

have been hinged on (i) capex investments with subpar returns (RoE of 1.0% vs

average RoE of 27% for SSA peers), (ii) opex pressures, and (iii) high debt levels (Net

Debt/EBIDTDA of 4.6x). However, we recognize that Zambeef may unlock some value

through corporate action (disposals and JVs) and faster turnaround.

Innscor (SELL, YE15 PT USD0.60) is facing several constraints within its environment.

While Innscor has a regional expansion strategy, Zimbabwe still represents 80% of its

revenues. The IMF expects Zimbabwe to post a 1.0% GDP growth in 2015 (0.5% in

2016) and conditions on the ground should remain difficult with low business activity

and scarce liquidity - consumer names should continue to feel the pinch. We note that

FY14 revenues were 6% below our forecast, hit in most of the divisions, including

Bakeries & Fast Foods (-3%), Distribution Group Africa (-1%) and SPAR (-4%). We

maintain our view that Innscor has a sound business model, with strong brands, but is

operating under tough macro conditions in Zimbabwe. In our view, the current risk

return is negative. Further, Innscor's earnings capabilities are likely to remain thwarted

given the margin pressure emanating from intensifying competition.

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Sector Valuation Comparisons

Mkt Cap PER EV/EBITDA EV/EBIT EV/Sales P/BV

SA Food Producers Country USDm 15F 16 F 17F 15F 16F 17F 15F 16 F 17F 15F 16F 17F 15F 16 F 17F

Tiger Brands SA 4 792 19.1 16.6 14.8 15.5 13.6 12.7 18.2 15.6 15.3 2.4 2.2 2.0 3.9 3.5 3.3

Pioneer Foods SA 2 753 22.0 19.0 16.6 16.0 14.3 12.8 20.0 17.6 15.5 1.8 1.7 1.6 3.4 3.0 2.7

AVI SA 2 430 18.6 17.1 15.4 12.3 11.4 10.5 14.5 13.4 12.1 2.4 2.2 2.1 5.0 4.6 4.3

Oceana SA 1 027 17.2 15.3 13.3 10.9 9.7 8.7 12.1 10.6 9.5 2.1 1.9 1.7 5.2 4.6 4.3

Clover Industries SA 326 18.9 15.6 13.7 7.7 6.8 6.1 6.2 5.5 4.9 0.4 0.4 0.4 1.5 1.3 1.2

Astral SA 652 10.6 9.6 7.8 6.9 6.4 5.4 8.6 7.8 6.7 0.7 0.6 0.6 2.9 2.6 2.5

Rainbow SA 1 434 20.3 14.1 12.2 7.1 6.3 5.9 12.8 9.8 8.7 0.6 0.6 0.5 1.5 1.4 1.3

Tongaat SA 1 988 13.4 11.4 9.9 8.8 8.4 7.7 11.1 10.3 9.4 1.7 1.6 1.5 1.5 1.4 1.3

Illovo SA 1 105 12.0 10.2 8.6 6.4 5.7 5.1 7.5 6.5 5.7 1.1 1.1 1.0 1.7 1.5 1.4

SA Food Producers Avg. 16.9 14.3 12.5 10.2 9.2 8.3 12.3 10.8 9.8 1.5 1.4 1.3 3.0 2.7 2.5

SSA Food Producers

Zambeef Zambia 112 34.8 11.7 20.5 9.0 6.9 8.1 38.4 14.8 12.8 0.7 0.7 0.7 0.5 0.5 0.5

Innscor Zimbabwe 324 9.2 9.1 9.0 5.5 5.2 4.8 5.4 5.2 5.0 0.4 0.4 0.4 1.2 1.1 1.0

Cadbury Nigeria Nigeria 478 24.5 21.2 19.5 13.0 11.6 10.5 17.0 14.8 13.4 2.4 2.3 2.1 4.4 4.1 3.8

Nestle Nigeria Nigeria 3 890 27.5 23.7 21.7 19.5 16.6 14.4 22.6 19.3 16.5 4.8 4.2 3.6 15.0 13.2 11.9

Unilever Nigeria Nigeria 717 31.0 22.9 19.5 17.4 14.8 12.5 24.9 19.7 16.3 2.3 2.1 1.9 14.1 13.1 12.1

UACN Nigeria 474 14.5 11.7 9.9 7.7 6.6 5.4 8.9 7.6 6.4 1.5 1.3 1.2 1.7 1.6 1.5

FMN Nigeria 693 15.6 11.7 10.9 7.5 6.4 5.8 11.3 9.4 7.8 0.7 0.7 0.6 1.3 1.3 1.3

Fan Milk Ghana 181 43.3 32.1 18.4 20.9 16.8 10.7 33.7 24.8 13.7 3.6 3.1 2.9 7.5 6.8 5.5

SSA Food Producers Average 25.1 18.0 16.2 12.5 10.6 9.0 20.3 14.5 11.5 2.1 1.8 1.7 5.7 5.2 4.7

EM Food Producers

JBS Brazil 13 248 20.4 11.3 9.8 6.6 5.9 5.4 9.8 8.8 7.8 0.5 0.5 0.4 1.5 1.4 1.3

Brasil Foods Brazil 22 928 31.9 22.1 18.9 14.9 12.7 11.3 21.2 17.6 15.3 2.0 1.9 1.7 3.6 3.3 3.1

Minerva Brazil 740 26.1 7.9 5.8 6.7 5.4 4.8 7.3 5.9 5.3 0.7 0.5 0.5 2.0 1.8 1.7

M Dias Branco Brazil 4 277 18.3 15.2 12.5 13.9 11.9 10.5 16.4 13.7 11.2 2.4 2.2 2.0 3.6 3.2 3.0

Marfrig Global Foods Brazil 1 192 20.0 18.6 11.5 6.4 5.6 5.1 9.8 8.2 7.1 0.5 0.5 0.4 1.1 1.2 1.2

Want Want China China 17 219 24.2 21.0 18.9 16.8 14.5 12.8 19.0 16.2 14.3 4.2 3.8 3.4 7.6 6.6 6.0

Inner Mongolia Yili China 12 460 17.9 14.8 12.6 12.2 10.0 8.5 15.4 12.3 10.4 1.3 1.1 1.0 3.8 3.4 2.8

China Mengniu Dairy China 7 840 23.0 18.5 15.7 12.6 10.5 9.1 20.0 16.0 13.4 1.0 0.9 0.8 2.3 2.1 1.9

China Yurun Food China 846 45.0 43.4 18.3 19.4 12.3 9.7 111.6 20.7 13.8 0.7 0.5 0.4 0.4 0.4 0.4

Nutresa Colombia 5 930 38.1 33.9 30.1 16.5 15.4 14.3 23.5 21.2 19.9 2.2 2.1 1.9 1.6 1.5 1.5

Grupo Bimbo Mexico 13 459 30.0 23.5 19.7 12.2 10.4 9.8 17.8 14.5 13.1 1.3 1.2 1.1 3.5 3.1 2.9

Indo Food Agri Singapore 835 11.3 8.2 8.2 7.5 7.0 5.9 10.4 9.9 7.9 1.7 1.6 1.4 0.7 0.7 0.6

EM Food Producers Average 25.5 19.9 15.2 12.1 10.1 8.9 23.5 13.7 11.6 1.5 1.4 1.3 2.6 2.4 2.2

Universe Average 22.5 17.4 14.6 11.6 10.0 8.8 18.7 13.0 11.0 1.7 1.5 1.4 3.8 3.4 3.1

Source: Bloomberg.

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Sector Performance Metrics Comparisons

Mkt Cap Sales Growth EPS Growth ROE Dividend Yield

SA Food Producers Country USDm 2015F 2016F 2017F 2015F 2016F 2017F 2015F 2016F 2017F 2015F 2016F 2017F

Tiger Brands SA 4 792 8% 9% 8% 8% 15% 13% 22% 22% 23% 3% 3% 4%

Pioneer Foods SA 2 753 6% 7% 7% 52% 16% 14% 17% 19% 20% 2% 2% 2%

AVI SA 2 430 9% 7% 8% 10% 9% 10% 30% 30% 30% 4% 5% 5%

Oceana SA 1 027 8% 11% 11% 7% 13% 15% 34% 33% 31% 4% 5% 5%

Clover Industries SA 326 5% 3% 8% 10% 22% 14% 10% 11% 12% 2% 2% 2%

Astral SA 652 10% 8% 9% 83% 10% 23% 27% 26% 26% 5% 5% 7%

Rainbow SA 1 434 26% 7% 7% 274% 44% 16% 6% 8% 10% 3% 3% 3%

Tongaat SA 1 988 6% 8% 8% 22% 17% 16% 13% 13% 13% 3% 3% 4%

Illovo SA 1 105 2% 7% 10% 13% 18% 18% 15% 16% 18% 4% 5% 6%

SA Food Producers Average 9% 7% 9% 53% 18% 15% 19% 20% 20% 3% 4% 4%

SSA Food Producers

Zambeef Zambia 112 15% 11% -4% -50% 198% -43% 3% 4% 5% 0% 0% 1%

Innscor Zimbabwe 324 8% 4% -2% 59% 2% 2% 16% 16% 17% 2% 2% 2%

Cadbury Nigeria Nigeria 478 -7% 8% 8% -44% 16% 9% 21% 29% 22% 3% 3% 3%

Nestle Nigeria Nigeria 3 890 11% 15% 16% 10% 16% 9% 61% 64% 62% 3% 4% 4%

Unilever Nigeria Nigeria 717 1% 9% 8% -16% 35% 17% 38% 52% 54% 3% 3% 4%

UACN Nigeria 474 9% 15% 10% 1% 25% 18% 12% 13% 15% 4% 5% 6%

FMN Nigeria 693 12% 11% 11% 76% 34% 7% 10% 11% 11% 4% 6% 8%

Fan Milk Ghana 181 15% 8% 35% 74% 16% 19% 29% 1% 1% 2%

SSA Food Producers Average 7% 11% 7% 5% 45% 12% 22% 26% 27% 3% 3% 4%

EM Food Producers

JBS Brazil 13 248 25% 12% 8% 76% 80% 15% 7% 12% 12% 1% 1% 2%

Brasil Foods Brazil 22 928 5% 8% 8% 61% 44% 17% 12% 15% 17% 1% 2% 2%

Minerva Brazil 740 26% 25% 10% 119% 232% 35% 15% 34% 33% 0% 2% 2%

M Dias Branco Brazil 4 277 6% 10% 9% 15% 21% 21% 19% 22% 24% 2% 2% 2%

Marfrig Global Foods Brazil 1 192 11% 13% 9% 86% 227% 63% -2% 7% 12% 0% 0% 1%

Want Want China China 17 219 7% 11% 11% 4% 15% 11% 35% 35% 35% 3% 3% 3%

Inner Mongolia Yili China 12 460 14% 13% 13% 26% 21% 18% 22% 24% 23% 2% 3% 3%

China Mengniu Dairy China 7 840 19% 12% 11% 18% 24% 18% 12% 12% 13% 1% 1% 1%

China Yurun Food China 846 -4% 23% 19% 35% 172% 137% 0% 2% 3% 0% 0% 1%

Nutresa Colombia 5 930 11% 7% 8% -12% 12% 13% 5% 6% 7% 1% 2% 2%

Grupo Bimbo Mexico 13 459 8% 7% 3% 40% 27% 19% 13% 14% 15% 1% 1% 1%

Indo Food Agri Singapore 835 12% 6% 12% 65% 9% 27% 6% 6% 8% 1% 1% 1%

EM Food Producers Average 12% 12% 10% 44% 74% 33% 12% 16% 17% 1% 1% 2%

Universe Average 9% 10% 9% 34% 46% 20% 18% 21% 21% 2% 3% 3%

Source: Bloomberg

9


Performance, Profitability & Growth of SSA Consumer Stocks

Absolute performance 3-months Absolute performance 1 year

Source: Bloomberg. Source: Bloomberg.

12m Trailing EBITDA Margins 12m Trailing ROIC

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10


KEY GROWTH DRIVERS IN SSA FOOD SECTOR

The Sub Saharan African (SSA) region offers huge latent demand for consumer products

on the back of a plethora of factors that are acting to drive the emergence of middle class

consumers. Some of the key factors include (i) rapid GDP growth, (ii) strong population

growth rates, (iii) bottom-heavy demographics; and (iv) improved urbanisation.

1. RAPID GDP GROWTH. According to the IMF, SSA is expected to continue registering

growing GDP growth rates averaging c5.5% as economies are expected to benefit

from robust domestic demand. The African region has been one of the fastest

growing as it is supported by natural resources. The demand for commodities from

nations such as China has largely driven foreign direct investments (FDI) in the

region. While GDP per capita levels in Africa remain low compared to Developed

and EM standards, there is a solid room for growth. On average, GDP per capita

levels of about USD8k in Africa tend to lag those of developed countries, averaging

around USD25k. The IMF expects GDP per capita in most African countries to

register an average 2013-17F CAGR of 6%, compared to 3.5% for most developed

markets. Overall, improvements in GDP per capita are expected to continue driving

consumer demand across Africa.

2015F GDP Growth Rates in SSA GDP per capita (USD/pp) in African States

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2. STRONG POPULATION GROWTH. Africa's population is growing rapidly. A number of

countries in the developed world are either experiencing slow or negative

population growth. However, the population picture in Africa is one that presents

many opportunities for sustained expansion in consumer markets given that the

continent has some of the highest population growth rates ranging on average

2.0%-3.0%. In 2005, Africa had an estimated population of more than 920m,

which increased to an estimated 1bn in 2010. It is forecasted that the population

in Africa will reach c2bn by 2050.

11


3. BOTTOM-HEAVY DEMOGRAPHIC PROFILES. Most African countries have young

populations with average ages of well below 35. With a young and increasing

population, Africa presents a growing consumer base that will have a sustained

demand for consumer goods. Generally, bottom-heavy demographic profiles tend

to support sustained demand for company products as brand loyalty and consumer

habits are formed at an early age. In addition, a comparison between population

pyramids of the developed countries with that of developing nations clearly shows

that there is a rapid increase in the number of young people in developing countries

(<15 years) as a result of high birth rates. This implies that virtually all future world

population growth will take place in developing countries.

4. IMPROVING URBANISATION LEVELS. Over the last two decades, the African population

has become more urbanised. Africa has historically been characterized as a rural

and sparsely populated region with few developed urban centres. Mckinsey

estimates that by 2050 almost two thirds of the population will live in cities vs. 40%

in 2010. According to urbanization trends elsewhere in the developing world,

most national wealth will be consolidated in these few urban mega-cities. It is

expected that urbanisation will also drive African consumers to purchase more

goods and services.

Overall, the above-mentioned factors support the emergence of a growing middle

class in Africa. According to a report by the African Development Bank, approximately

123million Africans are now classified as 'middle class' (daily per capita expenditure

of between USD4 and USD20), 30% higher than in 2000. African Development Bank

further estimates that there are a total of 190.6 million people on the continent that

spend between USD2 and USD4 daily, many of whom will join the middle class over

the next decade.

12


MACRO ECONOMIC OVERVIEW

SOUTH AFRICA: The risk of slow growth

The South African economy has been under some pressures on the back of a number of

factors such as slow GDP growth (c2.3%), rising inflation and a weakening rand. This

has in turn negatively impacted consumer and business confidence which are currently

at negative levels.

The IMF has recently cut its GDP forecast for SA from 1.7% to 1.4% in 2014 and from

2.7% to 2.3% in 2015. The reduction in the GDP growth was attributed to among other

factors the country's political situation, industrial actions in the mining, manufacturing

and agricultural sectors. The rating agency S&P has also downgraded the country's

sovereign rate from BBB to BBB-, which is only one notch above junk status,

highlighting that SA's political, social and economic conditions have worsened and

are largely attributed to domestic rather than international factors.

Inflation is currently above the 3-6% SARB target. Inflation reached 6.4% in August

2014. In 2015, inflation is expected to decrease to the upper 5% levels as the central

bank implements measures to control it. Food inflation, in particular, has been increasing

rapidly since the beginning of the year reaching 9.5% in August. Local commodity

prices including wheat and maize have been increasing over the past 5 years. However,

since the beginning of 2014, maize prices have fallen by about 45%. On the other

hand, global commodity prices of maize, soybeans and wheat have not increased

dramatically over the past years and this trend is expected to continue going forward.

Overall, consumer confidence in SA has been decreasing over the past 5 years. Factors

impacting consumer confidence include inflation (most specifically food inflation),

slow government spending, high interest rate and high fuel prices. SA consumers

have been under pressure as the prices of consumer goods continue to increase due

to the overall unfavourable condition of the local economy. Consumer disposable income

is being impacted by inflation, increasing debt levels, weak economic growth, tighter

lending policies, among other factors.

NIGERIA: New headwinds threatening growth

Nigeria has become the largest economy on the African continent after it rebased its GDP

from 1990 to 2010. As a result, the estimated size of the economy increased by 89%.

The rebasing exercise has revealed that Nigeria's economy is more diversified than

initially assumed, with the non-oil sectors such as agriculture, trade and services

having a bigger weight on GDP contribution. The country registered a nominal GDP of

USD510bn in 2013 vs USD350bn of SA in the same year. Nigeria's population is c174m

and it is also expected to grow at a constant rate of 2.75% p.a. On the other hand, while

the rate of the urban population growth was higher over the past years, it appears that

urbanization rate is now slowing at around the low 4% levels.

Good fundamentals but challenges remain. Unemployment is one of the big challenges

in Nigeria. More recently, the country has been facing security concerns in the North-

eastern part of the country, as more violent attacks by Islamist extremist leader Boko

Haram leader are faced. In addition, the 2015 presidential elections could possibly

increase the risk of local conflicts.

13


ZAMBIA: Growth to remain strong despite some uncertainties

Zambia has had a strong economic growth over the past years, and this trend is expected

to continue going forward. The positive economic performance is mostly driven by the

growth in the construction, trading and mining, transport and communications and

the public sector. Zambia is one of Africa's largest producers of copper, which accounts

for about 70% of the country's earnings exports.

Inflationary pressures and ZMW weakness. On March 2014 the Central Bank of Zambia

implemented a tight monetary policy by which it increased interest rates by 50 basis

points to 10.25% from 9.75%, as a measure to control inflation. Inflation reached

7.0% in 2013 and it's currently at around the 8.0% levels. Inflation was mainly driven

by non-food items, as well as the effects of the ZMW currency depreciation against the

USD.

ZIMBABWE: More of a political story…

Zimbabwe's economy declined during the 2000-09 period on the back of political

instability, hyperinflation, limited FDI and poor policy decisions. Only after the

implementation of the multi-currency system in 2009 did the economy start recovering

and reached a GDP growth of 10.6% in 2012.

However, the economy seems to be returning to its fragile position as GDP decreased to

3.3% in 2013 and is expected to further decrease to 3.1% in 2014.Several factors are

associated to the economy slowdown and these include liquidity concerns, deflation,

policy uncertainty, weak FDI and high cost of doing business (indigenization policy).

We also note that Zimbabwe's unemployment rate is among the highest in the world at

about 95% (as of the last collected data in 2009). However, it should be considered

that the informal sector is very active in Zimbabwe, with about 84% of the jobs allocated

in the informal sector, according to the Labour Force Survey. Overall, the consumer

environment is being negatively affected by the deteriorating economic environment.

Demand is slowing down and there also remain uncertainties around indigenisation

laws in the country.

14


MACRO ECONOMIC TABLES

Macro-Economic Data

GDP (%) 2012 2013 2014F 2015F 2016F 2017F 2018F

South Africa 2.5 1.9 1.4 2.3 2.8 2.7 2.7

Zimbabwe 10.6 3.3 3.1 3.2 3.9 4.3 4.4

Kenya 4.6 4.6 5.3 6.2 6.4 6.5 6.6

Botswana 4.3 5.9 4.4 4.2 4.1 4.2 4.1

Zambia 6.8 6.7 6.5 7.2 7.7 7.0 6.5

Nigeria 4.3 5.4 7.0 7.3 7.2 7.1 6.9

Namibia 5.0 4.3 4.3 4.5 4.6 4.6 4.6

Tanzania 6.9 7.0 7.2 7.0 7.1 7.0 6.9

Uganda 2.8 5.8 5.9 6.3 6.5 6.7 6.9

Inflation (%)

South Africa 5.7 5.8 6.3 5.8 5.5 5.3 5.3

Zimbabwe 3.7 1.6 0.3 1.2 1.8 2.4 2.5

Kenya 9.4 5.7 7.3 6.0 5.1 5.0 5.0

Botswana 7.5 5.8 4.8 5.4 5.4 5.3 5.3

Zambia 6.6 7.0 8.0 7.8 6.5 5.5 5.0

Nigeria 12.2 8.5 8.3 8.7 8.2 7.5 7.0

Namibia 6.7 5.6 5.9 5.8 5.6 5.5 5.5

Tanzania 16.0 7.9 5.9 4.9 4.9 4.9 4.9

Uganda 14.0 5.0 5.5 5.9 5.4 5.0 5.0

Population (mn)

South Africa 52.3 53.0 53.7 54.4 55.2 55.9 56.6

Zimbabwe 13.0 13.1 13.3 13.4 13.6 13.7 13.9

Kenya 40.7 41.8 42.9 44.1 45.3 46.4 47.7

Botswana 2.1 2.1 2.1 2.1 2.2 2.2 2.2

Zambia 14 15 15 16 16 17 17

Nigeria 165 169 174 179 184 189 194

Namibia 2.2 2.2 2.2 2.2 2.2 2.3 2.3

Tanzania 44.9 46.3 47.7 49.1 50.6 52.1 53.7

Uganda 35.7 36.8 38.0 39.3 40.6 41.9 43.3

Source: IMF.

15


Company Notes

16


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Still Leveraged…(YE15PT of NGN52.00 and Hold Recommendation)

4 Flour Mills of Nigeria (FMN) is the largest wheat flour producer in Nigeria. The company

has been expanding rapidly (revenue FY10-14 CAGR of 13%) and its

diversification and expansion strategy has revolved around its port concession

(via imported products). However, growth has been debt-funded with net gearing

reaching 162% in FY14 (ND/EBITDA of 4.2x). Finance costs have been a strain on

the earnings performances and 1H15 results showed a 21% and 28% fall in PBT and

PAT, respectively on increased finance charges.

4 Unicem comes to the rescue. FMN was recently involved in the M&A wave that

Lafarge and Holcim are spearheading in Africa. FMN will be disposing its 30%

stake in Unicem and liquidating a NGN11.5bn loan it advanced to Unicem.

The group has indicated that the deal will generate a total net cash in of

cNGN51bn. Overall, we view this transaction positively as it allows some

deleverage, generates a capital gain and simplifies the company's structure

(exit from the cement sector). Net gearing should fall from 169% in FY14 to

87% in FY15F as a result of the deal. Meanwhile, we estimate FMN to post a

revenue and EBIT CAGR14-18F of 9% and 16%, respectively.

4 Multiples look cheap but downside risks are still high. We have valued FMN using a

combination of a DCF and SOTP, setting our YE15PT at NGN52/share (7% upside).

The stock is now trading at FY16F PER of 10.6x and FY16F EV/EBITDA of 5.9x,

which looks cheap vs its peers. However, we remain wary on the group's aggressive

capex (particularly in green-field agricultural projects), limited cash flow

generation and high debt level. Other risks affecting the business include (i)

insecurity issues in Nigeria and (ii) intensifying competition (DFM and

Honeywell). Triggers to the upside include (i) favourable soft commodity prices

and (ii) faster earnings delivery in new projects. HOLD.

Stock data

Price (NGN): 48.70 Price Target (NGN): 52.00

Nº of shares (mn): 2 386 Bloomberg: FLOURMIL NL

Market Cap (NGNmn): 116 064 Market Cap (USD mn): 678

Avg.Daily Vol. [NGN '000]: 39 036 Avg.Daily Vol. [USD '000]: 228

Net Debt/EBITDA'14 4.2 Free-float: 40.7%

EPS growth ('14-'18F) 40% ROE'14: 16%

Major shareholders: Excelsior Shipping (52.2%); Stanbic Nominees (7.2%)

March YE 2013 2014 2015F 2016F 2017F 2018F

Diluted EPS (NGN)(1) 2.8 1.9 2.2 4.6 6.4 7.5

PER 24.8 25.2 21.7 10.6 7.7 6,5

Dividend Yield 2.8% 4.3% 3.0% 2.4% 3.3% 3.9%

FCF Yield -4.8% -8.1% -0.9% 2.6% 5.0% 6.9%

EV/EBITDA 9.2 7.3 6.3 5.9 5.3 4.7

(1) Adj for abnormal items.

EQUITY RESEARCH

Flour Mills of NigeriaFood

HoldHigh-Risk

November 2014

Nigeria

FMN vs. NSE ALSI vs. S&P

Africa Index

Available on our website:

www.bpiequity.bpi.pt, BPI Online

and Bloomberg, at BPAF.

Source: Bloomberg.

Historical Recommendation

Date Recommendation

11-Apr-12(1) Buy

(1) Initiating Coverage.


Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

18


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1H15 EARNINGS-GROWTH BOUND BY A DEBT CURSE

FMN published its 1H15 results, showing a rather flat performance on the topline. Revenue

declined 1.5% yoy to NGN166bn and the GP margin was stable at 10.5% vs

10.7% in 1H14. All in all, gross profit was down 2.6% yoy to NGN17.4bn. We

attribute the stability of the gross margins to the favourable movement in the

prices of soft commodities such as wheat and raw sugar at the international markets.

