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Forward guidance from Delta and Econet on navigating the current reporting season



The next coming weeks will see several of Zimbabwe`s listed companies publish their financials, as Zimbabwe`s earnings announcements season progresses. Already a couple of companies have released their financial results, and there are salient themes that stick out, giving leading indicators of what to expect for some of the leading corporates in Zimbabwe. Numbers are not opinions, and the statistics point to an unforgiving economic environment, which will see even those companies with solid business models and good strategy, struggle under the throes of weakening economic fundamentals. As such, expect tightening margins, slumping profits and slowing revenues this year. Positive earnings stories will be pretty hard to come by. These trends are also going to affect even Delta and Econet, Zimbabwe`s traditional heavyweights, and if these two giants are sneezing on account of the economy, then the rest of the listed companies will most certainly catch a cold.

Delta Beverages
This company is almost always a good place to start as it has proved to be the bellwether counter on the local stock exchange. In spite of beer`s relative inelastic demand qualities, lager volumes have been on a downward trend since last year, and this has paved the way for declining company revenues. The soft drinks narrative closely mirrors lager beer`s performance, with volumes also receding sharply.  Zimbabwe has just come from what have been record high temperatures particularly in the last quarter of 2015, after last year was recorded as the warmest year in record since record keeping began in 1888 globally. This could potentially have provided some respite to the beverage maker at the close of 2015, especially in the sparkling and alternative beverages category as volumes will likely have picked up a little.

However, should this be the case, the uptick in volumes would be negligible, also factoring in the rather muted festive season characterised by a depreciating rand which saw subdued diaspora flows, as well as the delayed payments of civil service salaries and bonuses. In keeping with recent trends, we expect most of the growth to come from the Sorghum beer section, but even in this category; we see this growth being tepid. Going forward, the company faces the risk of incurring a high sin tax, should the government further raise excise taxes as it is has been wont to do in the past. Another challenge Delta will have to contend with in the future is the dumping of cheaper foreign products locally as the dollar strengthens against regional currencies. Delta has over the years maintained a rather generous dividend payout ratio at (48%) 1.40 cents in the latter half of last year. This trend is forecast to continue, although the payouts will likely taper off somewhat.

Econet
The company`s growth story has begun to stutter, largely due to the nature of the industry it operates in. Technology is ever evolving, and voice, which traditionally has been the company`s main revenue driver has been under pressure. Average Revenue per User (ARPU) has been dwindling, and the much touted “overlay services” which are seen to be the future growth drivers, will mean increased and diversified revenue flows. But with diversification, Econet risks turning into a behemoth of a company which may be difficult to effectively manage.  One thing is for certain however, Econet will have to diversify its revenue streams if it is to keep delivering value. Steward Bank which has been the Group`s ‘sick child’ has of late been showing nascent signs of growth as evidenced by its return to profitability with income rising to $12, 5 million in the prior reporting period.  This will come in handy in the broader context of the Group`s overall results.

We see revenues continue to decline on account of sector trends such as double-simming which is prevalent  in Zimbabwe as well as the entrenchment of Over-the Top (OTT)  services, which will mean greater competition for the company`s traditional revenue earning products. This makes the case for the company to strengthen its revenue diversification initiatives nonetheless. Ecocash will be the mainstay of the business in the immediate term, as the “fintech” market in Zimbabwe still has scope for growth, when looking at the financial inclusion levels.  In the last reporting season, Ecocash contributed around 10% to total revenues, at $35 million. One would foresee the unit`s contribution to total revenues climb up, at least in the short term as its revenues continue with their uptick.

These two heavyweight counters invariably give guidance on what to expect in the earnings announcements of companies this year.  Declining revenues, profits, lower margins and an increased focus on cost efficiencies companies are likely going to be the dominant themes this reporting season. A proliferation of cheaper foreign products on the local market directly competing with local products will also present management executives with a headache. All in all, the outlook for the first half of 2016 is subdued, as the economy continues to teeter on the brink of total collapse. Companies will look to preserve themselves with a view of coming out of Zimbabwe`s current economic morass unscathed. There is no timeline however as to when this will be. Tough times do lie ahead indeed for corporate Zimbabwe!



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