Investment In Feed Capacity Paying Off
BMI view: Zambeef 's 2012 FY results confirm our strong outlook for food consumption growth in Zambia, especially for value-added goods such as meat and dairy products. The company's margins have improved in 2012 thanks to increasing investment in feed production and storage capacity. However, the sudden growth in capital expenditure in 2012 boosted working capital needs, taking operating cash flows into negative territory and debt higher. This will put short-term downside risks to the company's share price.
Zambeef's 2012 FY results confirm our outlook for strong food consumption growth in Zambia, especially for value-added goods such as meat and dairy. For all the company's meat and dairy products, demand outpaced supply, pushing sales higher mainly because of higher volumes and prices. Revenue growth was strongest in the pork and beef segments, mainly because the company's procurement capacity was the strongest in these segments while Zambeef had more difficulty meeting the booming demand for chicken and dairy products, resulting in slower sales growth. We expect demand for these food products to continue growing at a strong pace in the coming years and our Africa team is forecasting real GDP growth of 7.1 % in 2013: among the highest growth rates in the world.
The company's margins improved again in 2012, especially in the meat divisions, thanks to the increasing vertical integration. The company plans to expand its feed division's capacity and has already invested in Mpongwe farm in order to increase soy production in sufficient amounts to meet feed demand from livestock divisions. The company's farm currently produces about 31,000 tonnes of soybean per year, while demand from Zamanita, Zambeef's soymeal and oil production facility, could reach about 100,000 tonnes annually. For 2012, the company's increasing internal soybean production as well as strong stocks helped take gross margins higher, especially in a context of high meat prices. Over the medium term, we expect higher investment in feed production and storage capacity to continue pushing down the cost of goods.
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