Wheat prices are a major driver given that the Food business (wheat milling) is a core part

of the business, constituting c80% to group revenues.

Evolution of Revenues (NGNm) Y15F Revenue Contribution

Source: BPI Capital Africa.Source: BPI Capital Africa, Company.

Evolution of Group Margins

Source: Company, BPI Capital Africa.

Financial performance dented by a 79% increase in finance costs. 1H15 EBIT increased

12.5% yoy to NGN12.4bn, with margins rising from 6.6% in 1H14 to 7.5%. This

improvement was mainly driven by a 10% decline in opex. However, this gain was

not reflected on the bottom line as finance charges surged 80% yoy to NGN10.2bn.

The ND/Equity rose to 190% in 1H15 from 169% in FY14 due to a 15.7% increase

in gross debt between FY14 and 1H15. We highlight that leverage had been increased to

fund FMN's expansion drive in its agricultural projects (sugar, pasta, edible oils and rice).

Overall, 1H15 PBT and PAT declined by 21% and 28%, respectively. Our view is that the

company's gearing (169% in 2014) has been a strain on the earnings performances.

Comparison of FY14 Divisional

GP Margins


12% 13% 14% 15%

Agro-A llied

Port Operations

Group

Foods

Others (incl. RealEstate)

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UNICEM DISPOSAL: A VALUE ACCRETIVE TRANSACTION

In a recent development, FMN has announced that it will be disposing its 30% stake in

Unicem, a cement producer in Nigeria with a capacity of 2.5mtpa. The transaction has

been triggered by Lafarge's consolidation of businesses in Africa.

We highlight that FMN had also granted to Unicem a shareholder loan of

NGN11.5bn to finance projects at the green field Cement Plant at Mfamosing

(Calabar). The loan had no fixed term or repayment date and attracted an interest

at 90 day NIBOR plus 2%.

Salient Terms of the Transaction

- FMN has indicated that the transaction will generate a total net cash inflow of between

NGN47bn and NGN55bn (USD270m-USD320m) in the next 15 months. We have used

a mid-point of NGN51bn as the transaction amount;

- Subtracting the value of the shareholder loan (NGN11.5bn), will imply a valuation

of Unicem of NGN39.5bn;

- We have valued Unicem at NGN30.9bn, using a target FY15F EV/tonne of

USD250 and production capacity of 2.5mt; and

- Our valuation implies a profit on disposal of NGN8.6bn.

Financial Impact of Transaction

- On the B/S, the transaction implies a liquidation of two financial assets (investment

in associate + shareholder loan to Unicem);

- On the P&L, FMN will book a once off gain on disposal in FY15F (NGN8.6bn).

However, FMN will no longer book any gains associated to (i) investment income

on the shareholder loan and (ii) income from associate (1H15 results show that

Unicem had returned to profitability).

Overall, our view on the transaction is positive as it implies an exit from the cement sector thus

enabling FMN to focus on its core business of food production. Further, the cash inflow will

be directed towards (i) funding the growth in the food and agro-allied businesses and

(ii) debt expulsion. An area of concern has been the debt burden on the group's B/S.

We estimate a reduction in net gearing from 169% in FY14 to 87% in FY15F. Interest

expenses will also likely moderate downwards in FY16F on reduced borrowings.

FMN Interest Cover and Net Gearing FMN Gearing Levels

Source: BPI Capital Africa, Company. Source: Bloomberg, Company.

20


UPDATE ON KEY OPERATING DIVISIONS

Food Businesses (78% of FY14 Revenues)

The food category is the mainstay of the business and largely focuses on branded consumer

products (flour, pasta, noodles, semovita, sugar, rice, edible oils, snacks and breakfast

cereals) as well as branded intermediate products (bread flour, biscuit flour, sugar and

edible oils). Under this category, FMN operates Nigerian Eagle Flour Mills (51%),

Niger Mills Division (100%), Northern Nigeria Flour Mills (52.6%), Golden Pasta

Division (100%), Golden Noodles Division (100%) and Golden Sugar (100%).

Growth strategy has been hinged on capacity expansion and new product developments.

The food division has registered strong FY10-14 revenue CAGR of 19%. In FY14,

food revenues increased by 18% yoy to NGN259bn. Top-line growth has largely

been driven by new capacity additions such as (i) the expansion of Apapa Flour

Milling capacity, (ii) commissioning additional pasta lines, (iii) increased flour milling

capacity in Calabar and; (iv) volume ramp up at the new sugar refinery (750,00mtpa).

Food Revenue & PBT Margin Progression

Source: BPI Capital Africa, Company.

In the outlook period, we expect the capacity additions to continue supporting volumes

growth and FY14-18F revenue CAGR of 9.6%. The major risk in our view is competition

from other food producers such as Dangote Flour Mills (Tiger Brands) and Honeywell

- Dangote Flour Mills is currently undergoing a restructuring exercise while Honeywell

is also ramping up production. Nonetheless, FMN has been also developing its

product range, launching high margin wheat-based FMCG products and this should

be positive for margins. We expect the PBT margin to remain somewhat stable in the

outlook period at c2.6%.

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Global Wheat Prices (USD/tonne)

Source: BPICapital Africa.

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Competing Products: Shelf at Shoprite (Lagos) Informal Retail Market in Nigeria

Source: BPI Capital Africa. Source: BPI Capital Africa.

Food - Operational Performance

2012 2013 2014 2015F 2016F 2017F 2018F

Revenues (NGNm) 175 483 221 109 259 821 271 736 305 323 339 824 374 350

yoy 26% 18% 5% 12% 11% 10%

PBT 6 312 10 784 6 071 6 793 7 633 8 835 9 733

yoy 71% -44% 12% 12% 16% 10%

PBT margin 4.0% 4.9% 2.3% 2.5% 2.5% 2.6% 2.6%


Global Maize Prices (USD/tonne) Nigeria, Kano, Maize, Wholesale Price Global Soya Prices (USD/tonne)

(Naira/100 kg)

Agro-Allied Businesses (17% of FY14 Revenues)

The agro-allied segment is mainly involved in the domestic cultivation and processing of

crops such as cassava, sugar cane, soybean, maize, rice and palm oil. This business

unit is critical for the execution of FMN's backward integration strategy. The key

businesses include Premier Feed Mills (62%), Kaboji Farm (100%), Rom Oil Mills

(90%), Agri Palm (100%), Sunti Golden Sugar Estate (100%), Thai Farm International

(75%), Golden Fertilizer (100%), Agri Farms (100%) and Golden rice (100%).

Source: Bloomberg.

22


An aggressive vertical integration approach. The division has registered FY10-14 revenue

CAGR of 30%, benefiting from the ramp up in production capacities. In FY14, agro-

allied revenues increased by 13% yoy to NGN57.6bn. Top-line growth was driven

by new capacity additions. FMN has been expanding its agricultural production

activities and this has entailed the acquisition of a 4,500Ha rice farm on the Niger

River and 3,000ha oil palm plantation. The group has also engaged in several

other investments such as developing additional land in Kaboji Farms (Niger State)

to support expansion in capacity of the Group's feed mills.

Agro Allied Revenue & PBT Margin Progression Nigeria: Total Consumption in MT (Wheat, Corn & Rice)

Demand-driven growth. In the outlook period, we expect the investment in production

to support volumes growth and estimate FY14-18F revenue and PBT CAGR of 9%.

Consumption of all staples is in general, likely to increase in Nigeria (corn, rice,

sorghum, wheat) as disposable income rises and processed food consumption grows.

However, given that there is limited value-addition, we project fairly stable PBT

margins of c3.7%.

Source: BPI Capital Africa, Company. Source: USDA.

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Agro-Allied- Operational Performance

2012 2013 2014 2015F 2016F 2017F 2018F

Revenues (NGNm) 33 159 50 852 57 555 60 849 67 065 73 544 80 862

yoy 53% 13% 6% 10% 10% 10%

PBT 1 530 890 2 250 2 130 2 414 2 721 2 992

yoy -42% 153% -5% 13% 13% 10%

PBT margin 4.6% 1.7% 3.9% 3.5% 3.6% 3.7% 3.7 %


Packaging Business (4% of FY14 Revenues)

FMN wholly owns BAGCO, a packaging business that is involved in the manufacturing

of bags and sacks used to package powder and granular industrial products (cement,

fertilizer, flour, sugar and salt) and open market products (shopping bags and agric

products). Approximately 50% are internal sales and 50% is third party business.

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FY14 results reflect some competitive pressures. BAGCO has been experiencing

challenges on increased competition in the sector. In FY14 revenue declined by

40%yoy to NGN13.6bn and the division registered a loss on NGN140m. We also

highlight that polypropylene is the most important raw material, accounting for

more than 80% of the COGS on average. As a result, margins tend to decline

whenever polypropylene prices increase- the prices are largely driven by oil prices.

Packaging Revenue & PBT Margin Progression Polypropylene Prices (USD/MT)


We expect revenue growth to remain constrained in the outlook period. BAGCO is likely

to face some constraints associated with (i) competition and (ii) high Polypropylene

Prices. We are forecasting FY14-18F revenue and EBIT CAGR of -4.1% and 3.0%,

respectively. EBIT margins are likely to be supported by restructuring efforts. Management

is currently streamlining operations and developing a new product mix.

Source: Bloomberg.

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Packaging - Operational Performance

2012 2013 2014 2015F 2016F 2017F 2018F

Revenues (NGNm) 15 771 22 457 13 595 10 975 9 831 10 572 11 490

yoy 42% -39% -19% -10% 8% 9%

PBT 1 963 1 268 -140 110 197 233 264

yoy -35% -111% -178% 79% 18% 14%

PBT margin 12.4% 5.6% -1.0% 1.0% 2.0% 2.2% 2.3%


Port Operations & Other Businesses (0.4% of FY14 Revenues)

FMN operates a number of support businesses such as the Apapa Bulk Terminal (100%).

We recall that the business was set-up as a Special Purpose Vehicle (SPV) to take

advantage of the concession granted by Nigerian Ports Authority/Bureau of Public

Enterprises to manage and operate Terminals A and B of the Apapa Port Complex.

The business provides a spectrum of facilities in terms of consolidations,

warehousing, open storage areas, packing, repair facilities and even office

complexes. Other businesses include real estate, power and transport.

24


CONSOLIDATED EARNINGS FORECASTS & OUTLOOK

We estimate FMN to register FY14-18F revenue CAGR of 9.0% vs FY10-14 revenue CAGR

of 12.6%. More recently, consumer demand in Nigeria has been showing signs of

weakness on the back of a number of external factors such as insecurity issues and

the negative impact of the fall away of fuel subsidies. Our revenue estimates are on

average 10% below consensus between FY15F and FY18F.

However, we expect FMN to benefit from its aggressive capacity expansion in the food businesses.

There has also been a strong emphasis by the government to support agricultural

production. In our view, this is positive for FMN's vertical integration strategy.

FMN Evolution of Revenue & EBITDA Margin

Port Operations Revenue & PBT Margin Progression Others: Revenue & PBT Margin Progression

Source: BPI Capital Africa, Company. Source: BPI Capital Africa, Company

Port Operations - Operational Performance

2012 2013 2014 2015F 2016F 2017F 2018F

Revenues (NGNm) 2 614 3 513 620 651 775 929 1 115

yoy 34% -82% 5% 19% 20% 20%

PBT 4 816 223 108 41 61 87 121

yoy -51% -62% 47% 43% 39%

PBT margin 6.3% 17.5% 6.3% 7.8% 9.3% 10.8%


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BPI vs. Consensus Estimates (NGNm)

FY15F FY16F FY17F FY18F

BPI Cons. BPI Cons. BPI Cons. BPI Cons.

Sales 344 752 372 324 -7% 383 575 414 954 -8% 425 491 459 689 -7% 468 483 560 392 -16%

Gross Profit 44 969 49 955 -10% 50 141 56 780 -12% 56 065 62 833 -11% 62 378 65 450 -5%

Gross Margin 13.0% 13.4% 13.1% 13.7% 13.2% 13.7% 13.3% 11.7%

EBIT 25 318 24 171 5% 28 277 29 050 -3% 31 812 5 088 -9% 35 675 33 789 6%

EBIT Margin 7% 6% 7% 7% 7% 8% 8% 6%

PBT 21 658 11 790 84% 17 378 15 715 11% 23 728 20 227 17% 27 894 25 088 11%

PBT Margin 6.3% 3.2% 4.5% 3.8% 5.6% 4.4% 6.0% 4.5%

Net Income Adj 5 338 8 012 -33% 10 944 9 448 16% 15 167 12 860 18% 17 902 16 254 10%

EPS Adjusted (NGN) 1.9 3.2 -39% 4.6 3.9 17% 6.4 4.8 32% 7.5 5.4 38%

Source: Bloomberg.

We expect the EBIT margin to increase from 5.8% to a peak 7.5% in FY17F and then

stabilise at 8.0% in the long term. Generally, the outlook of commodity prices (wheat)

forms a significant proportion of FMN's key inputs, implying that a surge in pricing

in the long term presents downside risk to margins. The company's investment in

local sourcing should result in positive margins in the long term. It is also worth

highlighting that the flour milling industry is characterised by over-capacity. There

is a risk that Flour Mills may continue to face competitive threats as competitors

such as Dangote Flour Mills move beyond the restructuring phase. Overall, we are

forecasting a FY14-18F EBIT CAGR of 16% as the group's approach of focusing on new

product categories such as value-added wheat -based products should sustain margins.

Overall, we estimate EPS FY14-18F CAGR of 40% (low base effect in FY14). We have

estimated a dividend pay-out ratio of 60% in the outlook period.

FMN DPS & EPS FNM Total Dividend & Dividend Cover

Source: Company, Bloomberg. Source: BPI Capital Africa, Company.

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The group's net debt position has increased on the back of an aggressive investment drive

in agriculture Greenfield projects, reaching a peak of NGN135bn in FY15. The sale of a

30% stake in Unicem is expected to improve the ND/EBITDA from position from

4.2x in FY14 to 3.0x in FY15F. We estimate a ND/EBITDA of 2.1x by FY18F. Further,

our concern has been on the company's aggressive capex plan that has been

financed through debt. As a result, cash flow has been poor. Management has

however indicated that the capex trend will decline in the outlook period. We are

projecting capex of c NGN18bn by FY18F. FMN should continue to invest in ongoing

food projects such as the sugar project (Sunti Golden Sugar Estates).

FMN Capex Trend Evolution of Return Measures

Source: BPI Capital Africa, Company. Source: BPI Capital Africa,Company.

27


VALUATION & RECOMMENDATION

We have valued Flour Mills using a combination of a Sum-of-the-parts and DCF valuation

method. Our YE15 Price Target of NGN52/share is based on an average of both valuations.

FMN SOTP Valuation (NGNm)

Contribution to EV

Food 2015F EBITDA 27 370

Peer EV/EBITDA 5.4x

Implied EV 147 796 73%

Agro-Allied 2015F EBITDA 6 129

Target EV/EBITDA (x) 7.1x

Implied EV 43 514 22%

Packaging 2015F EBITDA 1 105

Peer EV/EBITDA 8.0x

Implied EV 8 843 4%

Port Operations & Other 2015F EBITDA 120

Peer EV/EBITDA 8.2x

Implied EV 985 0.5%

TOTAL EV 201 139

Net Debt -102 805

Minorities -6 564

Financial Assets 8 452

Total Equity Value 100 221

No. of shares 2 386

YE15 Price Target (NGN) 48.00

Current share price (NGN) 48.70

Upside -0.4%

Source: BPI Capital Africa/Bloomberg

On our DCF model, we have applied the following valuation assumptions.

DCF Assumptions

Risk free rate 13.0%

Risk premium 6.0%

Beta 1.3

Cost of equity 21.0%

Cost of debt 12.0%

Tax rate 34.8%

Cost of debt after tax 7.8%

D/EV 40%

WACC 17.3%

Long term growth 5.0%


Valuation Summary (NGN/sh)

SOTP 48

DCF 55

YE15 Price Target 52

Current share price (NGN) 49

Upside 7%


Contribution to EV


28


DCF (NGNm)

Terminal

Year End 31st March 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F Value

EBIT 25 318 28 277 31 812 35 675 40 693 49 173 57 847 68 447 78 144 89 914 104 271

Depreciation 9 406 9 877 10 370 10 889 11 433 12 005 12 605 10 500 10 400 10 200 10 000

Changes in WC -1 626 -2 898 -2 836 -2 495 -2 562 -3 075 -3 538 -4 046 -4 595 -5 186 -5 816

Capex -26 875 -20 362 -18 000 -17 500 -16 500 -12 000 -10 800 -10 500 -10 400 -10 200 -10 000

Notional tax -8 801 -9 829 -11 058 -12 401 -14 145 -17 093 -20 108 -23 793 -27 164 -31 255 -36 245

Free cash flow -2 578 5 065 10 288 14 167 18 919 29 011 36 006 40 609 46 386 53 474 62 210 532 561

Beta 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3

Debt/(debt + equity) 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%

WACC 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3%

Discount period - 1 2 3 4 5 6 7 8 9 10 10

Discount factor @ WACC 1.00 0.85 0.73 0.62 0.53 0.45 0.38 0.33 0.28 0.24 0.20 0.20

Present value of FCF -2 578 4 319 7 482 8 786 10 005 13 083 13 847 13 318 12 973 12 753 12 652 108 311

Value of Operations 214 950

Net Debt -102 805

Minorities -6 564

Financial Assets 8 452

Equity fair value 114 032

No of shares (m) 2 386

YE15 Price Target (NGN) 55.00

Current share price (NGN) 48.70

Upside 13%

Source: BPI Capital Africa .

We highlight that our DCF takes into account the impact of the Unicem transaction. We therefore excluded (i) financial assets

relating the Unicem loan and (ii) any investment in associates.

Sensitivity Analysis (NGN/share)

Risk Free Rate

12.0% 2.5% 13.0% 13.5% 14.0%

4.0% 58.4 54.4 40.6 47.0 43.6

4.5% 61.0 56.7 52.8 49.0 45.5

Long term growth rate (g) 5.0% 63.8 59.3 55.2 51.2 47.5

5.5% 66.9 62.2 57.7 53.6 49.7

6.0% 70.3 65.2 60.6 56.2 52.1


We have performed a DCF sensitivity analysis to the risk free rate and long term

growth rate, so investors can easily consider different assumptions. We have applied

a risk free rate of 13% in our consolidated model.

29


RECOMMENDATION

Overall, our valuation method point to a YE15PT of NGN52/share, showing a potential

upside of 7% on the current trading price. At a FY16F PER of 10.6x and FY16F EV/

EBITDA of 5.9x, the stock looks cheap relative to its peers. However, we remain

wary on the group's aggressive capex (particularly in green-field agricultural projects).

Key risks affecting the business include (i) insecurity issues in Nigeria and (ii)

intensifying competition (DFM and Honeywell). Triggers to the upside include (i)

favourable soft commodity prices and (ii) faster earnings delivery in new projects.

HOLD.

FMN Equity Story

Positives Negatives

Strong food brands in mass market Complex structure

Increasing exposure to FMCG Huge exposure to commodity prices

Strong track record in expansion Highly geared

of new segments Majority owned by family

Stiff competition in food businesses


FMN Key Metrics

2013 2014 2015F 2016F 2017F 2018F

ROE 16% 16% 15% 16% 16% 17%

ROA 4% 4% 6% 6% 6% 7%

ROIC 7% 6% 8% 8% 9% 10%

Net gearing 129% 162% 87% 84% 75% 65%

Net debt/EBITDA 3.9 4.2 3.0 2.8 2.5 2.1

Interest cover 1.6 1.2 1.7 2.6 3.9 4.6

Asset Turnover 108% 112% 115% 121% 128% 135%

FCF yield -5% -8% -1% 3% 5% 7%

PER 24.8 25.2 21.7 10.6 7.7 6.5

EV/EBITDA 9.2 7.3 6.4 5.9 5.3 4.7


30


Income Statement

CAGR

(NGNm) 2013 2014 2015F 2016F 2017F 2018F 14-17F

Net revenues 301 941 332 143 344 752 383 575 425 491 468 483 9%

EBITDA 27 494 31 860 34 724 38 153 42 182 46 564 10%

EBITDA margin 9.1% 9.6% 10.1% 9.9% 9.9% 9.9%

Dep.+ Provision 9 636 12 485 9 406 9 877 10 370 10 889 -3%

EBIT 17 857 19 375 25 318 28 277 31 812 35 675 16%

EBIT margin 5.9% 5.8% 7.3% 7.4% 7.5% 7.6%

Net financials -11 407 -16 101 -14 480 -10 899 -8 083 -7 781

Investment Income 5 465 5 028 2 216 - - -

Associate/gain on disposal -1 038 -74 8 605 - - -

Taxes -3 337 -2 860 -6 931 -5 561 -7 593 -8 926 33%

Minority interests -794 -756 -785 -873 -968 -1 066 9%

Net profit 6 746 4 612 13 94 10 944 15 167 17 902 40%

Balance Sheet

CAGR

(NGNm) 2013 2014 2015F 2016F 2017F 2018F 14-17F

Net intangibles 4 821 4 703 4 703 4 703 4 703 4 703 0%

Net fixed assets 141 078 169 288 186 756 197 242 204 871 211 482 6%

Financial assets 24 065 22 415 5 383 5 383 5 383 5 383

Inventories 65 650 63 684 66 102 71 436 76 902 82 095 7%

ST Receivables 19 314 17 272 17 927 19 563 21 275 22 956 7%

Other Assets 3 371 3 063 3 063 3 063 3 063 3 063

Cash & Equivalents 21 837 16 825 17 666 18 550 19 477 20 451 5%

Net assets 280 138 297 249 301 601 319 939 335 675 350 134 4%

Equity & Minorities 82 485 83 569 117 958 127 039 139 383 153 875 16%

MLT Liabilities 83 143 85 031 66 399 47 767 34 811 33 166

o.w. Debt 63 075 65 098 46 466 27 834 14 878 13 233

ST Liabilities 114 510 128 649 117 244 145 133 161 480 163 093 6%

o.w. Debt 65 202 86 858 74 006 97 823 109 828 107 061 5%

Equity + Min. + Liab 280 138 297 249 301 601 319 939 335 675 350 134 4%

Cash Flow Statement

(NGNm) 2013 2014 2015F 2016F 2017F 2018F

+ EBITDA 27 494 31 860 34 724 38 153 42 182 46 564

+ Change in working capital 3 062 -3 329 -1 626 -2 898 -2 836 -2 495

= Operating cash flow 30 556 28 531 33 098 35 256 39 346 44 068

Capex -34 635 -32 999 -26 875 -20 362 -18 000 -17 500

Net Financial Inv. - - 51 000 - - -

= C.F. after Investments -4 079 -4 468 57 223 14 894 21 346 26 568

- Net Fin. Expenses -11 407 -16 101 -14 480 -10 899 -8 083 -7 781

- Taxes Paid -3 337 -2 860 -6 931 -5561 -7 593 -8 926

- Dividends Paid -4 771 -5 010 -3 486 -2736 -3 792 -4 475

+ Equity Increase - - - - - -

- Others - - - - - -

Change in net debt (FCF) 23 595 28 440 -32 326 4 302 -1 878 -5 386

Source: Company data (2013, 2014), BPI Capital Africa (F).

31


APPENDIX 1

Source: Company.

32



Held hostage by ZIM headwinds…(YE15 PT of USD0.60 vs YE14 PT of USD0.93; Sell Recommendation maintained)

4 Innscor's FY14 results were worse than expected and confirmed our stance that the

macro environment in Zimbabwe is weighing on consumer demand. FY14 revenues

were 6% below our forecast, hit in most of the divisions, including Bakeries &

Fast Foods (-3%), Distribution Group Africa (-1%) and SPAR (-4%).While Innscor

has a regional expansion strategy, Zimbabwe still represents 80% of its revenues.

The IMF expects Zimbabwe to post a 1.0% GDP growth in 2015 (0.5% in

2016) and conditions on the ground should remain difficult with low business

activity and scarce liquidity - consumer names should continue to feel the pinch.

4 Restructuring efforts have intensified but our concerns remain. Innscor has embarked

on various restructuring efforts in its key divisions, which triggered some

management changes. The company has a new CEO (former CEO of the Ellerines

in SA) and has a clear restructuring mandate aimed at reducing the cost base

and driving efficiencies across the group. However, our concerns around low

cost competition remain, especially in bakeries, fast food and DGA. We have

cut our group EBITDA estimates by an average of 17% in FY15F-FY18F, leading

us to forecast a 6% CAGR14-18F. Innscor will continue to generate cash.

4 With our revised numbers, our SOTP valuation points to a YE15 PT of USD0.60, which

implies 18% downside on the current share price. We maintain our view that

Innscor has a sound business model, with strong brands, but is operating

under tough macro conditions in Zimbabwe. In our view, the current risk return

is negative. Further, Innscor's earnings capabilities are likely to remain thwarted

given the margin pressure emanating from intensifying competition. The stock

continues to be trading at discount to its SSA and EM peers, which however,

we believe is justifiable given the ZIM risk and low earnings visibility. SELL.

