Demand for milk seen softening

LOCAL securities firm Morgan & Co has projected that the demand for milk and milk-based products at Dairibord could buckle under the weight of recent policy pronouncements surrounding sugar tax and route-to-market restrictions for manufacturers.

In his 2024 National Budget, Finance minister Mthuli Ncube introduced a raft of measures including sugar tax, route-to-market restrictions, domestic minimum top up tax, among other measures.

In their analysis of Dairibord’s financial results for the year ended December 31, 2023, Morgan & Co researchers also noted that the milk processor’s collection of United States dollar revenue will be hampered.

“Milk supply boost to sustain top line, interest costs to dent bottom line efforts to revive local milk production capacity have seen Zimbabwe's milk output has increased, and this is expected to address the risks of acute milk shortages in FY24 [financial year 2024],” it said.

“However, demand for milk and milk-based products could buckle under the weight of recent policy pronouncements.

“We also highlight that the introduction of withholding tax to non-VAT [value added tax]compliant traders will likely constrain Dairibord’s United States dollar revenue collections. Cost pressures have somewhat subsided, but Dairibord’s increased leverage will likely result in an interest burden that is high enough to upend FY24 profits.”

The research firm said efforts by the public and private sector to revive local milk production capacity have been yielding results considering that Zimbabwe's milk output increased to 100 million litres in 2023 from 80 million litres in 2021.

These developments, it noted, somewhat dull the risks of acute milk shortages vis-a-viz the impact of El Niño on livestock throughout the country which currently affects national dairy herd count and feed costs.

Dairibord posted an overall sales volume growth of 11%, which was largely a result of an 8% growth in Chimombe volumes and an 18% growth in beverages sales. This, coupled with periodic price adjustments, resulted in a 47% increase in revenue to ZWL$723,2 billion.

Despite an improved United States dollar revenue contribution to 84%, a combination of exchange rate distortions and a jump in interest rates resulted in a surge in operating expenditure and finance costs. Resultantly, Dairibord’s bottom line nearly halved to ZWL$6,9 billion.

Total assets increased by 20% mainly because of an increase in prepayments to suppliers and revaluation gains in property, plant, and equipment. Net cash balances were down 22% due to a surge in operating expenditure. Exchange rate gains, however, kept cash balances positive. No interim dividend was declared.

Morgan & Co estimated a FY24 price target of US$0,0943 that is largely driven by an enterprise value to its earnings before interest, taxes, depreciation and amortisation valuation.

“Global peers were used to generate forward looking multiples, and these were adjusted for differences in country risk,” it said.