Stock data

Price (USD): 0.66 Price Target (USD): 0.60

Nº of shares (m): 542 Bloomberg: INN: ZH

Market Cap (USDm): 357 Avg.Daily Value [USD '000]: 119

Net Debt/EBITDA'14 0.3 Free-Float: 51%

EPS CAGR ('14-'18F): -9% ROE'14: 29%

Major Shareholders: ZMD Investments (19%); HM Babour (18%); Old Mutual (6%)

June YE 2013 2014 2015F 2016F 2017F 2017F

EPS (USc)(1) 7.2 1.2 5.2 6.5 7.2 7.6

P/E 10.2 18.2 12.7 10.1 9.2 8.7

Dividend Yield 2.5% 2.0% 1.3% 1.9% 2.3% 2.8%

FCF Yield -0.1% 2.3% 0.7% 1.2% 1.5% 1.8%

EV/EBITDA 7.6 7.0 6.6 5.9 5.2 4.5

(1) Our EPS numbers do not incorporate the dilutive impact of the indigenisation

transaction.

EQUITY RESEARCH

InnscorFood

SellHigh-Risk

November 2014

Zimbabwe

Innscor vs. ZSE vs. S&P Africa

Index




Source: Bloomberg.


Date Recommendation

11-Nov-13 (1) Hold

18-Mar-14 Sell



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

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-

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1 200

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2012 2013 2014 2015F 2016F 2017F 2018F

Bakeries & Fast Foods Distribution Group Africa SPAR

M iiling & Pro tein Househo ld Goods Associates & Other Bus.

Corporate Services

FINANCIAL PERFORMANCE REFLECTS A CONSTRAINEDCONSUMER ENVIRONMENT

Innscor's FY14 results were worse than expected. It is difficult to make prior year

comparisons because of a change in the accounting method, resulted from changes

in corporate governance structures. Innscor now consolidates globally National

Foods (37.5% interest) and Irvine's (49%). However, we note that FY14 revenues

of USD1.011bn were 6% below our forecast of USD1.080bn. Overall, results

confirmed our stance that the macro environment in Zimbabwe is weighing on

consumer demand. There was top-line downward pressure in most of the divisions

including Bakeries & Fast Foods (-3%), Distribution Group Africa (-1%) and SPAR

(-4%). The Household Goods (+2%) was helped by price discounting while Natpak

(+65%) benefited from capacity increases.

Progression of Divisional Revenues


Margin erosion. We also highlight that FY14 EBITDA of USD80.6m (EBITDA margin

of 8.0%) was 6% below our estimate of USD85m as all divisions experienced a

decline in margins. It is clear that the group has faced a challenging trading

environment. Management advised that in many cases, divisional gross profit margins

were reduced in an effort to stimulate revenues given a backdrop of reduced

disposable incomes. EBIT of USD96.2m was 44% ahead of our estimate of

USD66.8m due to FV gains of USD40.8m (as a result of a change in the accounting

method, a FV gain of USD39m was credited to the P&L, which is the difference

between the market value and the carrying value of group's existing interest at the

date of consolidation). All in all, after adjusting for FV gains, our adj. EPS came in at

US3.64c (42% below our estimates)

REVIEW OF KEY OPERATING DIVISIONS

Milling & Protein (48% of Revenues, 52% of EBITDA)

The division encompasses National Foods, Irvine's and Colcom. In FY14, the business

segment benefited from a strong performance from National Foods and Colcom:

- National Foods revenues were up 11% yoy to USD343m and volumes increased 8%

yoy to 538kt. The growth at National Foods was on the back of (i) a successful

Innscor FY14 EBITDA Contribution

Source: Company.

Main Sources of Income for

Zimbabweans

Source: Finscope.

35


strategic raw material purchasing programme; and (ii) improved plant efficiencies

that boosted margins. The business registered PAT growth of 20.4%.

- Colcom showed a strong recovery, following a difficult FY13. Revenues increased

10% yoy to USD67m largely driven by volumes (+16% yoy). PAT increased

219% as the prior year has abnormal once off write down of assets and expense

provisions of cUSD3.9m. On an adjusted basis, PAT growth was 13%.

In the outlook period, we estimate Milling & Protein revenues and EBITDA FY14-18F CAGR

of 7.0% and 5.0%, respectively. While the division will continue to register positive

revenue growth, the major risk is increased competition, particularly from SA.

Generally, the weakening ZAR has enabled SA millers to be more competitive in the

Zimbabwe market. This has put pressure on National Foods to counteract the flood of

imports by adjusting its prices. All in all, we have increased our revenue estimates by an

average of 8% between FY15F and FY18F, but cut our EBITDA estimates by an average of 7%.

Bakeries & Fast Foods (26% of Revenues, 31% of EBITDA)

The consumer environment in Zimbabwe has a negative impact on the Bakeries and Fast

Foods division. In FY14, revenues declined 3% yoy to USD262m while the EBITDA

margin declined from 12.4% to 9.6%, reflecting competitive pressures. Bread

volumes in the Bakery operations declined 10% yoy while Fast Food Zimbabwe

operations recorded customer counts that were 2% lower. In the region, the Fast

Food operations reported an increase in customer counts of 4%. The two key

factors affecting the division are:

- Falling demand in the Bakeries business. Sales volumes in the bakeries business

have been declining on weak demand and Innscor is now scaling back and has

consolidated all bakery production operations in Harare at the Graniteside facility

while the other site has been put under care and maintenance. In addition,

the termination of the OK Zimbabwe deal has also hit volumes. OK Zimbabwe

is now going it alone on its in house bakeries that were previously run by

Innscor. The retailer is now looking to run its own in store bakeries. This

represents a direct revenue loss for Innscor's Bakeries business.

- Competitive threats in the fast food industry have intensified. The mushrooming of

new players such as KFC and other local groups (African Fried Chicken, TN

Grill and Chicken Express) is a major threat as this may decrease profitability

for the industry. We expect a spat of price competition activities in the form of

promotional offers and discounts to be the order of the day.

All in all, we expect the division to register revenue and EBITDA FY14-18F CAGR of

3.8% of 2.2%, respectively. We are forecasting EBITDA margins to decline from 9.6%

in FY14 to an average of 8.0% in the outlook period. We have cut our revenue and

EBITDA estimates between FY15F and FY18F by an average of 5% and 29%, respectively.

SPAR (16% of revenues, 0% of EBITDA)

The retail division continues to disappoint. Despite a number of restructuring efforts,

SPAR registered an EBITDA loss of USD4.9m in FY14. We also highlight that the

SPAR Distribution Centre performance was disappointing given that a considerable

number of independent stores were unable to maintain any reasonable trading patterns.

We expect the retail division to continue facing a number of headwinds and estimate a FY14-

18F revenue and EBITDA CAGR of -1.2% and 1.0%, respectively. We have cut our revenue

and EBITDA estimates between FY15F and FY18F by an average of 18% and 55%, respectively.

Analysis of Divisional EBITDA

Margins


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ZAR/USD Exchange Rate

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Distribution Group Africa (9% of Revenues, 10% of EBITDA)

In FY14, the division reported a volume growth of 17% although this translated to

a 1.0% decline in revenues to USD93m. This was mainly a result of a lower average

selling price per unit due in part to a weakening ZAR. Opex also grew ahead of

revenue growth and as a result, trading profits declined 9% on FY13.

Looking forward, we expect the market to become more price sensitive due to the

entrance of a number of independent traders/distributors in the industry. We have

cut our revenue and EBITDA estimates by an average of 10% and 11% respectively

between FY14F and FY18F. We expect margins to decline to 8.6% in FY14 to an average

of 8.1% in the outlook period.

Household Goods (5.3% of revenues, 0.2% of EBITDA)

The division registered a 2.4% increase in FY14 revenues to USD53m. The growth was

driven by TV Sales & Home which reported an increase in revenue of 6%, benefiting from

a growing debtors book. On the contrary, operations at Capri were severely impacted

by falling local disposable incomes and despite volumes showing only a 3% decline,

this was at the expense of gross margin which was reduced to stimulate demand.

Overall, EBITDA margin declined from 22% in FY13 to 19%.

We expect growth in this division to remain constrained given the tight liquidity in

the market. We have cut our revenue and EBITDA estimates by an average of 4.0%

and 22% respectively between FY14F and FY18F. We estimate a FY14-18F revenue

and EBITDA CAGR of 6.7% and 3.0%, respectively.

Natpak and other Businesses (2.0% of revenues, 0.1% of EBITDA)

In FY14, the Group's packaging operation, Natpak, was the outperformer amongst

some of the smaller businesses, recording a 14% increase in trading profit on the

back of an increase in capacity. We estimate a FY14-18F revenue and EBITDA CAGR of

8.8% and 13.0%, respectively.

CHANGES TO GROUP ESTIMATES AND OUTLOOK

We have revised our estimates and have cut our consolidated revenue estimates by an

average of 7% between FY15F and FY18F. While the Milling and Protein Division should

register some growth, we expect other key divisions to continue experiencing

significant pressures.

The broader economic environment is showing signs of weakness. In fact, the IMF

expects Zimbabwe to register GDP growth of 1.0% in 2015 and 0.5% in 2016.

Further, the country continues to face macro-economic vulnerabilities and structural

impediments to investment in key sectors such as mining and infrastructure, driven

by Indigenisation laws. The IMF also believes that the global environment may

affect the Zimbabwean economy given that the stronger USD can lower global

demand for key exports. We therefore expect demand for consumer products to

slow down. Overall, we estimate Innscor to register a revenue FY14-18F CAGR of 5.0%.

37


Changes in Estimates (USDm)

2014 2015F 2016F 2017F 2018F Avg.

Segmental Rev. & EBITDA Actual Fcts Var New Old(1) Var New Old(1) Var New Old(1) Var New Fcts Old Fcts Var Cut

Bakeries & Fast Foods Rev. 262 270 -3% 270 280 -4% 280 293 -5% 292 310 -6% 305 330 -8% -5%

EBITDA 25 27 -6% 22 28 -23% 22 31 -27% 23 34 -32% 24 36 -33% -29%

EBITDA margin 10% 10% 8% 10% 8% 11% 8% 11% 8% 11%

Distribution Group Africa Rev. 93 96 -3% 95 101 -6% 98 107 -9% 101 114 -11% 105 122 -14% -10%

EBITDA 8 8 5% 8 8 -6% 8 9 -9% 8 9 -12% 9 10 -17% -11%

EBITDA margin 9% 8% 8% 8% 8% 8% 8% 8% 8% 8%

Milling & Protein Rev. 489 474 3% 538 498 8% 568 525 8% 601 556 8% 639 590 8% 8%

EBITDA 42 36 17% 39 43 -8% 42 46 -7% 46 50 -7% 50 53 -6% -7%

EBITDA margin 8% 7% 7% 9% 7% 9% 8% 9% 8% 9%

SPAR revenues 160 165 -3% 159 174 -9% 158 185 -15% 155 197 -21% 152 210 -28% -18%

EBITDA -5 0 n.m. 0 0 -54% 1 2 -57% 2 4 -43% 2 5 -64% -55%

EBITDA margin -3% 0% 0% 0% 1% 1% 1% 2% 1% 3%

Household Goods Rev. 53 55 -4% 56 58 -4% 60 62 -4% 64 67 -4% 69 72 -4% -4%

EBITDA 10 12 -15% 10 12 -22% 10 13 -22% 11 14 -22% 12 15 -22% -22%

EBITDA margin 19% 21% 17% 21% 17% 21% 17% 21% 17% 21%

Natpak & other Rev. 20 18 11% 23 20 11% 24 22 11% 26 23 11% 28 25 11% 11%

EBITDA 2 2 -6% 2 2 -16% 2 3 -15% 2 3 -14% 3 3 -13% -14%

EBITDA margin 8% 10% 8% 11% 9% 12% 9% 12% 10% 13%

P&L

Revenue 1 011 1 080 -6% 1 075 1 134 -5% 1 122 1 196 -6% 1 174 1 269 -7% 1 233 1 352 -9% -7%

Growth 54% 64% 6% 5% 4% 6% 5% 6% 5% 7%

Gross profit 343 354 -3% 362 377 -4% 380 402 -5% 400 431 -7% 422 461

GP Margin 34% 33% 34% 33% 34% 34% 34% 34% 34% 34% 0%

EBITDA 81 85 -6% 82 96 -14% 89 105 -15% 95 116 -18% 102 125 -19% -17%

EBITDA Margin 8% 8% 8% 8% 8% 9% 8% 9% 8% 9%

EBIT 96 67 44% 54 73 -26% 63 79 -20% 68 86 -20% 75 92 -19% -21%

EBIT Margin 10% 6% 5% 6% 6% 7% 6% 7% 6% 7% -11%

Interest expense -8 -7 13% -7 -7 9% -7 -6 9% -5 -5 9% -6 -5 9% 9%

Equity acc. earnings -EBT 2 2 49% 3 2 60% 3 2 59% 3 2 59% 3 2 58%

Profit before tax 92 61 50% 94 68 -28% 60 71 -20% 66 83 -20% 72 89 -18% -22%

Taxation -14 -15 -8 -17 -10 -19 -12 -21 -14 -22

Profit after tax 79 46 71% 42 51 -19% 50 56 -11% 54 62 -13% 58 66 -12% -14%

Adj EPS -USc 3.6 6.3 -42% 5.2 6.6 -22% 6.5 7.3 -11% 7.2 8.3 -13% 7.6 8.8 -14% -15%

(1) Old forecasts have been adjusted for the consolidation effect.


Margin pressures should continue despite restructuring efforts. Innscor has embarked on various restructuring efforts in its

key divisions and this has also triggered some changes at management level. Antonio Fourie, the former CEO of the

Ellerines (South Africa) has been appointed as the new CEO, taking over from John Koumides. FD Julian Schonken will

now lead the Light Manufacturing division while Basil Dionisio, Head of Bakers Inn and SPAR supermarket is expected

to be appointed as executive director of Quick Service Restaurants. These changes are in line with the group's restructuring

efforts given that the new CEO has a clear restructuring mandate aimed at reducing the cost base and driving efficiencies

across the group. However, our concerns around low cost competition remain. More recently, there has been a proliferation

of Chinese retailers and local informal operators in Zimbabwe while cheap imports from SA have been exacerbated by a

weak ZAR. We have cut our group EBITDA estimates by an average of 17% between FY15F and FY18F and estimate an EBITDA

FY14-18F CAGR of 6.0%.

Overall, we have cut our PBT and net income estimates by an average of 22% and 15%, respectively on the back of (i) margin

pressures; and (ii) slightly higher finance charges. All in all, we estimate adj. FY14-18F EPS CAGR of -9%.

38


VALUATION UPADATE & RECOMMENDATION

Innscor SOTP Valuation

Business Description of operations Stake Methodology USDm Valuation 2015F 2016F 2017F

Milling & Protein National Foods, Colcom & Irvine's DCF Valuation 246 6.2 5.8 5.4

Bakeries & Fast Foods Bakeries & QSRs 100% DCF Valuation 132 6.1 5.9 5.6

SPAR Retail Retailing (SPAR) & Wholesale 100% DCF Valuation 14 n.m. 18.4 7.2

Distribution Group Africa Wholesale Distribution 100% DCF Valuation 38 5.0 4.8 4.6

Household Goods Appliance manufacturing & retailing 100% DCF Valuation 83 8.7 8.1 7.6

Natpak & Other Businesses Packaging & Other 100% DCF Valuation 16 8.7 7.6 6.7

EQUITY ACCOUNTED BUSINESSES

Shear Water Adventures Tourism & Adventure 50% Net Asset Value 3.9 11.1 10.3 9.6

PBV 2.0

Value of operations 7.8

Innscor Fair Value Contribution 3.9

Freddy Hirsch Group Spices & packaging 39% Net Asset Value 2.6 6.2 5.8 5.4

PBV 2.0



Afrigrain Trading Soft commodities trading 40% Net Asset Value 5.5 3.0 2.8 2.6

PBV 2.0



Paperhole Investments Procurement of grain 40% Net Asset Value 1.3 10.8 10.3 9.8

Peer PBV 2.0



Total value of operations 541

YE14 Net Debt(1) 72

Minorities (PBV of 2.0x) 227

Financial Assets (PBV of 2.0x) 9

Equity Value 395 14.1 11.2 10.2

Number of Shares (m)(2) 622

Value per Share 0.66

Small caps discount 10%

YE15 Price Target (USD) 0.60

Upside/Downside -18%

(1) Includes the cash impact of the Indigenisation transaction. (2) Includes the additional 80m shares under the indigenisation

transaction. Source: BPI Capital Africa.

With our revised numbers, our SOTP valuation points to a YE15 Price Target of USD0.60/

share, which implies 18% downside on the current share price. We maintain our

view that Innscor has a sound business model, with strong brands, but is operating

under tough macro conditions in Zimbabwe. In our view, the current risk return is

negative. Further, Innscor's earnings capabilities are likely to remain thwarted

given the margin pressure emanating from intensifying competition. Comparing

the stock with its peers shows that Innscor's 10.1x FY16F PER and 5.9x FY16F EV/

EBITDA is at a discount to the SSA and EM averages. However, we believe the

discount is justifiable given the lack of visibility on the outlook in the country and

the ongoing prevailing risks. We maintain our SELL recommendation.

39


Segmental Revenues and EBITDA

CAGR

12m to June (USDm) 2012 2013 2014 2015F 2016F 2017F 2018F 14-18F

Bakeries & Fast Foods revenues 246 269 262 270 280 292 305 4%

yoy growth 9% -3% 3% 4% 4% 4%

EBITDA 37 33 25 22 22 23 24 -1%

yoy growth -10% -24% -15% 4% 4% 4%

EBITDA margin 15.0% 12.4% 9.6% 8.0% 8.0% 8.0% 8.0%

SPAR revenues 188 167 160 159 158 155 152 -1%

yoy growth -11% -4% 0% -1% -1% -2%

EBITDA 3 3 -5 0 1 2 2

yoy growth -8% -289% -102% 891% 156% -2%

EBITDA margin 1.5% 1.6% -3.1% 0.1% 0.5% 1.3% 1.3%

Distribution Group Africa revenues 92 94 93 95 98 101 105 3%

yoy growth 2% -1% 2% 3% 3% 4%

EBITDA 8 9 8 8 8 8 9 1%

yoy growth 8% -10% -5% 4% 4% 4%

EBITDA margin 9.0% 9.6% 8.6% 8.0% 8.1% 8.1% 8.1%

MiIling & Protein revenues 53 61 489 538 568 601 639 7%

yoy growth 15% 704% 10% 5% 6% 6%

EBITDA 7 5 42 39 42 46 50 5%

yoy growth -33% 763% -5% 7% 9% 8%

EBITDA margin 13.7% 7.9% 8.5% 7.3% 7.4% 7.6% 7.8% -2%

Household Goods revenues 46 52 53 56 60 64 69 7%

yoy growth 13% 2% 6% 7% 7% 7%

EBITDA 10 11 10 10 10 11 12 5%

yoy growth 13% -14% -3% 7% 7% 8%

EBITDA margin 22.2% 22.1% 18.5% 17.0% 17.1% 17.1% 17.2%

Natpak & other revenues 1.2 12.2 20.2 22.6 24.4 26.2 28.3 9%

yoy growth 937% 65% 12% 8% 7% 8%

EBITDA 0 2 2 2 2 2 3 13%

yoy growth 987% 1% 10% 15% 14% 14%

EBITDA margin 13.2% 13.8% 8.4% 8.3% 8.8% 9.3% 9.8%

Source: Company and BPI Capital Africa (F).

40


Income Statement

CAGR

12m to June (USDm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net revenues 656 1 011 1 075 1 122 1 174 1 233 5%

EBITDA 67 81 82 89 95 102 6%

EBITDA margin 10.3% 8.0% 7.6% 7.9% 8.1% 8.2%

Dep.+ Provision -15 -23 -28 -25 -27 -27 3%

EBIT 51 96 54 63 68 75 -6%

EBIT margin 7.7% 9.5% 5.0% 5.6% 5.8% 6.1%

Net financials -3 -6 -7 -7 -5 -6 -1%

Equity a/c earnings 12 2 3 3 3 3 9%

Taxes -11 -14 -8 -10 -12 -14 0%

Minority interests -10 -18 -13 -14 -16 -17 -1%

Net profit 39 60 28 35 39 41 -9%

Balance Sheet

CAGR

12m to June (USDm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net intangibles 3 42 42 42 42 42 0%

Net fixed assets 140 229 244 258 269 281 5%

Investments in associates 50 9 12 14 18 21 24%

Financial assets 8 8 8 8 8 8 0%

Inventories 55 105 112 114 116 119 3%

ST Receivables 62 95 101 102 104 106 3%

Other Assets 11 24 25 25 25 25 1%

Cash & Equivalents 23 37 50 70 90 129 36%

Net assets 352 548 588 627 667 725 7%

Equity & Minorities 193 317 354 396 443 491 12%

MLT Liabilities 20 50 55 61 66 72 9%

o.w. Debt 3 17 22 28 33 39 22%

ST Liabilities 136 181 179 170 158 162 -3%

o.w. Debt 103 94 73 49 19 19 -33%

Equity + Min. + Liab 349 548 588 627 667 725 7%

Cash Flow Statement

12m to June (USDm) 2013 2014 2015F 2016F 2017F 2018F

+ EBITDA 67 81 82 89 95 102

Change in working capital -4 22 -6 -1 -1 -1

= Operating cash flow 63 103 77 88 94 101

Capex -43 -48 -43 -39 -38 -38

Net Financial Inv. - - - - - -

= C.F. after Investments 20 55 33 49 56 62

Net Fin. Expenses -3 -6 -7 -7 -5 -6

Taxes Paid -10 -13 -8 -10 -12 -14

Dividends Paid -12 -14 -5 -7 -8 -10

Equity Increase - 0 - - - -

Others - - - - - -

= Change in net debt (FCF) 5 -21 -14 -26 -31 -33


Innscor Shareholder Structure

Source: Company.

Estimated Market Shares for

Key Divisions


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DCF Assumptions

Risk free rate 15%

Equity risk premium 6%

Beta 0.70

Cost of equity 19%

Tax rate 25%

After tax cost of debt 8%

Debt to Equity 10%

WACC 18%

Long term growth rate 5%


Firmly in BUY territory(YE15 PT of R104 vs YE14 PT of R91.20; Rec. Upgraded from Hold to Buy)

4 Oceana is a top quality company, combining a strong competitive position (largest

fishing company in SA; powerful brands), good management team, healthy

returns and cash flow generation and strong B/S. Execution has been high,

despite ongoing hurdles (private consumption under pressure, unstable fishing

quotas in Namibia and volatility of the fishmeal business). FY14 results were

ahead of expectations and confirmed the positive trend - Revenues and EPS

climbed 7% and 17%, mainly fuelled by a turnaround of the fishmeal business,

sound volume growth in canned fish and positive price environment.

4 We have fine-tuned our estimates, revising our EPS numbers by an average of 5% in

FY15-18F. We expect total revenues to post a 12% CAGR14-18F, driven by (i)

fish meal businesses; and (ii) increased penetration of canned fish in SSA. We

also expect EBITDA margin to improve from 19.2% in FY14 to 19.6% in FY18F,

helped by cost efficiencies. Our forecasts imply a FY14-18F EPS CAGR of 15%,

while cash flow generation (even after dividends) will remain high.

4 We have set our YE15 PT at R104/share, implying an upside of 20%. Dividend yield

should remain attractive and we foresee some positive triggers in the short to

medium term such as (i) faster penetration into SSA; and (ii) improved margins

in the fish meal & oil business on strong prices. Key risks for Oceana include

unstable TACs (Namibia and SA) and regulatory constraints on M&A activity in

SA. Share price performance has been rather poor and not reflective of the

underlying performance. Considering the growth prospects, the stock looks rather

cheap at a FY15F P/E and FY15F EV/EBITDA of 16.0x and 9.5x, respectively.

We therefore upgrade Oceana from Hold to BUY.

Stock data

Price (R): 86 Price Target (R): 104

Nº of shares (mn): 119.5 Reuters/Bloomberg: OCEJ.J / OCE SJ

Market Cap (Rmn): 10 274 Market Cap (USD mn): 934

Avg.Daily Vol. [R '000]: 6 903 Avg.Daily Vol. [USD '000]: 622


HEPS growth ('14-'17F) 15% ROE'14: 34%

Major shareholders: Tiger Brands (37.4%); Brimstone (16.8%), Khula Trust (11.8%)

September YE 2013 2014 2015F 2016F 2017F 2018F

EPS (R) 3.94 4.67 5.37 6.23 7.16 8.01

P/E 21.9 18.4 16.0 13.8 12.0 10.7

Dividend Yield 3.7% 4.4% 5.0% 5.9% 6.8% 7.6%

FCF Yield 1.1% 8.6% 5.0% 6.2% 7.1% 8.1%

EV/EBITDA 12.7 10.8 9.5 8.2 7.1 6.3

EQUITY RESEARCH

OceanaFood

BuyMedium-Risk

November 2014

South Africa

Oceana vs JSE ALSI vs JSE

Food Producers




Source: Bloomberg.


Date Recommendation

17-Apr-12(1) Hold



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

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42


FY14 RESULTS AHEAD OF MARKET EXPECTATIONS

Oceana released a solid set of FY14 results, which were largely ahead of market

expectation, showing 17% yoy increase in EPS. Group revenue increased 7% yoy to

R5.039bn vs our estimate of R4.997bn. The growth was off a strong base in FY13

and was driven by price increases and a favourable fx environment. The inshore

fishing division outperformed, with revenue growth of 16.4% on the back of (i)

volume growth in canned fish; and (ii) a turnaround in the fishmeal business.

However, operational performance was negatively impacted by lower horse mackerel

catch rates. FY14 EBIT increased 20% yoy to R856m (EBIT margin of 17%).

Overall, a final DPS of 271c, bringing the total DPS for the year to 377c (up 17%

on FY13) and implying a dividend pay-out of 78.5%.

INSHORE FISHING (69% of FY14 revenues, 48% of FY14 EBIT)

The inshore fishing division has registered a revenue and EBIT FY10-14 CAGR of 11%

and 19%, respectively. In FY14, revenues increased 16.4% to R3.49bn. We highlight

that canned fish volumes grew 2.3% yoy from 8.6m cartons in 2013 to 8.8m

cartons. Therefore, revenue growth for canned fish was largely achieved through

price adjustments. We note that Oceana's pilchard's brand, Lucky Star, remains

strong with a retail market share of 70%. Furthermore, a turnaround of the fish

meal business was a major contributor. Lobster volumes were affected by a reduced

TAC and lower catch rates but this was offset by improved USD pricing. The French

fries operation has improved significantly with a return to profitability primarily

due to increased volumes driven by better raw material quality. On the contrary,

the squid business incurred a loss due to the continued decline in landings.

All in all, the division experienced improved anchovy and redeye herring landings

in an environment of firm international prices. Overall, the EBIT margin increased

from 7.9% in FY13 to 12.2%. In the outlook period, we are projecting revenue

and EBIT FY14-18F CAGR of 13% and 16%, respectively. We expect EBIT margins to

expand to 13.4% by FY18F on the back of (i) buoyant international prices for fish meal &

oil; and (ii) operational efficiencies emanating from plant upgrades.

MID WATER & DEEP SEA FISHING (24% of FY14 revenues, 40% of EBIT)

The mid water & deep sea fishing division has registered a revenue and EBIT FY10-14

CAGR of 7% and 15%, respectively. In FY14, revenue declined 12.4% yoy to R1.2bn

as volumes decreased within the horse mackerel segment. While the 2014 Namibian

horse mackerel TAC remained at 350 000 tons, the Ministry of Fisheries continued

to allocate further quota to new rights holders which resulted in a reduction of

Oceana's quota. This had a negative impact on the overall tonnage caught despite

good catch rates. In SA, the Precautionary Maximum Catch Limit for targeted

catch of horse mackerel increased by 10% to 38 115 tons (2013: 34 650 tons).

However, catch rates in SA declined significantly due to an unexpected scarcity of

resource, leading to a 55% reduction in volumes. In terms of the hake business,

the 2014 hake TAC was unchanged at 140 000 tons. There was however a substantial

improvement on the back of (i) stable prices; and (ii) improved operating efficiencies.

Overall, we forecast the EBIT margin to decline from 28.9% to 28.4% in FY15F on the

back of the impact of an expensive horse mackerel quota associated with an increase in

outsourcing in Namibia. However, we estimate that the EBIT margin will stabilise at c.

29% in the outlook period. All in all, we estimate hake & mackerel revenues to grow at a

FY14-18F CAGR of 8%.

FY14 EBIT Breakdown

FY14 Revenue Breakdown

Source: Company.

Source: Company.

43


COLD STORAGE (7% of FY14 revenues, 12% of FY14 EBIT)

The Cold Storage division has registered a revenue and EBIT FY10-14 CAGR of 10% and

9%, respectively. In FY14, Cold storage revenues increased 5%yoy to R343m on the

back of improved occupancy levels that were bolstered by (i) a positive turnaround of

the Western Cape cold stores; and (ii) an increase in throughput in Nambia. The EBIT

margin also increased from 25.4% in FY13 to 31% on cost efficiencies. We estimate

cold storage revenues and EBIT to post a FY14-18F CAGR of 11% and 13%, respectively.

CHANGES IN ESTIMATES & EARNINGS OUTLOOK

We have increased our revenue estimates by an average of 7% between FY15F and FY18F. We

expect Oceana's consolidated revenues to grow at a FY14-18F CAGR of 12%. According

to management, the fish meal business will be a key focus area in Oceana's growth

strategy. Demand for fish meal is forecasted to increase in the medium to long term.

Changes in Estimates (Rm)

2014 2015F 2016F 2017F 2018F

Actual Fcts Chg New Old Chg New Old Chg New Old Chg New Old Chg Avg.

Total Revenues 5 039 4 837 4% 5 659 5 403 5% 6 348 6 009 6% 7 175 6 676 7% 7 970 7 233 10% 7%

Innshore Fishing 3 492 3 222 8% 3 995 3 552 12% 4 552 3 897 17% 5 188 4 276 21% 5 791 4 597 26%

Midwater & Deep Fishing 1 203 1 282 -6% 1 274 1 497 -15% 1 361 1 736 -22% 1 509 2 002 -25% 1 662 2 214 -25%

Cold Storage 344 334 3% 390 354 10% 434 375 16% 478 398 20% 517 422 22%

Gross Profit 1 977 1 919 3% 2 208 2 184 1% 2 491 2 452 2% 2 821 2 741 3% 3 131 2 958 6% 3%

GP Margin 39.2% 39.7% 39.0% 40.4% 39.2% 40.8% 39.3% 41.1% 39.3% 40.9%

EBITDA 970 894 9% 1 096 1 054 4% 1 244 1 202 4% 1 409 1 359 4% 1 559 1 456 7% 5%

Innshore Fishing 474 338 40% 542 398 36% 642 452 42% 742 505 47% 828 529 57%

Midwater & Deep Fishing 385 449 -14% 401 539 -26% 429 625 -31% 476 721 -34% 524 786 -33%

Cold Storage 135 107 27% 153 117 31% 174 125 39% 192 133 44% 207 141 47%

EBITDA Margin 19.2% 18.5% 19.4% 19.5% 19.6% 20.0% 19.6% 20.4% 19.6% 20.1%

Innshore Fishing 14% 11% 14% 11% 14% 12% 14% 12% 14% 12%

Midwater & Deep Fishing 32% 35% 32% 36% 32% 36% 32% 36% 32% 36%

Cold Storage 39% 32% 39% 33% 40% 33% 40% 33% 40% 33%

Depreciation & Amortisation 114 99 121 106 13% 123 112 9% 125 117 126 119

EBIT 856 795 8% 976 947 3% 1 122 1 090 3% 1 284 1 241 3% 1 433 1 337 7% 4%

Innshore Fishing 426 297 44% 491 353 39% 590 405 46% 689 455 51% 775 479 62%

Midwater & Deep Fishing 347 416 -17% 361 504 -28% 389 588 -34% 434 682 -36% 482 747 -35%

Cold Storage 107 82 30% 123 90 37% 143 97 47% 160 103 55% 176 111 58%

EBIT Margin 17.0% 16.4% 17.2% 17.5% 17.7% 18.1% 17.9% 18.6% 18.0% 18.5%

Innshore Fishing 12% 9% 12% 10% 13% 10% 13% 11% 13% 10%

Midwater & Deep Fishing 29% 32% 28% 34% 29% 34% 29% 34% 29% 34%

Cold Storage 31% 24% 32% 25% 33% 26% 33% 26% 34% 26%

PBT 876 846 4% 1 005 1 006 0% 1 170 1 154 1% 1 349 1 309 3% 1 514 1 410 7% 3%

PBT margin 17.4% 17.5% 17.8% 18.6% 18.4% 19.2% 18.8% 19.6% 19.0% 19.5%

Taxation -267 -271 -304 -322 -354 -369 -409 -419 -459 -451

Tax rate 30% 32% 30% 32% 30% 32% 30% 32% 30% 32%

PAT 609 575 6% 700 684 2% 815 785 4% 941 890 6% 1 055 959 10% 6%

Attr.Income 574 544 6% 661 649 2% 771 746 3% 891 847 5% 1 000 912 10% 5%


44


While Oceana may face some headwinds in the domestic market due to constrained

demand, there is scope for Oceana to grow its revenues into Africa through further

penetration of canned fish. Oceana has set up an Africa team that will spear head the

expansion of the canned fish business in SADC and East Africa. Our view is that

demand growth in Africa will be sustained by strong macro fundamentals in SSA

(GDP growth of c5.5%) and a relatively low per capita fish consumption of 7kgs vs.

a world average of 18kgs.

We have increased our EBITDA estimates by an average of 5% between FY15F and FY18F.

We expect group EBITDA margins to increase from 19.2% in FY14 to 19.6% in

FY18F. While Oceana has been driving cost efficiencies through plant upgrades

and vessel optimisation, the focus has also been on (i) value addition as in the

case of the cold storage division through additional services such as Logistics; and

(ii) expanding the business in high margin business lines such as hake. Management

has indicated that the business will continue to look for acquisition opportunities

given the strong cash generation. The Foodcorp deal (without the pelagic fish quota),

for example could potentially increase Oceana's hake quota from 6% to 10%.

We have also increased our EPS estimates by an average of 5% between FY15F and FY18F

and forecast Oceana's EPS to increase 15% yoy to R5.37 in FY15F. Our forecasts imply a

FY14-18F EPS CAGR of 15%. Earnings growth has historically been robust (FY10-14

CAGR of 16%), which has enabled the group to systematically show double-digit

ROCE (average of 27%) while rewarding investors with healthy dividends (div yield

of c5%). We highlight that Oceana is set to benefit from a growth in JV income

(FY14-18F CAGR of 27%) as the Angola fishmeal plant (49% owned) is expected

to be commissioned in 2H15F. We also note that our estimates do not incorporate

potential acquisitions which, if concluded can uplift earnings significantly.

VALUATION UPDATE & RECOMMENDATION

We have updated our valuation and rolled over our Price Target to YE15: we have set our

YE15 PT at R104/share (vs YE14 PT of R91/share), which implies a FY15F P/E of 19.3x.

We continue to value Oceana using DCF Sum-of-the-parts and have largely

maintained our previous assumptions. On average, we applied a WACC and long

term growth rate (g) of 12.5% and 5% across the three main divisions.

Sum of the Parts (Rm)

EV Stake EV Att. as % EV EV/EBITDA 15 EV/EBITDA 16 EV/EBITDA 17

Inshore Fishing 6 298 100% 6 298 49% 11.6 9.8 8.5

H. Mackerel & Hake 5 344 97% 5 205 40% 13.3 12.5 11.2

Cold Storage 1 575 92% 1 455 11% 10.3 9.1 8.2

Total EV 12 958

YE14 Net Debt(1) -172

Financial Investments 225

Equity Value 13 355

Number of Shares(2) 119.5

YE15 Fair Price (R) 112

Small Caps Discount 10%

YE15 Price Target (R) 104

(1) Adj. for minorities and share options. (2) Fully diluted (Share Options) and adj for treasury stocks . Source: BPI Capital Africa.

45


Our YE15 Price target of R104/share (includes a 10% small caps discount) implies an

upside of 20%. We like Oceana's dominant position in the domestic market, strong

returns (FY14 ROE of 34%) and rising exposure in SSA. In the short to medium

term, we foresee some positive triggers such as (i) faster penetration into SADC

and East Africa; and (ii) improved margins in the fish meal & oil business on the

back of buoyant international prices. Key risks for Oceana include unstable TACs

(Namibia and SA) and regulatory constraints on M&A activity in SA. Share price

performance has been poor and not reflective of the underlying performance.

Considering the growth prospects, the stock looks cheap at a FY15F P/E and FY15F

EV/EBITDA of 16.0x and 9.5x, respectively (13.8x and 8.2x in FY16F) vs the 20.9x

FY15F P/E and 11.1x EV/BITDA for SA Food Producers (18.3x and 10.0x in FY16F).

We upgrade the stock from a HOLD to a BUY recommendation.

In Shore Fishing- Operational Performance (Rm)

2011 2012 2013 2014 2015F 2016F 2017F 2018F

Revenues 2 268 2 933 3 001 3 492 3 995 4 552 5 188 5 791

yoy -1% 29% 2% 16% 14% 14% 14% 12%

EBIT 185 348 238 426 489 591 688 774

yoy -12% 88% -32% 79% 15% 21% 16% 12%

EBIT margin 8% 12% 8% 12% 12% 13% 13% 13%

Mid Water & Deep Sea Fishing- Operational Performance (Rm)

2011 2012 2013 2014 2015F 2016F 2017F 2018F

Revenues 1 171 1 435 1 374 1 203 1 274 1 361 1 509 1 662

yoy 29% 23% -4% -12% 6% 7% 11% 10%

EBIT 274 297 423 347 360 389 434 481

yoy 39% 8% 42% -18% 4% 8% 11% 11%

EBIT margin 23% 21% 31% 29% 28% 29% 29% 29%

Cold Storage- Operational Performance (Rm)

2011 2012 2013 2014 2015F 2016F 2017F 2018F

Revenues 218 280 326 344 390 434 478 517

yoy -7% 28% 17% 5% 13% 11% 10% 8%

EBIT 54 66 83 107 121 143 160 175

yoy -30% 23% 26% 29% 14% 18% 12% 9%

EBIT margin 25% 24% 25% 31% 31% 33% 33% 34%


DCF Assumptions-Inshore Fishing

Risk free rate 8%


Beta 0.8

Cost of equity 13%

Cost of debt 10%

Tax rate 28%


Debt to Equity 0%

WACC 12.5%



46


Income Statement

CAGR

(Rm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Turnover 4 701 5 039 5 659 6 348 7 175 7 970 12%

EBITDA 816 970 1 096 1 244 1 409 1 559 13%

EBITDA Margin 17.4% 19.2% 19.4% 19.6% 19.6% 19.6%

Dep. + Provision 102 114 121 123 125 126

EBIT 714 856 976 1 122 1 284 1 433 14%

EBIT Margin 15.2% 17.0% 17.2% 17.7% 17.9% 18.0%

Net Financials 9 -4 1 10 15 20

JV Income 30 23 28 38 51 61 27%

Taxes -228 -267 -304 -354 -409 -459 15%

Minority Interests -33 -35 -39 -44 -50 -55 12%

Net Profit 491 574 661 771 891 1 000 15%

Balance Sheet

CAGR

(Rm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net Intangibles 103 98 98 98 98 98 0%

Net Fixed Assets 458 512 513 511 508 506 0%

Financial Assets 225 226 225 225 225 225

Inventories 1 213 839 947 1 061 1 200 1 336 12%

ST Receivables 695 933 1 048 1 175 1 328 1 476 12%

Other Assets 29 24 24 24 23 23 -1%

Cash&Equivalents 111 344 221 244 329 469 8%

Net Assets 2 834 2 975 3 075 3 337 3 712 4 133 9%


MLT Liabilities 181 439 229 134 95 91 -33%

o.w. Debt 144 381 172 77 39 35 -45%

ST Liabilities 864 789 889 994 1 122 1 247 12%

o.w. Debt 257 0 0 0 0 0

Equity +Min.+ Liab. 2 834 2 975 3 075 3 337 3 712 4 133 10%

Cash Flow Statement

(Rm) 2013 2014 2015F 2016F 2017F 2018F

+ EBIT 816 970 1 096 1 244 1 409 1 559

- Changes in working capital 359 -345 123 137 165 159

= Operating Cash Flow 457 1 315 973 1 107 1 245 1 400

- Capex 139 163 121 121 122 123

- Net Financial Inv. 52 -23 -28 -38 -51 -61

= C. F. after Investments 267 1 175 880 1 024 1 174 1 338

- Net Fin. Expenses -9 4 -1 -10 -15 -20

- Taxes Paid 320 267 304 354 409 459

- Dividends Paid 359 385 451 519 606 699

+Equity Increase 3 1 0 0 0 0

- Other -23 -268 -39 -44 -50 -55

=Changes in Net Debt 424 -253 -87 -117 -124 -144


Oceana Fishing Licenses

Source: Company.

Breakdown of Oceana Cash Costs

Source: Company.

Contribution of Oceana SOTP

Fair Value

Source: Company.

Farming Value(YE15 PT of USD1.40 and Buy Recommendation maintained)

4 A good start to FY15F. SeedCo released its 1H15 results showing a 7% decline in

revenues to USD16m. On the positive side, the GP margin improved to 50% vs

39% in 1H14 and overheads declined 17%yoy while finance costs were down

48%. Overall, the loss for the period improved to USD7.6m vs a loss of

USD12.8m in 1H14. The improvement was mainly driven by (i) reduced write

downs and impairments and (ii) reduced USD borrowings as a result of a capital

injection.

4 Limagrain is already the major shareholder and will increase its stake. The deal

should be concluded by December 2014 at USD1.0921 per share (21% upside).

We continue to be positive on SeedCo due to: (i) its exposure to fast growth

SSA markets, (ii) the high industry barriers to entry, (iii) the Limagrain

partnership is set to unlock value; (iv) low capex demands and (v) de-risking

through M&A activity. Growth will be driven by (i) increased penetration in EA;

and (ii) improved capacity and pricing in Malawi. Overall, we estimate FY14-

18F revenue CAGR of 12%. SeedCo should see an upliftment in the EBIT

margin from 15.5% in FY14 to 23% by FY18F. We are projecting FY14-18F

EBIT and EPS CAGR of 23% and 24%, respectively.

4 Strong Valuation Upside. Our YE15 PT of USD1.40 shows 56% upside potential.

While short term multiples seem rather high, reflecting the dilution impact of

the Limagrain transaction, the risk profile and future growth opportunities of

SeedCo are set to improve. SeedCo's FY16F PER and EV/EBITDA of 9.8x and

6.1x is at a discount to global seed major averages of 12.5x and 7.6x,

respectively. Key risks include political /economic risk and inability to liquidate

government debt. Positive triggers are (i) faster growth in new markets and (ii)

improved working capital management. BUY.

Stock data

Price (USD): 0.90 Price Target (USD): 1.40

Nº of shares (mn): 206 Bloomberg: SEEDCO ZH

Market Cap (USD mn): 186 Avg. Daily Vol. (USD'000) 51

Net Debt/EBITDA'14: 1.4 Free-Float: 38%

EPS growth ('14-'18F): 24% ROE'14: 12%

Major shareholders: Vilmorin (14.9%); Old Mutual Zimbabwe (13.4%); Stanbic (11.3%)

March YE 2013 2014 2015F 2016F 2017F 2018F

Diluted EPS (USD) 0.06 0.06 0.07 0.09 0.12 0.14

PER 15.5 15.7 12.2 9.8 7.8 6.6

Dividend Yield 0.0% 0.0% 3.6% 3.9% 4.9% 6.8%

FCF Yield 1.7% 4.2% 17.2% 4.3% 12.0% 18.8%

EV/EBITDA 9.0 9.2 6.3 6.1 4.6 3.5

EQUITY RESEARCH

SeedCoAgriculture

BuyHigh-Risk

November 2014

Zimbabwe

SeedCo vs. ZSE Industrial

Index vs. S&P Africa Frontier




Source: Bloomberg.


Date Recommendation

11-Apr-12(1) Buy



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

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1H15 RESULTS SIGNIFY A GOOD START TO THE YEAR

SeedCo recently released its 1H15 results largely reflecting improvements in underlying

business performance. Generally, the first half of the year is a cost accumulation

period for SeedCo and should not be used as a gauge for full year performance.

Group revenue was down 7.0% yoy to USD16.04m as total volumes for the period

declined by 5.7% yoy (maize volumes (+6.5%) and winter cereal sales (-24.9%). The

first half of the year is largely characterised by winter cereal sales. However, hybrid

maize seed remains the mainstay of the business constituting c65% of total annual volumes.

SeedCo Sales Volumes Progression (MT) FY14 Volumes Contribution by Crop Type

Source: BPI Capital Africa, Company. Source: Company.

Below are the key highlights for 1H15:

Firstly, there was an improvement in the GP margin. Gross profit for 1H15 was up

21.8% yoy to USD8.1m as the GP margin improved to 50%. We recall that in

FY14, the GP margin fell below the 3-year historic average of 50% and came in at

45% on the back of a write-down of some old seed stocks. We expect this positive

trend to continue in FY15F;

Secondly, overheads for 1H15 declined by 17% to USD12.4m. We note that opex in

1H14 was largely impacted by an exceptional item in the form of a USD3.1m

impairment of a deposit receivable from a failed bank (Interfin);

Thirdly, finance costs declined by 48.3% yoy to USD2.0m on the back of intensified

debt collections and the positive effect of a capital injection from Limagrain; and

Finally, total assets for the group increased by 4.0% to USD177.9m. Non-current assets

have increased from USD49m to USD69m due to the completion of a factory in

Malawi and the issuance of a USD23.9m long term Treasury Bill by the Zimbabwe

government as settlement for long standing accounts receivables. As a result,

accounts receivable declined by 54% to USD34.8m. All in all, the loss for the period

improved to USD7.6m vs a loss of USD12.8m in 1H14.

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Source: BPI Capital Africa, Company. Source: BPI Capital Africa, Company.

FIVE REASONS TO BUY SEEDCO

We continue to view SeedCo as an attractive play to gain exposure in agriculture in SSA.

Our thesis is supported by the strong food demand outlook in the region. According

to FAO, SSA has seen a strengthening of its food security position over the past

years. This has largely been driven by the rapid pace of economic growth in SSA.

Moreover, governments in the region are increasing policy focus on the agricultural

sector in order to support food affordability and availability. In this note, we discuss

five key reasons why investors should buy SeedCo at current levels: (i) exposure to

high growth SSA countries diversifies risk, (ii) high industry barriers to entry, (iii)

the Limagrain partnership is set to unlock value, (iv) low capex demands and high

returns; and (v) scope for further M&A activity.

1. EXPOSURE TO HIGH GROWTH SSA COUNTRIES DIVERSIFIES RISK

Revenue Split: Zimbabwe vs Rest of SSA Estimated Adoption Rates of Certified

Seed in SSA Countries


Through an aggressive regional expansion strategy, SeedCo has been diversifying away

from political and economic risk in Zimbabwe. The group has made successful forays

into new markets in both East and West Africa. In FY14, Zimbabwe operations

constituted 42% of turnover and rest of Africa 58%. New markets such as East and

West Africa present an attractive growth outlook given the low penetration/adoption levels

of certified seed in these markets. For example, the adoption rate in Tanzania is 25% vs.

95% in Zimbabwe and 56% in Zambia.

50


Macro Prospects (GDP growth) in key markets

2013 2014F 2015F 2016F 2017F 2018F 2019F

Traditional Markets

Zimbabwe 3.0% 3.1% 4.0% 4.1% 4.0% 4.0% 4.0%

Zambia 6.0% 7.3% 7.1% 6.8% 6.6% 6.3% 6.0%

Malawi 5.0% 6.1% 6.5% 6.5% 6.2% 6.3% 5.9%

Growth Markets

Tanzania 7.0% 7.2% 7.0% 7.1% 7.0% 6.8% 6.9%

Kenya 5.6% 6.3% 6.3% 6.4% 6.4% 6.5% 6.5%

Nigeria 6.3% 7.1% 7.0% 6.9% 6.9% 6.6% 6.7%

Other Markets

Mozambique 7.1% 8.3% 7.9% 7.7% 7.9% 7.8% 7.8%

Rwanda 5.0% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

Uganda 6.0% 6.4% 6.8% 7.1% 7.2% 7.3% 7.4%

Source: WEO.

We are forecasting higher growth in businesses outside Zimbabwe over the outlook period

(FY14-18F revenue CAGR of 13% vs 9% for Zimbabwe) which will see contribution from

businesses outside Zimbabwe increasing to 61% by FY18F. We also note that Zimbabwe's

weight on EBIT is significantly less than 42% given that margins are higher in

markets such as Zambia. Overall, SeedCo should continue to register solid growth

and we estimate FY14-18F revenue CAGR of 12%. Below, we give an overview of

the key markets.

GEOGRAPHICAL MARKET OVERVIEWS

Traditional Markets (Zimbabwe, Zambia and Malawi)

Zimbabwe (42% of FY14 revenues)

The Zimbabwe unit registered turnover growth of 10.5% to USD42m on the back of a 9%

yoy increase in volumes. Maize volumes were up 11% yoy while soyabean seed volumes

were 28% lower. The GP Margin dropped from 53% to 49% as it was affected by

(i) a changeover to new treatment regime, (ii) increased packaging costs and (iii) a

write-down of excess soya bean stocks. Average maize seed prices increased by

c10% from USD2,000/MT in FY14 to USD2,200MT in 1H15.

Zimbabwe Sales Volumes Progression (MT) Estimated Market Share in Zimbabwe

Source: BPI Capital Africa/Company. Source: Company.

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Strong market positioning to bolster growth in the outlook period. SeedCo has an

estimated market share of 70% for open market sales and c49% for government

sales in Zimbabwe. The SBU has registered FY10-14 revenue CAGR of 9%. While

Zimbabwe's GDP growth has been revised downwards from 6.1% to 3.1% on the back

of under-performance in mining and manufacturing sectors, agriculture has remained

a key driver of the economy (agricultural growth has been revised upward from 9.0%

to 23.8% for FY14). SeedCo's dominance on the local market coupled with the

government's strong focus on agriculture should drive growth in the outlook period.

We are projecting FY14-18F revenue CAGR of 9.8% for the Zimbabwean business.

Zambia (25% of FY14 revenues)

Strong growth despite short term macro headwinds. More recently, the economy of

Zambia has been facing some constraints in the form of (i) a weak ZMW, (ii) high

interest; and (iii) inflationary pressures. Despite these headwinds, the Zambia

SBU posted revenue growth of 15% as volumes increased 17%yoy. However, the

GP margin came under pressure as it declined from 55% to 49% on the back of

the disposal of excess soya seed.

Zambia Sales Volumes Progression (MT) Estimated Market Share in Zambia


A strong market with legs. Zambia remains a strategic market for SeedCo given that

it has been more stable than other markets with maize seed prices averaging

cUSD2,800/MT- USD3,000/MT. The business has an estimated c50% for open

market sales and c30% for government business and has registered FY10-14 revenue

CAGR of 8%. We also note that the business unit has been exporting seed into

neighbouring countries such as DRC (sales of 473MT in FY14). We expect growth

in the outlook to be driven by (i) the government input programmes in Zambia;

and (ii) increased export volumes into DRC. We expect the SBU to record FY14-

18F revenue CAGR of 14.1%.

Malawi (11% of FY14 revenues)

Macro-economic headwinds slowed growth in FY14. FY14 turnover was flat at

USD13.4m while overall sales volumes declined 11% yoy .The Malawian economy

has been facing a number of key constrains such as high interest rates while

inflation is expected to remain double digit. The GP margin declined from 45% in

FY13 to 37% as slow moving stock was written off. Pricing was negatively affected

by the devaluation of the MWK as average prices effectively declined from USD1800/

MT to USD1,300/MT. We also note that the removal of the Presidential Input

Program negatively impacted volumes.

52


Malawi Sales Volumes Progression (MT) Estimated Market Share in Malawi


Management is confident on a recovery. SeedCo has an estimated c53% market share

in Malawi and has also recently commissioned a new USD10m production facility.

Management has indicated that Malawi ginners are placing "good orders" for the

coming year and expect revenues of cUSD15m-USD20m and PAT of cUSD3.0m

from Malawi in FY15F. We also highlight that the outlook on pricing is positive as

SeedCo has concluded an agreement with the Government to set prices in USD.

We are forecasting the SBU to register FY14-18F revenue CAGR of 8% vs FY10-14

revenue CAGR of -4%.

Growth Markets (East & West Africa)

East Africa

East Africa has been one of the markets that SeedCo penetrated aggressively having

established bases in Kenya and Tanzania. SeedCo also serves other East African states

such as Uganda and Rwanda through exports.

Tanzania (11% of FY14 Turnover)

Benefiting from increased adoption levels. In Tanzania, turnover for FY14 increased

by 20%yoy and volumes were up 9%. The business unit has benefited from a wider

footprint given that the focus has been to develop the retail network. A new factory

has been set up in Arusha while other stations are spread around Mbeya and Mwanza.

Tanzania Sales Volumes Progression (MT) Estimated Market Share in Tanzania


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We expect Tanzania volumes to register a FY14-18F CAGR of 11.2%. According to

management, the estimated market size for hybrid maize seed in Tanzania is

30,000MT vs production of 5,000MT reflecting scope for growth. SeedCo already

has an estimated market share of 46% in Tanzania and should continue increasing

its share. Overall, we estimate the SBU to register FY14-18F revenue CAGR of 12.4%

Kenya (6% of FY14 Turnover)

Strong growth despite the MLND threat. The Kenya business registered turnover and

volumes growth of 17% and 14%, respectively. Management has attributed this

growth to improved aggressive marketing campaigns such as the Kilimo Salama

campaign. However, the biggest threat currently is the Maize Lethal Necrosis Disease

(MLND). The disease began decimating crops in Kenya in 2011 and has spread to

Tanzania, Uganda and Rwanda. Kenya's Ministry of Agriculture has had some

strategic response to MLND with information-sharing campaigns and extension

services.

Kenya Sales Volumes Progression (MT) Maize Lethal Necrosis Disease (MLND)

The Maize Lethal Necrosis Disease has re-

emerged in some parts of Kenya.

Source: BPI Capital Africa/Company. Source: KRI.

SeedCo’s strategy is focused on developing defensive traits against MNLD. Joint

collaboration work between CIMMYT, Limagrain & SeedCo on developing MLND

resistant products are developing. Further, SeedCo is looking to start producing

highland varieties (highlands constitute c60% of the Kenyan market). Overall, we

estimate the SBU to register FY14-18F revenue CAGR of 14% albeit off a low base.

West Africa - A long term growth opportunity

Nigeria is an important market for SeedCo. While this business is still in development

stage, the case for investing in Nigeria remains compelling. The country has

estimated maize seed market size of c120kt. Maize seed demand is expected to

continue rising on the back of a large growing population (c169m). SeedCo is

continuing its development work in Nigeria and a new research station was set up

in Gwagwalada. We expect SeedCo to develop and grow its market share in Nigeria over

a period of about 3-5 years and estimate production levels of about 8,000MT by FY18F.

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Estimated Maize Seed Market Sizes SSA Agriculture Land use

Source: Company. Source: FAO.

Business Development Activity in Africa (total Maize acreage & Hybrid value)

Source: Company.

2. HIGH INDUSTRY BARRIERS TO ENTRY

SeedCo´s business model is difficult to replicate. The key competitive edge is that

SeedCo has a strong focus on communal farming activities in SSA, having developed

a number of seed varieties in the region over time. Most of the global seed majors

tend to focus on commercial farming activities in developed markets and have

limited expertise in the African continent. As a result, the business has managed

to maintain very strong market share positions on the continent. In our view, the

focus on Africa is a key competitive edge. We therefore contend that SeedCo will continue

to grow and maintain dominant market positions in various SSA countries.

On the other end, smaller local players in various markets could find it difficult to

enter the market segment given that biotechnology requires investments in research

and development (R&D). For example, SeedCo has been investing c4.0% of its

revenues in R&D and plans to increase this to 10% in the long term.

55


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R&D as a % o f revenues-RHS

Global Seed Market Shares R&D Spend Historical Progression

Source: ETC Group. Source: BPI Capital Africa, Company.

3. LIMAGRAIN PARTNERSHIP IS SET TO UNLOCK VALUE

We remain bullish that the partnership with Limagrain will unlock value in the long term.

Groupe Limagrain, the world leader in vegetable and field seeds and the fourth

largest seed company in the world has come on board and is targeting a minority

stake in SeedCo of 31% by December 2014. While the initial terms of the transaction

indicated that Limagrain will eventually own 25%, Groupe Limagrain has been

making market purchases. The group purchased two blocks of shares during 1H14

(3.5% and 2.9%, respectively). Consequently, the stake of Vilmorin & Cie in SeedCo

is expected to increase to 31.4%.

In our view, the partnership will enhance SeedCo's research capabilities. We expect SeedCo

to benefit from an importation of new technology. Limagrain has more than 100

research centres and over 1,400 researchers over the world that create approximately

600 new varieties each year. The group's annual research budget is in the region of

€ 162m. SeedCo is therefore set to leverage from the strong R&D capabilities.

The partnership has led to a cash injection of USD13m which has assisted in funding the

business. The transaction was structured in two phases. In the first stage, Limagrain

purchased a block of shares from majority shareholder (AICO) and then participated

in SeedCo's reserved capital increase and this led to a 15% stake (effective price of

USD0.9925). The second stage will involve the exercise of a call option (strike price

of USD1.0921).This second part of the equity raise is expected to be completed

before December 2014 and will raise an addition USD27m, implying total proceeds

of USD40m. The capital will be directed towards debt expulsion and regional

expansion efforts. We also highlight that interest bearing borrowings in FY14

declined by 32% from USD43.7m to USD32.2m.

4. LOW CAPEX DEMANDS

A key advantage is that SeedCo's business model is not demanding on capex (ex-R&D).

Generally, most companies in the agricultural sector consume significant amounts

of cash on the back of high capex requirements associated with farm acquisitions

and maintenance. SeedCo is a biotechnology company and most investments are in

R&D. We also like the out-grower model that does not compel the company to invest

in farms. Total capex for FY14 amounted to USD9.5m (8% of net revenues). We are

forecasting capex as a percentage of net sales to average about 6% in the outlook period.

56


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SeedCo has registered an average ROIC of 16% in the past 4 years. We note that this is

significantly above the 1.0% ROIC registered by Zambeef in FY13. Overall, we are

forecasting SeedCo's ROIC to increase from a low of 10% in FY14 to 19% by FY18F.

Evolution of Capex SeedCo vs Zambeef: Evolution of ROIC

Source: BPI Capital Africa,Company. Source: BPI Capital Africa,Company.

5. DERISKING THROUGH M&A ACTIVITY

SeedCo has been looking to reduce its exposure in Quton (the cotton business). According

to management, the cotton industry remains largely volatile. In Zimbabwe, the

industry continues to be affected by structural issues. In FY14, turnover declined

by 36% from USD12.8m to USD8.2m as there was poor farmer sentiment owing to

depressed commodity prices.

Enter Mahyco. SeedCo has recently agreed to sell 60% of its shares in Quton to

Mahyco, a company that develops and markets genetically modified seed. Mahyco

was the first firm in India to sell GM cotton on a commercial basis since 2002. It

is worth noting that Monsanto, the world's biggest producer of genetically modified

seed, pesticides and herbicides, owns 26% of Mahyco via Monsanto India, a 72%

subsidiary.

CTC gives a conditional approval. The Competitions and Tariffs Commission (CTC)

has approved the deal on conditions that Quton would adhere to the demands of

the Seed Services Laboratory Institute which is a specialised department that

deals with GMOs.

Overall, we are positive on the transaction as this will lead to a direct cash injection and

also reduce exposure to a volatile market segment. This will also enable SeedCo to

concentrate on its core competency, which is maize hybrid seed business. Mahyco

is also expected to bring expertise on cotton seed development in the country.

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KEY DOWNSIDE RISKS

The Working Capital Question

The major risk associated with the SeedCo's business model is the exposure to governments

that may delay payments. It is clear that the government's failure to settle debts can

negatively impact financial performance. A breakdown of the FY14 trade receivables

(USD75m), showed that 51% of the accounts receivable figure was due from the

Zimbabwe government (USD38m). More recently, the Government of Zimbabwe

has allotted SeedCo a USD20m, 2.5-Yr Treasury Bill at a yield of 2.0%p.a as

settlement for part of the long standing debt. SeedCo, together with other seed

companies in Zimbabwe are negotiating with authorities for a reduction in the TB

tenure from 2.5 years to 1.0 year. It is difficult to assess the tradability of the

Treasury Bills at this stage given the current state of the Zimbabwe financial markets

that is marked by liquidity constraints.

Analysis of Working Capital Changes Breakdown of FY14 Trade Receivables

(USD75m)

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Trade and other payables (USDm)WC as a % of Sales

Source: BPI Capital Africa,Company. Source: Company.

The Zimbabwe Government remains cash strapped. According to the 2014 Mid-Year

Fiscal Policy Review Statement, cumulative revenue collections for the period

January-June 2014 amounted to USD1.7bn against a target of USD1.9bn, resulting

in a shortfall of USD112m. Also, recurrent expenditures such as employment costs

constituted c76% of total expenditures and this has largely compromised other

essential expenditures. The risk for SeedCo is that an inability to pay on time may

result in higher financing costs thus putting pressure on margins.

Risk Mitigation Measures

Besides engaging with relevant authorities to make sure that the debt is cleared, SeedCo

has taken a number of strategic moves to manage its working capital positions and this

has entailed:

Right-sizing stock levels. We recall that there was an overproduction in FY12 as SeedCo

ramped up maize seed production in Zimbabwe to about 30,000MT. Demand of

maize seed in Zimbabwe then turned out lower at 17,000MT, which led to an increase

in total carry-over stocks to about 37,000MT (63% of sales vs. target of 20%). SeedCo

has been unwinding this position and carryover seed volumes have come down to

c18,600MT. With stock levels reduced, the business is no longer under pressure to

sell any excess stocks to government. In FY14, inventories declined 24% yoy to USD33m.

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SeedCo Production vs Volumes Sold (MT) Analysis of Inventory Turnover


Other measures being pursued by management to liquidate account receivables in

Zimbabwe include:

- Net-off arrangements. SeedCo is looking at an arrangement whereby it can net

off taxes due to Zimbabwe Revenue Authority (ZIMRA) against the debt owed

by the government. Indications are that total amount of USD4.0m will be offset

through tax payable to the Zimbabwe Revenue Authority (ZIMRA); and

- Charging above-market rates on accounts receivables. We note that SeedCo has

been applying a high interest rate on debtors of c10%-14% p.a vs money

market deposit rates in Zimbabwe of c2-3% pa. This measure is expected to

discourage delays in payments particularly on the part of debtors.

Going forward, SeedCo will be employing stricter measures when dealing with the

Zimbabwean Government. Management have indicated that SeedCo will look to support

Agriculture programmes only when there are special arrangements with quasi -

government institutions such as NSSA or development banks such as PTA and

Afreximbank. In the outlook period, account receivables should continue to grow,

bearing in mind that Zimbabwe remains a key market for SeedCo (42% of revenues).

However, our forecasts show that account receivables will increase at a declining

rate as we expect the various measures being set by management to yield positive

results. We estimate receivables to constitute c60% of revenues between FY15F and

FY18F.

OTHER RISKS

- Risk of a change in public agriculture policy in a country could mean a significant

reduction in the company's volumes;

- Political/economic risks (e.g. in Zimbabwe);

- Droughts may affect the ability of communal farmers to finance seed purchases;

- Inadequate funds to purchase inputs and infrastructure can impact earnings

capabilities; and

- Poor farming practices such as recycling seed is a major concern in most African

states.

59


CHANGES TO ESTIMATES & OUTLOOK

We have recently increased our revenue estimates by an average of 2% between FY15F

and FY18F (Please see our research note (Five Reasons to BUY…) dated 17th of

September). We expect growth to be driven by increased penetration in East Africa

(market share gains in Tanzania and Kenya) and (ii) improved pricing in Malawi.

Other long term benefits are expected from inroads into DRC, Uganda and West

Africa. We estimate FY14-18F revenue CAGR of 11.6%.


2015F 2016F 2017F 2018F 15F-18F

New Old Var New Old Var New Old Var New Old Var Avg ∆Revenues 133.6 133.9 0% 149.8 148.5 1% 167.5 163.5 2% 186.5 178.9 4% 2%

yoy 11% 12% 12% 11% 12% 10% 10% 9%

EBITDA 29.4 35.9 -18% 34.4 40.1 -14% 41.9 44.4 -6% 49.0 49.0 0% -9%

margin 22% 27% 23% 27% 25% 27% 26% 27% -4%

EBIT 25.0 31.4 -20% 29.5 35.2 -16% 36.4 39.2 -7% 42.8 43.4 -1% -11%

margin 19% 23% 20% 24% 22% 24% 23% 24% -5%

Interest costs -2.3 -2.3 0% -1.0 -1.0 0% -0.4 -0.4 0% -0.4 -0.4 0% 0%

PBT 22.7 29.1 -22% 28.6 34.2 -17% 36.0 38.8 -7% 42.5 43.1 -1% -12%

yoy 46% 25% 26% 17% 26% 14% 18% 11% 66%

Diluted EPS (USD) 0.07 0.11 -35% 0.09 0.13 -28% 0.12 0.14 -18% 0.14 0.15 -11% -23%

Capex -9.9 -9.4 5% -9.0 -10.4 -14% -8.4 -9.0 -7% -7.5 -9.8 -24% -10%


Revenue and EBITDA Margin Progression Revenues Breakdown per Country (USDm)


Our EBIT margins are cut by an average of 11% between FY15F and FY18F. We maintain

that a recovery of gross margins to historic levels of c50% will take some time given

constraints associated with price increases. It is worth highlighting the SeedCo's

prime target markets are subsistence farmers and this may hinder aggressive price

increases. We also think SeedCo should continue to incur business development

related costs on the back of its expansion strategy in SSA. Nonetheless, SeedCo

should see an upliftment in the EBIT margin from a low of 15% registered in FY14

(affected by once-offs) to 23% by FY18F. Management expect the business to rebound

in 2H15F and margins in all markets should improve on the back of (i) price

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60


increases,(ii) minimal stock write downs during the year; and (iii) reduced finance

costs. The major risk that we foresee is around managing the group's exposure to

the cash-strapped Zimbabwean government. Nonetheless, we remain confident in

management's efforts to manage liquidity risk going forward. Overall, we are projecting

FY14-18F EBIT CAGR of 23%.

We have largely left our finance costs assumptions unchanged. We expect SeedCo to

benefit from a cash injection of USD27m from the Limagrain call option. We

therefore estimate a net cash position from FY16F onwards.

Overall, our EPS is cut by an average of 23% between FY15F and FY18F as we forecast

FY14-18F EPS CAGR of 24%. We however note that there will be a dilution impact in

FY15F from the increase in the number of shares emanating from the Limagrain

transaction. We estimate EPS to grow by 29% yoy to USD7.4c in FY15F.

We have cut our capex assumptions by an average of 10% between FY15F and FY18F. We

do not foresee any significant capex projects and estimate average capex of cUSD9m

per annum. In FY14, the group invested USD9.5m in capex which was directed

towards construction of the Malawi factory and upgrading the factory in Tanzania.


Our YE15 Price Target at USD1.40 is 6% above our previous YE14 Price Target of

USD1.32. We have applied the following DCF valuation assumptions (risk free rate

of 13%, beta of 0.6, cost of debt of 11.5%, theoretical gearing of 10% and long

term growth rate of 5% which gives a WACC of 15.9%).

SeedCo DCF Valuation

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25

EBIT 25.0 29.5 36.4 42.8 51.2 60.4 65.2 77.1 87.7 98.8 113.9

Tax -6.0 -7.4 -9.1 -10.7 -12.8 -15.1 -16.3 -19.3 -21.9 -24.7 -28.5

NOPLAT 19.0 22.1 27.3 32.1 38.4 45.3 48.9 57.8 65.7 74.1 85.4

D&A 4.4 4.9 5.5 6.1 6.8 6.8 9.9 8.2 9.0 9.9 9.0

NWC Change -1.5 -7.1 -3.3 -0.6 -8.7 -8.7 -6.6 -3.9 -3.4 -2.7 -1.8

Capex -9.9 -9.0 -8.4 -7.5 -6.8 -6.8 -9.9 -8.2 -9.0 -9.9 -9.0

OpFCF 12.0 11.0 21.1 30.2 29.8 36.7 42.2 53.9 62.4 71.4 83.6

Discount period - 1 2 3 4 5 6 7 8 9 10

Discount 1.00 0.86 0.74 0.64 0.55 0.48 0.41 0.36 0.31 0.26 0.23

Discounted FCF 12.0 9.5 15.7 19.4 16.5 17.5 17.4 19.1 19.1 18.9 19.0

Terminal value 757

Discounted TV 172

EV 356

FY14 net debt 32

Financial Assets 1.4

Equity fair value (USDm) 326

Number of shares in issue (1) 234

YE15 Fair Price (USD/share) 1.56

Small Caps Discount 10%

YE15 Price Target (USD/share) 1.40

Upside 56%

(1) Fully diluted shares including Limagrain Share Option Shares.

Source: BPI Capital Africa

61


Sensitivity Analysis (USD/Share)

Risk Free Rate

12.0% 12.5% 13.0% 13.5% 14.0%

4.0% 1.49 1.41 1.34 1.28 1.22

4.5% 1.53 1.45 1.37 1.31 1.24

LT growth rate (g) 5.0% 1.57 1.48 1.40 1.34 1.27

5.5% 1.62 1.53 1.44 1.37 1.30

6.0% 1.67 1.57 1.49 1.41 1.33


We have performed a sensitivity analysis to the risk free rate and long term growth rate of

SeedCo, so investors can easily consider different assumptions. We believe one of the

key aspects that investors are concerned about the exposure to Zimbabwe and the

applicable risk free rate.

We have used a risk free rate of 13% in our consolidated model. However, as would be

expected, different assumptions could lead to material differences in the valuation

of SeedCo. Assuming a risk free rate of 12.0%, our YE15PT would be USD1.57/

share and our upside potential, 62%. If we use a risk free rate of 14%, our PT

would stand at USD1.27/share, and our upside potential would be 31%.

WORSE CASE SCENARIO

We have considered a theoretically worst case scenario that would imply a complete

write off of the Zimbabwe government debt (currently amounting to USD38m

(including the USD20m TB)). Subtracting this value from our FV would imply a

valuation of USD1.24, which still shows an upside of 38% on the current price.

Comparative Analysis of Global Seed and Chemical Protection Companies

Mkt. Cap PER EV/EBITDA EV/Sales P/BV ROE (%) Div. Yield (%)

Company Country USDm 15F 16F 17 F 15F 16 F 17F 15 F 16F 17F 15F 16F 17F 15F 16F 17F 15 F 16F 17 F

SeedCo Zimbabwe 186 12.2 9.8 7.8 6.3 6.1 4.6 1.4 1.4 1.2 1.3 1.3 1.2 12 14 15 3.6 3.9 4.9

Global Comparatives

Monsanto US 57 856 17.6 15.1 15.1 11.3 9.9 9.9 3.7 3.3 3.3 6.2 4.8 4.8 41 40 40 1.7 1.8 1.8

Dow Chemical US 59 282 14.4 12.2 12.2 8.3 7.5 7.5 1.3 1.3 1.3 2.2 1.9 1.9 16 18 18 3.1 3.3 3.3

Syngeta Switz. 30 101 15.4 13.8 13.8 10.9 9.8 9.8 2.2 2.1 2.1 2.8 2.6 2.6 18 19 19 3.7 4.0 4.0

Mosaic US 16 754 13.7 11.8 11.8 7.1 6.4 6.4 1.8 1.7 1.7 1.4 1.3 1.3 12 13 13 2.3 2.3 2.3

Agrium US 14 391 12.9 11.4 11.4 8.3 7.5 7.5 1.1 1.1 1.1 1.9 1.7 1.7 15 16 16 3.1 3.2 3.2

CF Industries US 13 176 12.7 10.3 10.3 7.0 6.2 6.2 3.4 2.9 2.9 2.5 2.3 2.3 24 27 27 2.2 2.1 2.1

FMC Group US 7 568 12.9 11.4 11.4 9.0 8.2 8.2 2.0 1.9 1.9 3.6 3.2 3.2 30 32 32 1.3 1.4 1.4

KWS SAAT Germany 2 138 17.4 15.7 15.7 8.7 7.7 7.7 1.3 1.2 1.2 2.2 2.0 2.0 13 13 13 1.3 1.4 1.4

Vilmorin & Cie France 1 910 14.0 13.0 13.0 6.7 7.1 7.1 1.4 1.4 1.4 1.3 1.2 1.2 9 9 9 2.3 2.2 2.2

Average 14.3 12.5 12.3 8.4 7.6 7.5 2.0 1.8 1.8 2.5 2.2 2.2 19 20 20 2.4 2.6 2.7

Source: Bloomberg.

WACC Calculations

Risk free rate 13.0%

Risk premium 6.0%

Beta 0.6

CoE 16.6%

Avg cost of debt 11.5%

Tax rate 19%


Gearing 10%

WACC 15.9%

LT growth 5.0%


62


SeedCo has no close comparatives in SSA. Most comparable SSA seed companies are

private companies or subsidiaries of Global Seed Majors such as Monsanto. We

have however performed a comparative analysis of global seed groups for illustrative

purposes.

Strong Valuation Upside. Our YE15 PT of USD1.40 shows a potential upside of 56% on

the current trading price. Further, SeedCo's FY16F PER and EV/EBITDA of 9.8x and

6.1x is at a discount to global seed major averages of 12.5x and 7.6x, respectively.

SeedCo provides a one-stop avenue to gain exposure in SSA Agriculture. Key risks

include political /economic risk and limited agricultural support by governments.

Positive triggers are (i) faster growth in new markets (East & West Africa) and (ii)

improved working capital management. We reinforce our BUY recommendation.

Equity Story

Positives Negatives

Attractive exposure to SSA Agriculture Political risks in the region ( e.g. Zimbabwe risk)

Wide distribution network in the region Large exposure to governments and donor funding

Strong growth opportunity in East & West Africa Exposure to commodity price volatility

Strong management team Exposure to adverse climatic events (floods &

droughts)

Strong barriers to entry in the Industry Limited pricing power (focus is on communal

farmers)


SeedCo Key Metrics

2013 2014 2015F 2016F 2017F 2018F

ROE 15% 12% 12% 14% 15% 16%

ROA 8% 7% 10% 11% 13% 14%

ROIC 14% 10% 13% 14% 17% 20%

Net gearing 52% 32% 0% -1% -9% -19%

Net debt/EBITDA 1.7 1.4 0.0 -0.0 -0.4 -0.8

Interest cover 3.1 6.1 10.8 30.7 92.0 119.0

Asset Turnover 69% 71% 76% 78% 79% 79%

Cash Conversion 46% 80% 143% 52% 75% 82%

Cal PE 15.7 13.1 10.4 8.3 6.9 5.8

Cal EV/EBITDA 9.1 7.0 6.1 5.0 3.8 2.9


63


APPENDIX I: SEEDCO'S FOOTPRINT IN AFRICA


64


Income Statement

CAGR

(USDm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net revenues 111 120 134 150 167 187 12%

EBITDA 26 23 29 34 42 49 21%

EBITDA margin 23.7% 18.8% 22.0% 23.0% 25.0% 26.3%

Dep.+ Provision -4 -4 -4 -5 -6 -6

EBIT 23 19 25 30 36 43 23%

EBIT margin 20.4% 15.5% 18.7% 19.7% 21.7% 23.0%

Net financials -7 -3 -2 -1 0 0

Extraodinaries 0 0 0 0 1 2

Taxes -3 -4 -5 -7 -9 -11

Minority interests 0 0 0 0 0 0

Net profit 12 12 17 21 28 34 30%

Balance Sheet

CAGR

(USDm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net intangibles 0.6 0.6 0.6 0.6 0.6 0.6 0%

Net fixed assets 43 47 53 57 60 61 9%

Financial assets 1 1 21 21 21 21 138%

Inventories 43 33 32 35 39 41

ST Receivables 68 84 67 75 75 73 2%

Other Assets 1 1 1 1 1 1 12%

Cash & Equivalents 5 4 6 7 17 38

Net assets 161 170 181 197 213 236 10%

Equity & Minorities 84 102 141 156 175 195 24%

MLT Liabilities 10 13 9 9 9 9

o.w. Debt 1 4 0 0 0 0

ST Liabilities 22 24 26 28 30 32 9%

o.w. Debt 46 32 0 0 0 0

Equity + Min. + Liab 162 170 181 197 213 236 10%

Cash Flow Statement

(USDm) 2013 2014 2015F 2016F 2017F 2018F

+ EBITDA 26 23 29 34 42 49

+ Change in working capital -11 -1 19 -9 -1 2

= Operating cash flow 16 22 48 25 41 51

Capex -8 -10 -10 -9 -8 -7

Net Financial Inv. 0 0 0 0 0 0

= C.F. after Investments 7 12 38 16 32 43

- Net Fin. Expenses -7 -8 -2 -1 0 0

- Taxes Paid -3 -4 -5 -7 -9 -11

- Dividends Paid -3 0 -5 -6 -8 -11

+ Equity Increase 0 13 27 0 0 0

- Others 2 -2 0 0 0 0

Change in net debt (FCF) 4 -12 -52 -2 -15 -21

Source: Company data (2013. 2014). BPI Capital Africa (F).

Africa exposure remains a bonus…(YE15 PT of R406 vs YE14 PT of R360, Recommendation downgrading to Hold)

4 We have rolled over our valuation to YE15, setting our PT at R406/ share (8% upside).

However, we downgrade our recommendation from BUY to HOLD owing to recent

share price outperformance. Tiger Brands recently released its FY14 results,

indicating a 15% growth in HEPS from continuing operations (vs our estimate

of 18% growth). While the performance was slightly below our estimates, it is

above the street's expectations. The growth has largely been driven by an improvement

in the trading environment, particularly in SA, namely Grains and Groceries.

4 Dominant market player in SA while the rest of Africa promises long term growth.

Tiger Brands' domestic businesses remain a key pillar of the business constituting

c75% of its revenues. While the group has reached some level of maturity in

the domestic market, most of the units remain sound. On the other hand,

Africa (ex-SA) operations (including exports) contributes c25% to revenues and

should increase to 32% by FY18F (mainly Nigeria, 13% and Exports 8%). We

expect Tiger Brands to accelerate its earnings performance and register FY14-

18F revenue CAGR of 10%, adj. EPS CAGR14-18F of 17% while generating

significant cash flow.

4 Key triggers for positive earnings surprises in the MLT include: (i) a turnaround at

DFM, (ii) margin recovery within the Groceries division and (iii) robust export

sales. Key risks include further restructuring hurdles in Africa and intensifying

competition in the domestic market. At a 13.5x FY16F PER and 10.6x FY16F

EV/EBITDA, the stock is at a premium to its SA peers in the short term, but

remains at a discount to EM peers. We believe that the premium on SA Food

Producers is justifiable given that the Tiger Brands business model is more

aligned to MNCs that tend to have a strong focus on international expansion.

Stock data

Price (R): 378 Price Target (R): 406

Nº of shares (m): 164 Bloomberg/Reuters: TBS SJ/TBS

Market Cap (Rm): 61 851 Market Cap (USD m): 5 623

Avg.Daily Vol. [R 'm]: 180.4 Avg.Daily Vol. [USD 'm] 16.4

Net Debt/EBITDA'13: 1.2 Free-Float: 55%

EPS CAGR ('14-'18F): 17% ROE'14: 15%

Major shareholders: PIC (9.8%); Colonial First State (9.2%);

Tiger Consumer Brands (5.4%)

Sept YE 2013 2014 2015F 2016F 2017F 2018F

EPS (R)(1) 15.7 18.8 23.7 27.9 31.4 34.6

P/E 24.0 20.1 15.9 13.5 12.0 10.9

Dividend Yield 2.3% 2.6% 3.3% 3.8% 4.3% 4.8%

FCF Yield 3.1% 2.1% 4.5% 5.7% 6.5% 7.3%

EV/EBITDA 18.3 15.3 12.3 10.6 9.4 8.4

(1) Adj for non-recurrent items.

EQUITY RESEARCH

Tiger BrandsFood

HoldMedium-Risk

November 2014

South Africa

Tiger Brands vs. JSE ALSI vs.

JSE Food Producers Index




Source: Bloomberg.


Date Recommendation

29-Jul-14(1) Buy



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

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Comparison of Revenue Growth


0% 10% 20% 30%

Do mesticOperatio ns

Internatio nal& Exports

(exc N igeria)

N igeria

Gro up

FY14-18F Rev CAGR

FY10-14 Rev CA GR

66


Income Statement

CAGR

12m to Sept (Rm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net revenues 27 004 30 072 33 824 37 244 40 530 43 790 10%

EBITDA 3 770 4 273 5 373 6 092 6 681 7 248 14%

EBITDA margin 14.0% 14.2% 15.9% 16.4% 16.5% 16.6%

Dep.+ Provision 688 717 734 741 734 714

EBIT 3 083 3 556 4 639 5 351 5 947 6 535 16%

EBIT margin 11.4% 11.8% 13.7% 14.4% 14.7% 14.9%

Net financials -379 -403 -238 -129 -103 -101

Associates 515 597 774 884 1 017 1 139 18%

Taxes -837 -832 -1 344 -1 586 -1 782 -1 966 24%

Minority interests 22 115 27 30 32 35

Net profit 2 577 2 020 3 879 4 574 5 138 5 669 29%

Balance Sheet

CAGR

12m to Sept (Rm) 2013 2014 2015F 2016F 2017F 2018F 14-18F

Net intangibles 5 425 4 527 4 527 4 527 4 527 4 527 0%

Net fixed assets 5 499 5 868 6 628 6 669 6 706 6 736 4%

Investments in associates 2 901 3 128 3 449 3 817 4 240 4 714 11%

Financial assets 651 820 820 820 820 820

Inventories 4 653 4 701 5 243 5 587 5 877 6 131 7%

ST Receivables 4 200 4 867 5 092 5 420 5 696 5 935 5%

Other Assets 1 281 - - - - -

Cash & Equivalents 633 312 313 325 1 949 3 836 87%

Net assets 25 241 24 222 25 758 27 141 29 814 32 698 8%


MLT Liabilities 2 397 1 533 2 383 2 388 2 388 2 383 12%

o.w. Debt 1 453 627 1 478 1 483 1 483 1 478 24%

ST Liabilities 9 029 9 372 7 472 6 683 6 923 7 126 -7%

o.w. Debt 3 650 4 022 1 997 933 948 963 -30%

Equity + Min. + Liab 25 242 25 164 25 758 27 141 29 814 32 698 7%

Cash Flow Statement

12m to Sept (Rm) 2013 2014 2015F 2016F 2017F 2018F

+ EBITDA 3 770 4 273 5 373 6 092 6 681 7 248

Change in working capital -337 -261 -642 -397 -341 -304


Capex -728 -983 -778 -782 -770 -744

Net Financial Inv. -2 554 568 0 0 0 0

= C.F. after Investments 151 3 597 3 953 4 913 5 569 6 200

Net Fin. Expenses -409 -403 -238 -129 -103 -101

Taxes Paid -986 -832 -1 344 -1 586 -1 782 -1 966

Dividends Paid -1 125 -1 228 -1 544 -1 839 -2 052 -2 255

Equity Increase 18 22 0 0 0 0

*Others 541 17 0 0 0 0

= Change in net debt 1 811 -1 173 -827 -1 360 -1 633 -1 877


Milling & Baking

DCF Assumptions

Risk free rate 8%


Beta 0.9

Cost of equity 13%

Cost of debt 10%

Tax rate 26%


Debt/EV 20%

WACC 11.9%

Long term growth rate 3.0%


FY14 Revenue Contribution by

Business Segment

Source: Tiger Brands.

FY18F EBIT Contribution by

Business Segment


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Reshuffling Mode(YE15PT of NGN57.00 and Buy Recommendation)

4 UACN has been undertaking an amazing transformation of its business model in order

to strengthen its competitive position. Key strategies have been (1) setting-up

partnerships with strong SA players, namely Tiger Brands, (UAC Foods), Famous

Brands (Fast Food) and Imperial (logistics); (2) giving scale to Grand Cereals

and the lucrative paint unit; and (3) extracting value from its real estate assets

(UPDC). Management execution has been visible both in terms of revenues and

margins, but recent numbers were hit by slow private consumption, rising

competition and security concerns (Boko Haram and Ebola): total EBIT and

EPS declined by 24% and 21% in 9M14.

4 UACN's exposure to consumer spending is twofold and should support improved

earnings. Firstly, the Food arm (46% of 9M14 PBT) should benefit from the

recent partnerships, increased production capacity, innovative products and a

more benign consumer environment. Secondly, the exposure to real estate (11%

of 9M14 PBT) is unique and should benefit from the large deficit of residential

and commercial real estate in Nigeria. Overall, we estimate FY13-17F EBIT and

EPS CAGR of 8% and 11%, respectively. However, we are below market consensus.

4 The stock showed a strong price correction, in line with the Nigerian market. UAC is

now trading at a FY15P/E of 13.8x (11.8x in FY16F) and FY15 EV/EBITDA of

4.8x (4.2x in FY16F), which we find attractive and it is showing a 27% discount

to our SoP using the average market multiple for each business. We have set

our YE15 PT at NGN57/share, which indicates significant upside potential. Positive

triggers are (i) further restructuring benefits; (ii) acceleration of the real estate

business and (iii) a gradual stabilisation of the situation in Northern Nigeria.

Key risks are (i) competition and (ii) raw material constraints (Grand Cereals &

Livestock Feeds). BUY.

Stock data

Price (NGN): 44.00 Price Target (NGN): 57.00

Nº of shares (mn): 1 921 Bloomberg: UACN NL

Market Cap (NGNmn): 84 518 Market Cap (USD mn): 494

Avg. Daily Vol. [NGN '000]: 70 656 Avg. Daily Vol. [USD '000]: 413


EPS growth ('13-'17F) 11% ROE'13: 12%

Major shareholders: Franklin Resources (4.6%); JP Morgan (1.6%); Udoma (1.3%)

December YE 2012 2013 2014F 2015F 2016F 2017F

Diluted EPS (NGN) 2.6 2.9 2.3 3.2 3.7 4.4

PER 13.1 15.0 18.9 13.8 11.8 10.0

Dividend Yield 4.8% 4.0% 2.4% 3.3% 3.8% 4.5%

FCF Yield 27.4% -1.0% 6.0% 8.7% 10.8% 12.9%

EV/EBITDA 4.5 5.1 5.8 4.8 4.2 3.7

EQUITY RESEARCH

UAC of NigeriaFood

BuyHigh-Risk

November 2014

Nigeria

UAC vs. NSE All Share Index

vs. S&P Africa Frontier




Source: Bloomberg.


Date Recommendation

11-Apr-12(1) Buy

14-Aug-12 Hold



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

68


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SHRINKAGE IN THE ECONOMIC MAP AFFECTS 9M14NUMBERS

UACN released its 9M14 results, showing flattish turnover (0.9% yoy growth). This

performance was mainly a result of (i) weak consumer demand; (ii) competition

and (iii) insecurity issues in Northern Nigeria. Security concerns have severely

affected the trade execution of FMCG companies, implying shrinkage in the economic

map. Other external factors include the Ebola outbreak that impacted volumes in

the retail market, hospitality and QSR. Divisional performances during the period

were mixed, with UPDC revenues declining 18% yoy, UAC Restaurants (-18%),

UAC Foods (+4%), Grand Cereals (+2%), MDS Logistics (+5%), CAP (+15%),

Livestock Feeds (+27%), Portland Paint (+2%). We note that UPDC and Grand Cereals

were the weakest links given their relative size and contribution to revenues.

Evolution of Revenues (NGNm) FY14F Revenue Contribution

Source: Company and BPI Capital Africa.

The Gross profit margin declined from 23.5% in 9M13 to 22.6%. According to the

company, the decline in the GP margin was largely a result of difficulties in accessing

raw materials in the Northern parts of the country. While financial charges for the

period were down 28.1% yoy, PAT plunged 20.5%. The bottom line was largely

affected by a 36% decline in "other income", resulted from a subdued trading

activity at UPDC. In fact, UACN reported negative 'other income' of NGN78m in

3Q14 vs. NGN2.1bn in 3Q13. Management indicated that uncertainties related to

socio-political developments were delaying buying decisions in the real estate

category. Overall, annualised EPS came in at 176kobo vs 231kobo in 9M13.

FY13 Revenue Contribution 9M14 PBT Contribution


Source: Company.

69


OVERVIEW OF KEY OPERATING DIVISIONS

Food & Beverages (71% of FY13 Revenue & 37% of PBT)

The food & beverages business remains the mainstay of the business and encompasses a

number of food and agri-allied businesses. We analyse the key business units hereunder:

- Grand Cereals constitutes c60% of the food & beverages revenues. The business focuses

on edible oils, cereal meals and stock feed. Some of its brands include Grand Soya

Oil, Vital Poultry/Fish Feeds and Grand Maize Meals. During 9M14, the business

registered a 2% growth in revenues while PBT was up 14% yoy to NGN1.73bn as

cost containment initiatives delivered efficiency gains, thus driving margin gains.

- Livestock Feeds is an animal feeds manufacturer operating in Nigeria. This unit was

acquired in 2013 given the strong synergies it has with Crand Cereals. During

9M14, the business registered a 27% growth in revenues while PBT was up

46% as the unit benefited from additional capacity emanating from the

commissioning of a new mill in Ikeja.

- UAC Foods constitutes c27% of food & beverages revenues. The unit is a JV between

UACN (51%) and Tiger Brands (49%) and focuses on key FMCG brands such as

Gala Sausage Roll, Funtime Cake, Funtime Coconut Chips, Gala Crunchies, Snaps

Cheeseballs, Supreme Ice Cream, Supreme Flavoured Milk, Delite Fruit Juice,

Swan Water and Swan Soft Drinks. The business has leading market positions in

key food segments such as c16% of the sausage roll market and c39% of the ice

cream market. During 9M14, the business registered a 4% growth in revenues

while PBT was down 12%. Revenue growth was driven by new product developments

(Kingsway Beef Roll, Gala Chicken Sausage and Gala Tinkies). However, competitive

pressures persist while security issues continue to weigh in on margins.

Packaged Food in Nigeria - Market Shares Sausage Rolls Market Shares in Nigeria

Ice Cream Market Share in Nigeria


- UAC Restaurants manages the Quick Service Restaurants (QSR) arm of the business.

UAC Restaurants has partnered with South Africa's Famous Brands. The industry

has been marked by significant competitive threats in the industry from local and

international operators. During 9M14, insecurity issues in the North negatively

impacted UACN's restaurants business, particularly in places like Abuja, Kaduna

and Kano. Consequently, revenues declined 18% yoy and PBT was down 49%.


70


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Overall, the Food & Beverages division has registered strong FY09-13 revenue CAGR of

13%. However, we expect slower growth in FY14F and project top-line growth of

c6% on the back of slow demand, rising competition and insecurity issues. We

therefore expect margins to come under pressure in FY14F. However, we expect an

improvement in the PBT margin from 9.2% to 9.3% as we expect the business

segment to benefit from restructuring efforts at UAC Restaurants (Famous Brands)

and new product innovation initiatives at UAC Foods (such as the new gala). We

are projecting FY13-17F revenue CAGR of 9% on the back of volumes growth kicking in

from new capacity expansion at Livestock Feeds.

Food & Beverages Revenue & PBT Margin Progression

Mr Biggs Outlet in Lagos Competition in Fast Foods: Chicken Republic

Mr Bigg's currently operates over 170 restaurants spread

across 28 states out of the 36 states in Nigeria.


FY17F Revenue Breakdown


Food & Beverages - Operational Performance

2011 2012 2013 2014F 2015F 2016F 2017F

Revenues (NGNm) 43 170 46 406 55 842 59 235 64 831 70 874 77 402

yoy 7% 20% 6% 9% 9% 9%

PBT 2 276 4 418 5 165 5 450 6 029 6 627 7 276

yoy 94% 17% 6% 11% 10% 10%

PBT margin 5% 9.5% 9.2% 9.2% 9.3% 9.4% 9.4%



71


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Real Estate Business (14% of FY13 Revenues & 27% of PBT)

UACN holds a 42% stake in UPDC, a property development and management (globally

accounted). The real estate business has traditionally been strong but has recently

been facing some setbacks. 9M14 turnover was down 18% and PBT declined 74%

to NGN761m on the back of reduced demand for new projects and financing

constraints. In addition, other income was down NGN0.7bn on poor asset sales

during the period. Finance costs at UPDC also increased as there was a marked

slow-down in the off take of new projects. Confidence levels in real estate projects,

particularly in the north (Abuja) waned on the back of security concerns. In fact,

customers are looking to exit some projects, or deploying deposits to other

developments in the southern part of the country.

Well poised for a recovery. We are optimistic that the real estate sector will improve

in the outlook period as confidence in the real estate sector is restored. Management

also expect a REIT distribution in the medium term to lead to cash inflows that will

bring-down financing costs. We are expecting a fall in revenues and margins in

FY14 given the current trading environment. Nonetheless, UPDC should be able

to recover gradually in FY15F, posting a modest revenue growth of 2% and PBT

margin of 20%. All in all, we estimate UPDC to post FY13-17F revenue and PBT CAGR

of 1% and 9%, respectively.

Source: Company and BPI Capital Africa. Source: Global Property Guide.

Real Estate - Operational Performance

2011 2012 2013 2014F 2015F 2016F 2017F

Revenues (NGNm) 6 783 12 076 11 111 10 169 10 372 10 891 11 653

yoy 78% -8% -8% 2% 5% 7%

PBT 2 381 2 960 3 778 1 691 3 297 4 109 5 297

yoy 28% -55% 95% 25% 29%

PBT margin 35.1% 24.5% 34.0% 16.6% 31.8% 37.7% 38.0%


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PAINTS BUSINESS (10% OF FY13 REVENUE & 15% OF PBT)

The paints business encompasses CAP and Portland Paints and is also an important part

the business model as it has some synergies with the real estate arm. UACN recently

increased its stake in Portland Paints from 51.0% to 64.7%. The two businesses

are complimentary given that CAP largely focuses on the premium segment of the

market while Portland Paints focuses the standard (mid-tier) and value segment:

- CAP is a decorative paint producer in Nigeria and a technical licensee of Dulux, which

is a premium brand in the market. During 9M14, turnover increased 15% and PBT

was up 19% as it opened a new Dulux Colour Centre and 3 Dulux Colour Shops.

While the business faced some insecurity issues in the North, we note that there

are generally a few number of Colour Centres in the Northern parts of the country

and most of the shops are concentrated in the Southern part of the country.

- Portland Paints is a smaller paint manufacturer in Nigeria with a strong brand, broad

product range and a nationwide distribution network. During 9M14, turnover

increased 2% yoy while PBT was up 62% yoy. Portland Paints has been

undergoing a restructuring exercise which has involved discontinuing the

bathroom sales operation to focus largely on decorative and marine paints.

All in all, the paints business has registered FY09-13 revenue CAGR of 26% boosted by

the consolidation of Portland Paints. Margins have also been strong with 3-Y average

PBT margin of 30%. The paints business should continue to register robust top-

line growth, bolstered by demand in new segments such as marine paints (oil &

gas sector). We project FY13-17F revenue and PBT CAGR of 12% and 15%, respectively.

We estimate an increase in the PBT margin from 28% in FY13 to 32% by FY17F.

Paints Revenue & PBT Margin Progression Decorative Paints Per Capita Consumption (kg)

Source: Company and BPI Capital Africa. Source: Edel Research, Frost & Sullivan, Balifokus, BPI C.A.

Paints - Operational Performance

2011 2012 2013 2014F 2015F 2016F 2017F

Revenues (NGNm) 4 313 5 231 7 541 8 404 9 409 10 500 11 663

yoy 21% 44% 11% 12% 12% 11%

PBT 1 362 1 646 2 126 2 605 3 011 3 360 3 732

yoy 21% 29% 23% 16% 12% 11%

PBT margin 31.6% 31.5% 28.2% 31.0% 32.0% 32.0% 32.0%


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73


Logistics Business (5% of FY13 Revenue & 9% of PBT)

The Logistics business segment is involved in the provision of supply chain services

(warehousing, haulage and re-distribution) in Nigeria through MDS Logistics. The company

is a JV with Imperial Logistics of South Africa (49%). MDS Logistics has a strong

customer base in various sectors such as Food, Beverages, Telecoms and Pharma.

During 9M14, MDS Logistics registered turnover growth of 5%, benefiting from

capacity expansion and PBT was up 2%. Margins were negatively affected by security

challenges in the North that constrained movement of goods hence impacting

volumes.

Logistics Revenue & PBT Margin Progression Competition remains stiff in the logistics space

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The Logistics business has registered FY09-13 revenue and PBT CAGR of 4% and 12%,

respectively. The PBT margin has been strong averaging at 27% in the past three

years. We are however projecting FY13-17F revenue and PBT CAGR of 5% and 4%,

given the stiff competition in the logistics space. We expect the PBT margin to

increase slightly in FY15F and FY16F but settle at a c33% in the outlook period.

Logistics-Operational Performance

2011 2012 2013 2014F 2015F 2016F 2017F

Revenues (NGNm) 3 374 4 047 3 765 3 854 4 051 4 313 4 635

yoy 20% -7% 2% 5% 6% 7%

PBT 526 1 290 1 303 1 233 1 337 1 445 1 529

yoy 145% 1% -5% 8% 8% 6%

PBT margin 15.6% 31.9% 34.6% 32.0% 33.0% 33.5% 33.0%


74


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CONSOLIDATED EARNINGS FORECASTS & OUTLOOK

We estimate UACN to register FY13-17F revenue CAGR of 7.8%. While we expect FY14F

to disappoint on the back of a number of external factors, we expect a recovery in

FY15F. We note that there is a risk that security issues in Nigeria may take longer

to normalise than expected. However, UACN should start to benefit from synergies

within its business model following the recent acquisition of Livestock Feeds and

Portland Paints. UACN's exposure in the defensive food sector through its strong brands

should also drive volumes growth.

Evolution of Revenue & EBITDA Margin Evolution of PBT (NGNm)

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BPI vs. Consensus Estimates (NGNmn)

FY14F FY15F FY16F FY17F

BPI Cons. BPI Cons. BPI Cons. BPI Cons.

Sales 82 190 85 476 -4% 89 280 98 493 -9% 97 293 108 199 -10% 106 176 120 955 -12%

Gross Profit 18 082 20 642 -12% 21 433 24 590 -13% 24 038 27 988 -14% 27 151 31 287 -13%

Gross Margin 22.0% 24.2% 24.0% 25.0% 24.7% 25.9% 25.6% 25.9%

EBIT 12 894 14 756 -13% 16 066 17 270 -7% 18 561 20 330 -9% 20 602 21 148 -3%

EBIT Margin 15.7% 17.3% 18.0% 17.5% 19.1% 18.8% 19.4% 17.5%

PBT 11 507 13 031 -12% 14 290 15 802 -10% 16 255 19 012 -15% 18 657 21 681 -14%

PBT Margin 14.0% 15.2% 16.0% 16.0% 16.7% 17.6% 17.6% 17.9%

Net Income Adj 4 473 5 798 -23% 6 130 7 028 -13% 7 165 8 251 -13% 8 471 9 743 -13%

EPS Adjusted (NGN) 2.3 3.0 -21% 3.2 3.7 -13% 3.7 4.3 -14% 4.4 4.4 1%

Source: BPI Capital Africa, Bloomberg.

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Compared to consensus, our revenue estimates are on average 9% below consensus

between FY14F and FY17F. This can be attributed to our conservative revenue

growth outlook for the key businesses (Food & Bev and Real Estate).

We are forecasting a decline in EBIT margin from 19.4% in FY13 to a low of 15.7% in

FY14F. However, margins are set to improve to c18% in FY15F on the back of a

number of restructurings (UAC restaurants, Portland Paints and Livestock Feeds).

Management is focusing on investing behind brands so as to gain and retain brand

equity. Plant upgrades should also drive efficiency gains, particularly within the

food segment (UAC Foods and Grand Cereals). Management has indicated that

innovation and trade executions will be the key focus areas in order to drive

efficiencies. Overall, we estimate FY13-17F EBIT CAGR of 7.8%.

Evolution of UACN Group Margins Comparison of FY13 Divisional PBT Margins


All in all, we are projecting EPS FY13-17F CAGR of 11%. We expect stronger growth on

the bottom line as the group benefits from a lower tax rate of 29% from FY14F

onwards on the back of the pioneer status in two key businesses; Grand Cereals

(new plant) and UPDC (new real estate projects).

FY17F PBT Contribution


EPS & DPS Evolution of Return Measures


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Finally, we expect UACN's capex trend to ease beyond FY16F. We also estimate a dividend

pay-out ratio of 45% in the outlook period.

Capex Trend Total Dividend & Dividend Cover


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77



We have valued UACN using a combination of a Sum-of-the-parts and DCF valuation

method. Our YE15 Price Target of NGN57.00/share is based on an average of both

valuations.

SOTP Valuation

Contribution to EV

Foods & Beverages

2015F EBITDA 8 285

Target valuation multiple (x) 5.4

Target EV 45 063 38%

Real Estate (UPDC)

2015F EBITDA 4 531



Paints

2015F EBITDA 4 138



Logistics

2015 EBITDA 1 837


Target EV 9 737 8%

Others & Pension

2015F EBITDA 847


Target EV 3 810 3%

Group EV 120 087

Net Debt -17 302

Minorities (PBV of 1.6x) -45 414

Financial Assets (PBV of 1.6x) 58 587





Upside 37%

Source: BPI Capital Africa and Bloomberg.

DCF VALUATION

We have applied the following DCF valuation assumptions.

Valuation Summary (NGN/sh)

SOTP 60

DCF 54


Current share price 44

Upside 30%


DCF Assumptions

Risk free rate 13%

Risk premium 6,0%

Beta 1.2

Cost of equity 19.7%

Cost of debt 13.0%

Tax rate 29%


Gearing 27%

WACC 17.4%

Long Term growth 5.0%


78


DCF (NGNm)

Terminal

2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F Value

EBIT 16 066 18 561 20 602 22 031 23 758 25 055 26 312 28 166 30 280 32 568 35 791

Depreciation 3 571 3 892 4 247 4 645 4 444 4 165 4 100 4 069 4 177 4 371 4 781

∆ Working Capital -1 852 -2 080 -2 284 -2 534 -2 734 -2 956 -3 196 -3 455 -3 916 -4 053 -4 380

Capex -4 910 -4 865 -4 778 -4 645 -4 571 -4 860 -4 555 -4 152 -4 177 -4 371 -4 781

Notional tax -4 579 -5 290 -5 871 -6 279 -6 771 -7 141 -7 499 -8 027 -8 630 -9 282 -10 200

Free cash flow 8 296 10 219 11 915 13 218 14 126 14 264 15 162 16 601 17 734 19 233 21 210 174 572

PV of free cash flow 8 296 8 715 8 667 8 200 7 473 6 436 5 835 5 449 4 964 4 591 4 318 35 542

Value of Operations 108 487

Net Debt -17 302

Minorities (PBV of 1.6x) -45 414

Financial Assets (PBV of 1.6x) 58 587



YE15 Price Target (NGN) 54


Upside 23%


We highlight that (1) financial assets are a significant part of the equity value and are

mainly composed by investment properties - we have valued them at P/BV of 1.6x; and (2)

minorities are related with stakes owned by the SA partners: Tiger Brands, Imperial Logistics

and Famous Brands.

We have performed a DCF sensitivity analysis to the risk free rate and long term growth

rate, so investors can easily consider different assumptions. We have applied a risk free

rate of 13% in our consolidated model. However, as would be expected, different

assumptions could lead to material differences in the valuation of UACN. Assuming

a risk free rate of 12% and a g of 6.0% would imply a YE15PT of NGN59.

Sensitivity Analysis (NGN/Share)

Risk Free Rate

12.0% 12.5% 13.0% 13.5% 14.0%

4.0% 55.2 53.5 51.9 50.3 48.9

4.5% 56.0 54.3 52.6 51.0 49.5

Long term growth rate (g) 5.0% 57.0 55.1 54.2 51.7 50.2

5.5% 58.0 56.0 54.2 52.5 50.8

6.0% 59.1 57.0 55.1 53.3 51.6


79


RECOMMENDATION

Overall, our method signifies strong valuation upside. Our YE15PT of NGN57/share shows

a potential upside of 30% on the current trading price. Positive triggers to share price

performance are (i) further restructuring benefits and (ii) faster turnaround in the

real estate business (UPDC). Key risks are (i) competition from small food players

and large food producers such as Nestle Nigeria and (ii) raw material constraints

(Grand Cereals & Livestock Feeds). BUY.

UACN EQUITY STORY

Positives Negatives

Strong food brands in mass market Complexity of group structure

Increasing exposure to FMCG Large exposure to politically unstable parts

Partnerships with Tiger Brands, in North Nigeria (animal feeds)

Famous Brands & Imperial Stiff competition in food businesses

Strong position and track record in

real estate development

Diversified exposure


UACN Key Metrics

2012 2013 2014F 2015F 2016F 2017F

ROE 12% 14% 11% 12% 12% 13%

ROA 3.3% 4.5% 3.5% 4.6% 5.1% 5.9%

ROIC 10% 12% 10% 12% 13% 14%

Net gearing 27.8% 24.3% 18.9% 12.3% 5.5% -1.4%

Net debt/EBITDA 1.3 0.9 0.9 0.5 0.2 -0.1

Interest cover 14.8 12.1 9.3 9.0 8.0 10.6

Asset Turnover 57% 63% 64% 66% 70% 74%

FCF yield 27% -1% 6% 9% 11% 13%

PER 13.1 15.0 18.9 13.8 11.8 10.0

EV/EBITDA 4.5 5.1 5.8 4.8 4.2 3.7


80


Income Statement

CAGR

(NGNm) 2012 2013 2014F 2015F 2016F 2017F 13-17F

Net revenues 69 632 78 714 82 190 89 280 97 293 106 176 8%

EBITDA 13 330 18 269 16 181 19 637 22 453 24 849 8%

EBITDA margin 19.1% 23.2% 19.7% 22.0% 23.1% 23.4%

Dep.+ Provision -1 804 -3 001 -3 288 -3 571 -3 892 -4 247 9%

EBIT 11 526 15 267 12 894 16 066 18 561 20 602 8%

EBIT margin 16.6% 19.4% 15.7% 18.0% 19.1% 19.4%

Net financials -781 -1 257 -1 387 -1 776 -2 306 -1 944

Extraodinaries - -46 - - - -

Taxes -3 642 -4 062 -3 336 -4 143 -4 712 -5 409 7%

Minority interests -2 992 -4 261 -3 699 -4 018 -4 378 -4 778 3%

Net profit 4 111 5 642 4 473 6 130 7 165 8 471 11%

Balance Sheet

CAGR

(NGNm) 2012 2013 2014F 2015F 2016F 2017F 13-17F

Net intangibles 65 1 331 1 331 1 331 1 331 1 331

Net fixed assets 34 624 35 764 37 819 39 158 40 131 40 662 3%

Financial assets 34 573 36 617 36 617 36 617 36 617 36 617

Inventories 28 484 26 617 27 792 30 011 32 510 35 266 7%

ST Receivables 11 834 13 796 14 794 16 070 17 513 19 112 8%

Other Assets 0 1 997 1 997 1 997 1 997 1 997 0%

Cash & Equivalents 13 397 8 894 8 983 9 073 9 163 9 255 1%

Net assets 122 976 125 015 129 334 134 257 139 262 144 240 4%


MLT Liabilities 18 505 11 249 10 953 10 658 10 362 10 067 -3%

o.w. Debt 15 019 5 910 5 614 5 319 5 023 4 728 -5%

ST Liabilities 43 870 42 447 40 902 38 732 35 714 31 550 -7%

o.w. Debt 15 247 20 286 17 979 14 166 9 286 3 051 -38%

Equity + Min. + Liab 122 976 125 015 129 334 134 257 139 262 144 240 4%

Cash Flow Statement

(NGNm) 2012 2013 2014F 2015F 2016F 2017F

+ EBITDA 13 330 18 269 16 181 19 637 22 453 24 849

+ Change in working capital 12 423 -6 385 -1 412 -1 852 -2 080 -2 284


Capex -5 477 -8 348 -5 342 -4 910 -4 865 -4 778


= C.F. after Investments 20 277 3 536 9 427 12 875 15 509 17 787

- Net Fin. Expenses -781 -1 257 -1 387 -1 776 -2 306 -1 944

- Taxes Paid -3 642 -4 062 -3 336 -4 143 -4 712 -5 409

- Dividends Paid -3 567 -5 503 -2 013 -2 759 -3 224 -3 812

+ Equity Increase - - - - - -

- Others - - - - - -

Change in net debt (FCF) -12 287 7 285 -2 692 -4 198 -5 266 -6 622


81


APPENDIX I: UACN ORGANISATIONAL STRUCTURE

Source: Company.

82



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Waiting for a PE deal?(YE15 PT of ZMW2.70 and Sell Recommendation maintained)

4 Zambeef's financial performance has largely remained volatile, reflecting key risks

within the business model. Our concerns around Zambeef have been hinged on

(i) capex investments with subpar returns (RoE of 1.0% vs average RoE of 27%

for SSA peers), (ii) opex pressures, and (iii) high debt levels (Net Debt/EBIDTDA

of 4.6x). Zambeef continued to underperform in 1H14, recording a decline in

revenue of 2.4% to ZMW789m (first decline over the recent years). We have

recently reviewed our forecasts for FY14F and now expect a 2% decline in

revenues in FY14F and a 58% fall in EBIT. Overall, we expect Zambeef to post

a loss of ZMW17m in FY14F.

4 Turnaround strategies in place. While Zambia has been on the radar of many

investors into Africa on the back of strong macro-fundaments (historic average

GDP growth of 6.5% and forecasted GDP growth of 5.0% in the outlook period),

Zambeef has not crystallised this opportunity into positive returns. Consequently,

management has put in place a blue-print to turnaround the fortunes of the

company. The turnaround strategies include (i) driving exports growth in SADC, (ii)

fostering strategic partnerships and (iii) realising value from the sale of real assets.

4 No valuation upside but a PE transaction could be the game-changer. The stock has

been underperforming its closest peers, but is still trading at a premium. Our

YE15 PT of ZMW2.70 still implies a downside on the LuSE and we continue to

believe that Zambeef has a volatile business model and risks are on the downside.

However, we recognize that Zambeef may unlock some value through corporate

action (disposals and JVs) and faster turnaround. Further, we also see Zambeef as

a potential target for PE, bearing in mind its shareholder structure (mainly

institutional investors), its current P/BV (ex-intangibles) of 0.6x (vs. historical average

of 1.0x) and the ongoing wave of PE deals in the African agriculture space. SELL.

Stock data

Price in LuSE (ZMW): 2.85 Price Target (ZMW): 2.70

Nº of shares (m): 248.0 Bloomberg: ZAMBEEF:ZL

Market Cap (ZMWm): 707 Market Cap (USD m): 111

Avg.Daily Vol. [ZMW'000]: 300 Avg.Daily Vol. [USD '000] 47

Net Debt/EBITDA'13 4.6 Free-float: 100%

EPS growth ('13-'17F) 27% ROE'13: 1%

Major shareholders: M&G (18%); Investec (11%); Ashmore (10%)

September YE 2012 2013 2014F 2015F 2016F 2017F

Diluted EPS (ZMW) 0.06 0.06 -0.07 0.14 0.19 0.32

Adj EPS (ZMW) 0.33 0.12 -0.07 0.14 0.19 0.32

P/E 48.5 23.4 n.m 20.5 15.0 9.0

Dividend Yield 0.0% 0.0% 0.0% 0.0% 1.7% 2.8%

FCF Yield -21.5% 2.7% 0.5% 1.5% 2.6% 4.8%

EV/EBITDA 8.9 9.9 15.4 9.7 8.8 7.0

EQUITY RESEARCH

ZambeefFood

SellHigh-Risk

November 2014

Zambia

Zambeef vs. LuSE vs. S&P

Africa Frontier




Source: Bloomberg.


Date Recommendation

11-Apr-12(1) Hold

31-Oct-13 Buy

27-Feb-14 Sell



Analyst

Batanai Matsika

[email protected]

Phone: +27 21 410 9019

84


TRADING UPDATE CONFIRMS A DISAPPOINTINGFINANCIAL YEAR

Zambeef recently released a trading update on its performance for the year ending 30

September 2014, reflecting weak financial performances across the key divisions. Audited

results are expected to be announced on 28 November 2014. Management indicated

that key issues that negatively impacted financial performance included (i) extreme

exchange rate volatility (ii) the effects of African swine fever, (iii) lower soya bean

prices and (iv) the imported beef products. All in all, management expects FY14F

revenue to be lower than market expectations. However, the relatively stable exchange

rate in 2H14F has curtailed the previously notified escalation in Zambeef's dollar-

denominated cost base and has resulted in improved GP margins vs market expectations.

Below, we analyse the group's 1H14 results and evaluate the prospects of the business.

OVERVIEW OF 1H14 FINANCIAL RESULTS

External pressures slowing revenue growth. Revenue for the half year was down 2.4%

to ZMW789m. Management attributed the weak performance to (i) broad macro-

economic constraints in Zambia (inflation of 7.7% yoy, high interest rates of

12.0% p.a and a 15% depreciation of the ZMW against the USD) and (ii) stiff

competition within the key divisions.

Lower Margins. Gross profit declined 12% yoy to ZMW258m as the GP margin

declined from 36.3% to 32.7%. Management highlighted that divisional margins

came under pressure on the back of new entrants in the various markets. Other

factors that affected margins were (i) the outbreak of African swine fever, (ii) the

overhang around the imported beef issue; and (iii) depressed commodity prices

(Wheat prices declined from USD500/MT to USD410/MT while soya prices declined

from USD600/MT to USD500/MT).

1H14 Revenue Contribution 1H14 Gross Profit Contribution

Source: Company. Source: Company.

Pressures on the bottom line. Administrative expenses during the period increased by

7.3% yoy as inflation increased from 7.0% to 7.7% As a result, EBITDA declined

45% to ZMW48m, implying an EBITDA margin of 6.1% versus 10.8% in 1H13.

All in all, Zambeef posted adj. loss of ZMW11.5m in 1H14. Nonetheless, in spite

of the disappointing EBITDA, the business managed to deliver net cash inflow

before financing activities of USD4m on improved working capital management.

85


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Overall, Zambeef's volatile earnings reflect the key risks in the business model. Our

concerns around Zambeef have largely been hinged on (i) capex investments with

subpar returns (RoE of 1.0% vs average RoE of 27% for SSA peers), (ii) opex

pressures and (iii) high debt levels (net debt/EBIDTDA of 4.6x). The group also

remains exposed to foreign exchange risk arising from USD dollar denominated

debt. This therefore gives rise to fx losses when the ZMW depreciates. In 1H14, fx

losses amounted to ZMW29.5m.

Overview of key Divisional Performances in Revenues (‘000)

2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Edible Oils 119 971 242 277 239 946 279 643 237 882 370 445 358 961 370 280 385 597 401 866

GP Margin 18.6% 24.3% 15.0% 22.3% 6.6% 27.5% 19.0% 21.5% 21.6% 21.8%

Beef 166 222 224 729 202 895 279 898 327 160 323 897 317 451 326 848 336 523 353 483

GP Margin 37% 27% 31% 29% 35% 32% 25% 26% 26% 27%

Cropping 78 869 77 573 56 996 102 107 223 489 415 101 317 552 333 620 350 50 368 237

GP Margin 54.7% 36.9% 38.6% 27.6% 46.6% 37.3% 48.0% 48.1% 48.1% 48.2%

Stock feed 35 715 51 093 77 333 127 808 187 370 264 208 305 319 333 347 360 415 389 680

GP Margin 12% 22% 21% 22% 26% 22% 18% 18% 18% 19%

Chicken 51 425 59 504 83 382 106 108 120 265 135 070 139 122 146 162 153 557 162 909

GP Margin 22% 9% 25% 25% 29% 20% 20% 21% 21% 21%

Pork 28 082 47 142 64 288 84 169 116 534 115 485 97 977 94 999 93 992 98 748

GP Margin 43% 22% 31% 31% 29% 11% 13% 14% 14% 15%

West Africa 22 150 32 222 30 785 38 850 64 204 85 418 104 407 122 483 150 138 173 202

GP Margin 12% 22% 24% 30% 19% 25% 28% 28% 28% 29%

Milk & Dairy 32 202 40 789 42 572 51 892 53 531 61 402 74 972 87 447 99 183 109 349

GP Margin 59% 45% 65% 64% 56% 43% 50% 51% 51% 52%


EDIBLE OILS (19% of 1H14 Revenue)

Zamanita facing stiff competition. Revenues in 1H14 declined 12% yoy to ZMW180m

while the GP margin decreased from 24% in 1H13 to 19%. The three key factors

that impacted performance were (i) the high cost soya beans bought in FY13, (ii)

86


a major breakdown of the boiler during the year; and (iii) severe competitive

pressures. Zamanita is facing stiff competition from local players in the edible oils

space. We note that the two largest players in Zambia have a crushing capacity

that is larger than the whole soya crop in the country, implying oversupply conditions.

In addition, the issue of unregulated imported edible oils remains a concern.

Zamanita is expected to crush c65k-70k tons in FY14F (60k tons in FY13). The

focus for Zamanita will be on (i) expanding its product range and (ii) driving export

sales into SADC (exports now account for c36% of revenues). Overall, we have

recently reviewed Zamanita estimates downwards and have cut revenue and GP between

FY15F and FY17F by an average 15%. We are now projecting FY13-17F CAGR of 2% and

an average GP margin of 21%.

BEEF (18% of 1H14 Revenue)

Imported beef overhang remains. Turnover declined 6% yoy to ZMW147m as the

demand for beef remained stagnant on the back of an "overhang" from the imported

beef products issue. In order to regain market share, the division has had to

reduce pricing. As a result the GP margin has declined from 33% in 1H13 to 25%.

We recently have cut our revenue and gross profit estimates between FY15F and FY17F by

16% and 27%, respectively as we expect a revenues and margins to remain depressed.

We are forecasting FY13-17F revenue CAGR of 2.0% and a gradual recovery in the GP

margin to 26.5% by F17F.

CROPPING (17% of 1H14 Revenue)

Commodity price volatility limiting growth. While turnover for 1H14 was up 29% to

ZMW159m, gross profit declined 3% yoy on the back of lower commodity prices

(soya and wheat). Overall, the GP margin for the period declined from 36.3% to

32.7%. Wheat prices declined from USD500/MT to USD410/MT while soya prices

declined from USD600/MT to USD500/MT. An expected good wheat harvest and

higher prices in 2H14F has meant that the cropping division is likely to perform

above expectations in FY14F. We estimate a recovery in the price of commodities and

have recently increased our revenue and gross profit estimates between FY15F and FY17F

by 10% and 7%, respectively. Overall, we are forecasting FY13-17F revenue CAGR of -

3.0% for the cropping division and an average GP margin of 48% in the outlook period.

STOCK FEED (16% of 1H14 Revenue)

Volume growth on capacity expansion. Novatek managed to increase its sales volumes

in 1H14 to 54k tons of animal feed vs 46k tons in 1H13. This was a result of the

commissioning of a second pelleting line in May 2014, which increased capacity

by 50%. As a result, turnover was up 23% yoy to ZMW155m.

The proliferation of new players driving market share losses. While turnover increased,

gross profit declined 11% yoy giving a GP margin of 18% versus 24% in 1H13. A

combination of USD-denominated inputs and ZMW-based sales, along with

increased competition in the Zambian market, has negatively impacted margins.

We also note that the business held back on price increases and sacrificed GP

margins in order to maintain market share. Management is targeting total volumes

of c117k tons in FY14F versus 89k tons in FY13. The business has also been

exporting to Malawi, Zimbabwe and Namibia with export earnings now accounting

for 9.0% of turnover. All in all, we have recently cut our revenue and GP estimates

between FY15F and FY17F by an average of 9% and 16%, respectively. We are projecting

a FY13-17F revenue CAGR of 10% and an average GP margin of 18%.

87


CHICKEN (9% of 1H14 Revenue)

Rainbow partnership to drive value-addition. While revenue and gross profit were down

4% and 7%, respectively, the number of birds slaughtered increased from c100k

birds a week to about 120k birds. Generally, a large stock holding position of

chicken products in a competitive market resulted in discounted selling prices

hence putting pressure on margins. Overall, the business is set to benefit from its

JV with Rainbow and has started to expand its value added range such as Quick

Frozen portions. We have recently reviewed our revenue and GP estimates between

FY15F and FY17F downwards by an average of 13% and 23%, respectively. We are

forecasting a revenue FY13-17F CAGR of 5% and expect the GP margin to increase from

20% in FY13 to 21% in FY17F.

PORK (5% of 1H14 Revenue)

Outbreak of African swine fever hits margins. The Government of Zambia had to ban

the movement of live pigs during the year on the back on an outbreak of Africa

swine fever. The ban had a negative impact on Masterpork as revenues declined

19% yoy while gross profit was down 15% yoy. The Master Pork plant was closed

for a period of 3 months during 1H14. Overall, Masterpork slaughtered 14k pigs vs

27k in 1H13. Management is anticipating a return to normal trading and profitability

in 2H14F and expects to slaughter c32k pigs in FY14F vs 54k in FY13. We have

recently cut our revenue and GP estimates between FY15F and FY17F by an average of

32% and 48%, respectively. We estimate FY13-17F revenue CAGR of -4% and average

GP margins of 14%.

MILK & DAIRY (4% of 1H14 Revenue)

Capacity increases driving revenue growth. The division achieved robust turnover

growth of 29% in 1H14. In addition, gross profit increased 15% yoy to ZMW19m

(GP margin of 50%). The growth was driven by the commissioning of a new milk

processing plant in November 2013 that increased milk processing capacity from

25k litres to 65k per day. In 1H14, the dairy farm sold 3.3m litres of milk vs 2.8m

litres in 1H13, and expects to sell 6.4m litres in FY14F vs 6.0m litres in FY13.

While we have recently increased our revenue estimates by 1.0% between FY15F and

FY17F, we have increased our GP estimates by 11%. Overall, we are forecasting a revenue

FY13-17F CAGR of 16% and expect the GP margin to increase from 42.9% in FY13 to

52% in FY17F.

WEST AFRICA (5% of 1H14 Revenue)

West Africa operations continue to grow in line with Shoprite's increasing footprint

in the region. 1H14 revenues increased 22% yoy to ZMW49m while the GP margin

jumped from 24% in 1H13 to 28%. While revenue growth has been strong, the

business has been registering losses since 2012 on the back of expansion related

costs. We also cite key structural risks such as shortages of power in Nigeria and

poor infrastructure (roads). Insecurity issues in the North of Nigeria also pose a

major risk to the supply of livestock. Overall, the group now has 9 Shoprite stores

and 6 self-operated outlets in Nigeria, and 3 Shoprite stores in Ghana. Shoprite

has bullish expansion plans in Africa and is aiming to open 30 new stores in Africa

in the next 12 months so as to cement its position as a dominant retailer. In

Nigeria, new stores planned to open in 2H14F include Ibadan and Apapa/Lagos.

Shoprite also expects to open 4 new stores in 2015 and a further 5 in 2016. While

we have recently cut our revenue estimates for West Africa by 4% between FY15F and

FY17F, we have increased GP estimates by 20%. Overall, we are forecasting FY13-17F

revenue CAGR of 19% and an average GP margin of 28% in the outlook period.

88


TURNAROUND STRATEGIES FOR ZAMBEEF

Zambia has been on the radar of many investors into Africa on the back of strong macro-

fundaments (historic average GDP growth of c6.5% and forecasted GDP growth of c5.0%

in the outlook period). However, Zambeef has not crystallised this opportunity into positive

returns. The company has been delivering poor earnings over the past years, mainly

on the back of a number of factors such as competitive threats in key divisions,

cost pressures, limited cash flow generation, a huge debt overhang and inefficiencies

within the business model. Consequently, the group continues to generate sub-par

returns compared to its SSA peers. As a result, management has put in place a

blue-print to turnaround the fortunes of the company. We evaluate the turnaround

strategies hereunder:

STRATEGY 1: Increased Focus on Exports within the SADC Region

Remodelling into a regional food business. Zambeef is remodelling itself as a regional

player and is diversifying the business outside the core Zambian market. The group

is targeting markets within the 15 member states that make up the SADC (Angola,

Botswana, DRC, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia,

Seychelles, S.Africa, Swaziland, Tanzania, Zambia and Zimbabwe). Outside of the

SADC region, West Africa is contributing positively to the African growth story, driven

by the relationship with Shoprite. Zambeef West Africa now account c5.0% of revenues.

We believe the strategy to grow exports in the region provides an avenue to diversify

geographically. In addition, most SADC countries are exhibiting attractive GDP growth

rates of c5.5%, reflecting significant value that can be realized from exposure in

the region. Other factors such as bottom heavy demographic profiles and rapid

population growth rates (average of 2-3%) guarantee a sustained growing consumer

base in the long term.

2014 GDP Growth Estimates in SADC Population Growth (FY13-17F)

Estimates in SADC

Source: WEO. Source: WEO

However, competitive hurdles also exist in SADC. Zambeef has successfully built exports

in the SADC region from USD5.4m in FY11 to USD30.3m in FY13. In 1H14,

export sales amounted to USD20m, constituting 15% of group revenues. However,

we note that an impeding factor is growing competition from (i) other established

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89


food & agriculture companies (ii) informal traders and (iii) multinational products.

We also note that there has been the prevalence of cheap imports as well as

counterfeit products in countries such as Zimbabwe, Mozambique and DRC. Below,

we map some of the food and agriculture players in the SADC region that may

exhibit some competitive pressures.

Mapping Food & Agriculture Companies in Southern Africa


STRATEGY 2: Fostering Strategic partnerships

Zambeef is looking to foster strategic partnerships in key divisions such a cropping, beef

and edible oils. According to management, the introduction of strategic investors

will be instrumental in terms of providing financial and technical support. An

example would be the recent partnership with Rainbow Chickens (Zamchick and

Zamhatch). We note that partnering with Rainbow has provided access to technical

expertise given the fact that Rainbow already has a strong track record in the

chicken broiler business as it has demonstrated significant capabilities in the South

African market.

In our note, entitled On the ground in Nigeria, dated 27 May 2014, we highlight

that a key trigger for the West African operation will be the extension of the Zambeef/

Rainbow partnership to Nigeria for the purposes of poultry production. We believe

that some of Zambeef's operations such as West Africa and Dairy lack scale and

believe that corporate action activity such as an equity sale or spinoff can unlock

some value.

90


STRATEGY 3: Realising Value from the sale of Real Assets

According to Deloitte Touche, there are c925m hungry people in the world and the

world's population is expected to grow to 9.1bn by 2050, implying that food production

will need to nearly double by 2050 worldwide. In addition, about 40% of the world's

arable land is degraded to some degree and will be further affected by climate change.

Given the need for Governments to guarantee food security, the interest around farmland

investments globally has increased. Within SSA, a number of farmland acquisitions

have been concluded such as (i) the Nile Trading & Development (US) 49-year

lease agreement in South Sudan, (ii) the Ferrostaal (Germany) Jastropha and

biodiesel project in Zambia and (iii) the Katuri Global (India) horticultural

investments in Ethiopia. Nonetheless, while we have seen a number of mega-deals

in Africa farmland, there continues to be some degree of political sensitivity on the

subject of land acquisitions, particularly in Southern Africa (Zimbabwe being a

case in point).

Zambeef can unlock value through the sale of its farms. We recall that in FY13, Zambeef

announced a significant (non-cash) capital gain of USD98.7m resulting from the

revaluation of assets (mostly farms such as the Mpongwe Farm). Management is

now actively looking at ways of realising some of this value through an asset sale.

We believe an asset sale will assist in terms of injecting cash that will go towards

the a reduction in USD denominated debt, thereby reducing exchange rate risks

and interest costs.

In conclusion, while the 3 key strategies above could be instrumental in turning around

the fortunes of Zambeef, we believe that turning around the company calls for changes in

the management structure. Our view is that Zambeef management has been lacking

in terms of demonstrating an ability to deliver positive returns for shareholders. We

believe that the Zambeef business model carries high execution risk related (agricultural

and economic risks) and therefore calls for sound management approaches.

More recently, we have seen the emergence of Private Equity groups that are focused on

food and agriculture. Below, we highlight a few examples of recent food and agriculture

news in the private equity space:

- In 2013, Carlyle, Standard Chartered Bank and Pembani Remgro Infrastructure

Fund invested USD210m in Tanzanian-based Export Trading Group in November.

The group trades agricultural commodities in Africa, India and China. (Bloomberg)

- In October 2013, Agri-Vie, a private equity fund focused on food and agribusiness

investments in SSA acquired a 63% stake in Cape Olive Holdings, for an

undisclosed amount. (Business Day)

- In June 2014, Kohlberg Kravis Roberts (KKR) invested an undisclosed amount

into Afriflora, an agriculture production company focused on Ethiopia. (Private

Equity Africa)

- In June 2014, 8 Miles invested in Uganda's Biyinzika Poultry International (BPIL),

an agriculture production company that is part-owned by Pearl Capital Partners

(PCP). (Private Equity Africa)

91


- In July 2014, Databank Agrifund Manager Limited (DAFML) invested an

undisclosed amount into Avison, a South Africa-based agriculture inputs

production company. (Private Equity Africa)

- In August 2014, Injaro Investments closed its maiden West Africa-focused

agriculture fund at USD49m (Private Equity Africa)

In our view, a key turnaround trigger for Zambeef would be a partnership with a private

equity group that will not only put money on the table but will also contribute in terms of

driving the company strategies and unlock value from the company's assets. We also

note that the major shareholders in Zambeef are institutional investors who could

be willing to exit their positions. In addition, the stock is trading at a P/BV (ex-intangibles)

of 0.56x (43% discount to historic average of 0.98x), reflecting its poor earnings

performance - we believe this could attract a prospective PE investment group.

Zambeef Shareholder Structure Evolution of Historic P/BV (ex-intangibles)

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CHANGES TO GROUP ESTIMATES & OUTLOOK

We have recently cut our group revenue estimates by an average of 14% between FY15F

and FY17F (please see our note published last September - "A Private Equity target?"). We

expect a modest FY13-17F CAGR of 5%. We believe that performance in key divisions

such as edible oils and beef will remain depressed on the back of macro-economic

headwinds in Zambia and competitive pressures.

92



2014F 2015F 2016F 2017F

Segmental Rev. & G.Profit New Old Var New Old Var New Old Var New Old Var Avg.

Crops revenues 317 552 279 446 14% 333 620 293 586 14% 350 502 308 441 14% 368 237 324 049 14% 10%

Crops gross profit 152 425 139 723 9% 160 471 147 087 9% 168 591 154 838 9% 177 490 162 996 9% 7%

gross margin 48% 50% 48% 50% 48% 50% 48% 50%

Zamanita revenues 358 961 407 490 -12% 370 280 448 238 -17% 385 597 481 856 -20% 401 866 517 996 -22% -15%

Zamanita gross profit 68 203 87 304 -22% 79 735 96 522 -17% 83 096 104 262 -20% 87 407 112 665 -22% -15%

gross margin 19% 21% 22% 22% 22% 22% 22% 22%

Novatek revenues 305 319 305 266 0% 333 347 352 704 -5% 360 415 411 253 -12% 389 680 479 521 -19% -9%

Novatek gross profit 54 957 61 053 -10% 60 702 71 282 -15% 66 388 83 978 -21% 72 753 99 117 -27% -16%

gross margin 18% 20% 18% 20% 18% 20% 19% 21%

Beef revenues 317 451 350 295 -9% 326 848 382 522 -15% 336 523 429 763 -22% 353 483 482 839 -27% -16%

Beef gross profit 79 363 112 094 -29% 84 980 122 407 -31% 87 496 137 524 -36% 93 673 156 923 -40% -27%

gross margin 25% 32% 26% 32% 26% 32% 27% 33%

Chicken 139 122 148 915 -7% 146 162 164 178 -11% 153 557 186 178 -18% 162 909 211 126 -23% -13%

Chicken&Eggs g. profit 27 824 33 461 -17% 29 963 39 353 -24% 32 247 47 419 -32% 34 211 53 773 -36% -23%

gross margin 20% 22% 21% 24% 21% 25% 21% 25%

Eggs revenues 26 630 28 196 -6% 28 521 32 279 -12% 30 546 36 953 -17% 32 714 42 304 -23% -13%

Eggs gross profit 10 119 10 715 -6% 11 123 12 589 -12% 11 913 14 781 -19% 12 759 16 922 -25% -14%

gross margin 38% 38% 39% 39% 39% 40% 39% 40%

Pork revenues 97 977 129 713 -24% 94 999 146 965 -35% 93 992 166 511 -44% 98 748 188 657 -48% -32%

Pork gross profit 12 737 29 834 -57% 13 300 33 802 -61% 13 347 38 297 -65% 15 010 43 391 -65% -48%

gross margin 13% 23% 14% 23% 14% 23% 15% 23%

Milk revenues 74 972 71 613 5% 87 447 83 522 5% 99 183 97 412 2% 109 349 113 612 -4% 1%

Milk gross profit 37 486 31 510 19% 44 161 37 167 19% 50 583 43 835 15% 56 315 51 693 9% 11%

gross margin 50% 44% 51% 45% 51% 45% 52% 46%

Zamchick Inn revenues 13 124 13 124 0% 14 331 14 331 0% 15 649 15 649 0% 17 089 17 089 0% 0%

Zamchick Inn gross profit 5 906 5 906 0% 6 449 6 449 0% 7 042 7 042 0% 7 690 7 690 0% 0%

gross margin 45% 45% 45% 45% 45% 45% 45% 45%

Zamleather revenues 23 430 23 885 -2% 24 616 25 581 -4% 25 861 27 397 -6% 27 170 29 342 -7% -4%

Zamleather gross profit 7 029 7 165 -2% 7 385 7 674 -4% 7 758 8 219 -6% 8 151 8 803 -7% -4%

gross margin 30% 30% 30% 30% 30% 30% 30% 30%

Zamfish revenues 26 098 26 098 0% 28 969 28 969 0% 32 156 32 156 0% 35 693 35 693 0% 0%

Zamfish gross profit 9 917 9 917 0% 11 008 11 008 0% 12 219 12 219 0% 13 563 13 563 0% 0%

gross margin 38% 38% 38% 38% 38% 38% 38% 38%

Zamflour revenues 81 178 82 785 -2% 84 043 86 974 -3% 87 010 91 375 -5% 90 081 95 999 -6% -4%

Zamflour gross profit 21 918 22 352 -2% 21 179 21 917 -3% 21 927 23 026 -5% 22 701 24 192 -6% -4%

gross margin 27% 27% 25% 25% 25% 25% 25% 25%

West Africa revenues 104 407 106 263 -2% 122 483 126 817 -3% 150 138 158 025 -5% 173 202 185 534 -7% -4%

West Africa gross profit 29 234 22 315 31% 34 295 26 632 29% 42 414 33 580 26% 49 362 39 890 24% 20%

gross margin 28% 21% 28% 21% 28% 21% 29% 22%

PROFIT & LOSS

Revenues 1 565 564 1 657 394 -6% 1 683 045 1 863 764 -10% 1 789 343 2 084 088 -14% 1 907 424 2 325 918 -18% -14%

yoy -2% 4% 8% 12% 6% 12% 7% 12%

Gross profit 517 119 573 349 -10% 572 777 641 914 -11% 613 699 718 544 -15% 660 554 802 916 -18% -14%

Gross margin 33.0% 34.6% 34.0% 34.4% 34.3% 34.5% 34.6% 34.5%

Admin Expenses -483 759 -482 302 0% -486 400 -542 355 -10% -513 542 -606 470 -15% -524 542 -676 842 -23% -16%

D&A 58 852 57 584 2% 62 023 61 050 2% 63 352 64 517 -2% 66 473 67 983 -2%

EBITDA 92 212 148 631 -38% 148 401 160 609 -8% 163 509 176 591 -7% 202 486 194 057 4% -4%

EBITDA margin 5.9% 9.0% 8.8% 8.6% 9.1% 8.5% 10.6% 8.3%

EBIT 33 359 91 047 -63% 86 377 99 559 -13% 100 157 112 074 -11% 136 013 126 073 8% -5%

EBIT margin 2.1% 5.5% 5.1% 5.3% 5.6% 5.4% 7.1% 5.4%

Interest Costs -40 430 -44 866 -10% -36 663 -40 621 -10% -34 896 -38 881 -10% -33 431 -37 474 -11% -10%

PBT -7 070 46 182 -115% 49 714 58 938 -16% 65 261 73 193 -11% 102 581 88 599 16% -4%

PBT margin -0.5% 2.8% 3.0% 3.2% 3.6% 3.5% 5.4% 3.8%

Taxation -2 920 -4 618 -37% -7 457 -8 841 -16% -9 789 -10 979 -11% -15 387 -13 290 16% -4%

Tax rate -41.3% 10.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

Attr.Income -17 329 33 735 -151% 34 483 41 418 -17% 47 197 52 301 -10% 78 346 64 037 22% -1%

DPS 0.00 0.00 0.03 0.04 -17% 0.05 0.05 -10% 0.08 0.06 22% -1%

Capex 90 000 121 763 -26% 90 600 103 140 -12% 91 200 103 140 -12% 91 800 103 140 -11% -12%

Net debt 715 962 707 849 1% 731 005 726 092 1% 736 367 731 425 1% 713 241 722 519 -1% 0%


93


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We revised our GP margin estimate for FY14F downwards from 34.6% to 33.0%. Generally,

we foresee downward pressure on margins in divisions such as edible oils, beef,

stock feeds and pork. We also believe there continues to be a negative overhang

surrounding Zambeef products on the back of the imported beef issue. However,

we expect a more gradual recovery of the GP margins from 33% in FY14F to 34.6%

in FY17F. All in all, our gross profit estimates a cut by an average of 14% between

FY15F and FY17F.

We have cut our EBIT margin estimate for FY14F from 5.5% to 2.1%. We maintain a view

that Zambeef will continue to face some cost pressures emanating from increased

staff, fuel and energy costs. All in all, our EBIT estimate for forecasts between

FY15F and FY17F are cut by an average of 5%. Management's focus in the past

two years has been at maintaining a tight control of costs. Currently, 65% of total

admin expenses constitute (i) salaries & wages, (ii) repairs & maintenance and (iii)

water & electricity. Overall, we are forecasting Zambeef to post a loss of ZMW17m in

FY14F. We should however expect a return to profits in FY15F on the back of improved

margins and positive top-line growth.

We have reviewed our capex assumptions. Management has indicated that the group

will cut back in terms of its capex projects. Management has guided that they do

not expect to spend more than USD15m in FY14F. In 1H14, Zambeef spent USD7.3m

vs. a budget of USD22.5m. This capex has primarily been on farm equipment in

the cropping division (USD1.1m), pelleting line at Novatek stock feed (USD0.8m),

Kalundu Dairy (USD0.8m) and the palm project (USD1.7m). In 2H14F, the capex

plan is targeted at Zampalm (USD2.8m) and Zamhatch (USD4.0m).

Evolution of Consensus EBITDA Evolution of Consensus Adj. EPS

94



We continue to value Zambeef using a DCF valuation approach. Overall, we have set our YE15

Price Target at ZMW2.70/share. We have applied the same assumptions on our DCF (risk

free rate to 16.0% beta of 1.0x and a D/E ratio at 40%). Our methodology gives a

WACC of 14.8%. Further, our fair value is cut by a 10% discount for low liquidity (BPI

Capital Africa rule of thumb for stocks with average daily turnover below USD150k).

DCF Valuation

ZMW 000 FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F Cont.value

Operating profit 86 377 100 157 136 013 152 803 178 734 208 060 240 642 290 780 332 036 377 216 427 371

Depreciation 62 023 63 352 66 473 69 615 68 496 71 491 74 506 72 693 74 943 77 263 79 657

Net WC -28 723 -24 365 -26 943 -30 059 -29 378 -32 825 -34 639 -38 269 -38 706 -40 873 -43 396

Capex -90 600 -91 200 -91 800 -92 400 -93 000 -93 600 -94 200 -94 800 -75 000 -77 350 -79 800

Notional cash tax -7 457 -9 789 -15 387 -18 425 -22 835 -27 753 -33 041 -40 962 -47 550 -54 727 -62 651

Free cash flow 21 620 38 155 68 356 81 534 102 017 125 373 153 268 189 442 245 722 281 528 321 182 3 433 766

Beta (x) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Debt/(debt + equity) (%) 40 40 40 40 40 40 40 40 40 40 40 40

WACC (%) 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8

Discount period 0.00 1.0 2.0 3.0 4.0 5.0 6.0 7.0 9.0 10.0 12.0 12.0

Discount factor @ WACC 1.00 0.87 0.76 0.66 0.58 0.50 0.44 0.38 0.29 0.25 0.19 0.19

Present value of FCF 21 620 33 230 51 848 53 860 58 693 62 819 66 883 71 998 70 834 70 680 61 162 653 883

Value of operations 1 277 510

YE14 Net Debt -607 340

Non operating assets 62 558

Minorities -18 199

Equity value 714 530

No. of shares (000) 247 980

YE15 Fair Price 3.00

Small caps discount 10%

YE15 Price Target 2.70

Upside/Downside to current

share price in Lusaka -5%


Recommendation. Overall, our DCF method points to a YE15 Price Target of ZMW2.70

which implies a fundamental downside on the current trading price on the LuSE. A

comparative analysis of Zambeef multiples relative to its SSA and EM peers clearly

shows that FY14F will be a bad year for the group. FY15F multiples also look

demanding given FY15F PER and EV/EBITDA multiples of 21.6x and 9.9x, showing

a premium of 42% and 9%, respectively. While the stock has remained static at

around ZMW3.0 and is trading at a discount to NAV, we expect interest in the

stock to remain thwarted. We however note that the discount between the Zambeef

LSE and LuSE has widened significantly over the past 6 months, thus creating an

arbitrage opportunity (the LuSE is currently at a 95% premium to the LSE price).

Overall, the key trigger for Zambeef would be corporate action activities (disposals

and JVs) and a quicker than expected return to profitability. The potential entry of

a PE investor could be a game changer. SELL.

DCF Assumptions

Risk free rate 16%


Beta 1.0

Cost of equity 21%

Cost of debt 6%

Tax rate 15%


Debt to Equity 40%

WACC 14.8%



95


Income Statement

CAGR

(ZMW 000) 2012 2013 2014F 2015F 2016F 2017F 13-17F

Net revenues 1 296 339 1 595 062 1 565 564 1 683 045 1 789 343 1 907 424 5%

EBITDA 152 530 132 607 92 212 148 401 163 509 202 486 11%

EBITDA margin 11.8% 8.3% 5.9% 8.8% 9.1% 10.6%

Dep.+ Provision 42 125 53 491 58 852 62 023 63 352 66 473 6%

EBIT 110 405 79 116 33 359 86 377 100 157 136 013 15%

EBIT margin 8.5% 5.0% 2.1% 5.1% 5.6% 7.1%

Net financials -26 810 -40 884 -40 430 -36 663 -34 896 -33 431 -5%

Extraodinaries -68 037 -16 403 - - - -

Taxes -2 129 -5 794 -2 920 -7 457 -9 789 -15 387 28%

Minority interests 1 154 -2 269 -7 339 -7 774 -8 275 -8 849

Net profit 14 583 13 766 -17 329 34 483 47 197 78 346 54%

Balance Sheet

CAGR

(ZMW 000) 2012 2013 2014F 2015F 2016F 2017F 13-17F

Net intangibles 15 699 15 699 15 699 15 699 15 699 15 699 0%

Net fixed assets 909 962 1 475 416 1 508 342 1 538 965 1 569 165 1 597 197 2%

Financial assets - - - - - -

Inventories 505 256 473 093 469 669 495 657 517 120 540 755 3%

ST Receivables 65 989 65 132 63 989 68 372 72 300 76 660 4%

Other Assets 119 584 113 827 109 589 117 645 124 896 132 947 4%

Cash & Equivalents - - - - -

Net assets 1 616 490 2 143 167 2 167 290 2 236 337 2 299 181 2 363 258 2%

Equity & Minorities 752 841 1 333 744 1 316 415 1 350 898 1 389 474 1 456 020 2%

MLT Liabilities 32 109 30 497 22 050 22 050 22 050 22 050 -8%

o.w. Debt 342 120 335 124 329 801 293 572 289 842 289 934 -4%

ST Liabilities 145 582 160 647 161 805 173 554 184 183 195 991 5%

o.w. Debt 295 509 263 769 310 493 361 765 370 857 347 639 7%

Equity+Min.+Liab 1 616 490 2 143 167 2 167 290 2 236 337 2 299 181 2 363 258 2%

Cash Flow Statement

(ZMW 000) 2012 2013 2014F 2015F 2016F 2017F

+ EBITDA 152 530 132 607 92 212 148 401 163 509 202 486

Change in working capital -246 791 -1 811 8 183 -28 723 -24 365 -26 943

= Operating cash flow -94 261 130 796 100 395 119 678 139 144 175 543

Capex -131 365 -72 536 -90 000 -90 600 -91 200 -91 800


= C.F. after Investments -225 626 58 260 10 395 29 078 47 944 83 743

Net Fin. Expenses -26 810 -40 884 -40 430 -36 663 -34 896 -33 431

Taxes Paid -1 700 -8 956 -2 920 -7 457 -9 789 -15 387

Dividends Paid -5 307 - - - -8 621 -11 799

Equity Increase - - - - - -

*Others -88 716 - - - - -

= Change in net debt (FCF) 348 159 -8 420 32 954 15 042 5 362 -23 126

Note: Fiscal Year ends in Sep.


96



97


BPI CAPITAL AFRICA (PROPRIETARY) LIMITED

20th Floor, Metropolitan Life Centre

7 Walter Sisulu Avenue, Foreshore

Cape Town

South Africa

BPI CAPITAL AFRICA

Eduardo Coelho Rafael Joanes

[email protected] [email protected]

(27) 21 410 9030 (27) 21 410 9020

Research

Batanai Matsika [email protected] (27) 21 410 9019

Food & Agriculture

Brent Madel, CFA, MTA [email protected] (27) 21 410 9016

Industrials, Construction

Claire te Riele, CFA [email protected] (27) 21 410 9017

Breweries, Cement

Kate Turner-Smith, PhD, MBA [email protected] (27) 21 410 9015

TMT, Healthcare

Luis Colaço [email protected] (27) 21 410 9018

Retail

Steve Motsi [email protected] (27) 21 410 9013

Banks

Carmen Sitoe [email protected] (27) 21 410 9014

Lara Simpson [email protected] (27) 21 410 9034

Assistant

Institutional Sales

Harry Waldemar Brown [email protected] (27) 21 410 9022

Sales/Trading

Ian Louw [email protected] (27) 21 410 9023

Glaxton Robinson, CFA [email protected] (27) 21 410 9021

Stock Broker in Control & Compliance Officer

Neville Cooper [email protected] (27) 21 410 9011

Hannelie Truter [email protected] (27) 21 410 9012

Publishing

Maria do Céu Gonçalves [email protected] (351) 22 607 3137

Carla Gomes Alves [email protected] (351) 22 607 3160

Pedro Neves [email protected] (351) 22 607 3219

Economics Research - Angola, Mozambique & South Africa

Paula Carvalho [email protected] (351) 21 310 1187

BANCO PORTUGUÊS DE INVESTIMENTO, S.A.

Oporto Office Lisbon Office Madrid Office Paris Office

Rua Tenente Valadim, 284 Largo Jean Monnet, 1 Pº de la Castellana, 40-bis-3ª 31 Avenue de L'Opera

4100-476 Porto 1269-067 Lisboa 28046 Madrid 75001 Paris

PORTUGAL PORTUGAL SPAIN FRANCE

Phone: (351) 22 607 3100 Phone: (351) 21 310 1000 Phone: (34) 91 328 9800 Phone: (33) 14 450 3310

Telefax: (351) 22 600 2052 Telefax: (351) 21 353 5650 Telefax: (34) 91 328 9870

This research report is only for private circulation and only partial reproduction is allowed, subject to mentioning the source. This research report is

based on information obtained from sources which we believe to be credible and reliable, but is not guaranteed as to accuracy or completeness. This

research report does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive

it. This report should accordingly not be construed as advice of financial nature in regard to the purchase of a financial product. Investors should seek

financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this research report

and should understand that the statements regarding future prospects may not be realized. Unless otherwise stated, all views (including estimates,

forecasts, assumptions or perspectives) herein contained are solely expression of BPI Capital Africa's Equity Research department and are subject to

change without notice. Opinions expressed are our current opinions as of the date referred on this research report and they may change in the period

of time between the dates on which the said opinion were formulated and made public. Current opinions are subject to change as they depend on the

evolution of the company and subsequent alterations to our estimates, forecasts, assumptions, perspectives or valuation method used. Investors should

also note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may

receive back less than initially invested. There are no pre-established policies regarding frequency, update or change in opinions issued by BPI Capital

Africa Equity Research. The same applies to our coverage policy. Past performance is not a guarantee for future performance. BPI Group accepts no

liability of any type for any indirect or direct loss arising from the use of this research report. For further information concerning BPI Capital Africa

Research opinions and valuations, please visit www.bpi.pt/equity.

This research report did not have and is not intended for any specific recipient. The company subject of the opinion was unaware of the opinion or did

not validate the assumptions used, before its public disclosure.

Each Research Analyst responsible for the content of this research report certifies that, with respect to each security or issuer covered in this report:

(1) all of the views expressed accurately reflect his/her personal views about those securities/issuers; and (2) no part of his/her compensation was, is,

or will be, directly or indirectly, related to the specific opinions or views expressed by that research analyst in the research report. The Research Analysts

do not hold any shares representing the capital of the companies of which they are responsible for compiling the Research Report, except when mentioned

in the Report.

BPI Capital Africa is held by Banco BPI, S.A., a Portuguese listed company, through its subsidiary BPI Madeira - SGPS, Unipessoal, S.A.

BPI Capital Africa and BPI Group companies may provide corporate finance and other investment banking services to the companies referred to in this

report. Amongst the companies covered by BPI Capital Africa Equity Research, BPI Group has no qualified stakes.

BPI Group, members of the board, or BPI Group employees, may hold a position or any other financial interest in issuer's covered by BPI Capital Africa

Equity Research, subject to change, which shall be disclosed when relevant for assessing the objectivity of the opinion.

INVESTMENT RATINGS AND RISK CLASSIFICATION

(TOTAL RETURN IN 12-18 MONTHS):

Low Risk Medium Risk High Risk

Buy >15% >20% >25%

Hold >0% and < 15% >0% and < 20% >0% and < 25%

Sell < 0% < 0% < 0%

These investment ratings are not strict and should be taken as a general rule.

BPI is also present in Africa through:

in Angola (50.1% stake) in Mozambique (30% stake)

BPI CAPITAL AFRICA (PROPRIETARY) LIMITED

20th Floor, Metropolitan Life Centre

7 Walter Sisulu Avenue, Foreshore

Cape Town, 8001

South Africa

BPI Capital Africa

INVESTMENT RATINGS STATISTICS

As of 31st October BPI Capital Africa Equity Research's

investment ratings were distributed as follows:

Buy 42%

Hold 40%

Sell 19%

Total 100%

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