Innscor Africa the Quintessential Consumer Play 02.06.2011

7/27/2019 Innscor Africa the Quintessential Consumer Play 02.06.2011

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Innscor Africa Limited

The quintessent ia l consumer p lay

Innscor, still experiencing solid top-line growthInnscor Africas 1H11 results for the 6 months ended 31 Decemberreflected continued revenue and volume growth across the diversifiedbusiness. Profitability improved as evidenced by higher margins achieved,The EBITDA margin increased from 9% to 10% h-o-h, whilst the PBTmargin increased from 8% to 9% h-o-h; due to both revenue growth andimproved conversion efficiencies. Revenue at $255.5mn was up 22%versus prior comparable period, whilst EBITDA at $26mn was up 31%versus prior comparable period. PBT rose 51% from $16.1mn to $24.2mnh-o-h, whilst EPS rose a significant 116% from 1.21 cents to 2.61 cents.The group continued to display strong operating cashflows, with cashgenerated from operating activities rising 158% to $26.8mn from $10.3mnh-o-h. A highlight of 1H11 was the unbundling and subsequent listing of thegroups crocodile operation, Padenga, via a dividend in specie to Innscor

Africa shareholders.

Benefitting from increased consumer incomesInnscor is both a diversified and vertically integrated FMCG (fast movingconsumer goods) business. We believe that it is well positioned to benefitfrom rising consumer incomes as given by the current growth in GDP percapita. GDP per capita in 2010 was estimated at $594, this is projected togrow by 22% to $725 in 2011, before eventually drifting towards $1040 in2016E. It is currently estimated that the Zimbabwean consumer spends23.8% of their income on food, we therefore anticipate increased spend bythe Zimbabwean consumer particularly in the FMCG space as incomescontinue to grow. This trend is already evident in Innscors 1H11 volumesgrowth. We further believe that Innscors vertical integration, both backwardand forward, translates to reduced supply side constraints, better costmanagement and improved conversion efficiencies. This will continue toresult in improved margins and rising profitability.

Attractive ValuationUsing our revised earnings forecasts, we now estimate Innscor trades on PER(+1) 10.4x placing it at a discount to weighted emerging market comparablesat PER 19.17x (2012E). The group is on an EV/EBITDA (+1) 4.7x to 2012E,

placing the stock at a discount to weighted emerging market comparables atEV/EBITDA 12.6x for 2012E. We forecast gross revenue growth of 23% to$493.5mn for 2011E and then a further 18% to $580mn for 2012E. Weforecast EBITDA growth of 76% to $51mn for 2011E and then 37% to 70mnfor 2012E. We expect FY11 net income of $24.9mn versus FY10 net incomeof $15mn, an increase of 66%, which will rise 27% to $32mn 2012E. Using aweighted combined multiples valuation method (PER & EV/EBITDA), we havearrived at a target price of $0.88 for Innscor Africa, implying upside of 40%.We therefore maintain our coverage of Innscor Africa Limited with a Buyrecommendation.

Market Data

Report Date 02-June-11

Bloomberg Ticker INAF: ZH

Rating BUY

Current price $ $0.63

Target price $ $0.88

Market Cap $mn 329

EV $mn 350

Market Weight 7.24%

Common Shares Outstanding mn 540.12

Freefloat % 56%

Average Daily Vol. $000s 103.12

Last Dividend declared 08.10.10

Dividend Yield 2%

PER (+1) 10.4x

EV/EBITDA (+1) 4.7x

Share price perfomance YTD 22%

Innscors 1 year share price performance

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Equity ResearchConsumer

02 June 2011Zimbabwe

Contact Details

IH Securities (Pvt) Ltd4 Fleetwood RoadAlexander ParkHarareZimbabwe

Tel +263 (4) 745133/139Fax +263 (4) 745879

DisclaimerThis document has been prepared by IH Securities to provide backgroundinformation about the securities and (or) markets mentioned herein, the forecasts,

opinions and expectations are entirely those of IH Securities. This document wasprepared with the utmost due care and consideration for accuracy and factualinformation; the forecasts, opinions and expectations are deemed to be fair andreasonable. However there can be no assurance that future results or events will beconsistent with any such forecasts, opinions and expectations. Therefore the authorswill not incur any liability for any loss arising from any use of this document or itscontents or otherwise arising in connection therewith. Neither will the sources ofinformation or any other related parties be held responsible for any form of actionthat is taken as a result of the proliferation of this document.

Research Team

Dzika Danha+263(772) 573 [email protected] Mhongo+263(774) 171 [email protected]

Lloyd Mlotshwa+263(772) 936 [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Innscor Africa through its strategic focus on Fast Moving Consumer Goods has become thelargest producer and supplier of protein and cereal goods in the country. With GDP per capitarising 22% from $594 CY10 to $725 projected for CY11 and the average Zimbabweanconsumer spending 24% of income on food, we anticipate consistent growth in volumes forInnscor. This trend is already evident in the groups 1H11 results; in the milling andmanufacturing silo, Natfoods (milling) posted volumes growth of 17% h-o-h to 31 December2010, whilst Colcom (meat processing) posted revenue growth of 17% supported by volumesgrowth in its brands. Innscor bread division posted volumes growth of 54% supported byincreased capacity and improved efficiencies from 3 new plants commissioned in the year.Chicken sales at Irvines Zimbabwe improved 54% h-o-h, whilst sales of table eggs and dayold chicks improved 81%. In the distribution and wholesale silo, volumes processed throughthe distribution centre were up 64% in 1H11 versus prior comparable period, this wasachieved against an estimated loyalty rate of 30% from the independent Spar stores reflectingthe potential upside in volumes going forward. The retail silo continued to contribute the mostto total group turnover (34%) based on strong performance in the fast foods business, localcustomer count increased 19% h-o-h. The group intends to introduce 40 to 50 new fast foodcounters per year over the next 5 years in both Zimbabwe and the region. Capex spend in

FY11 will amount to $35mn and a similar amount ($35mn) has been budgeted for FY12, thefunds will be directed towards expansion projects, fixed asset refurbishments andmaintenance programs. Improved conversion efficiencies will see the group achieving highermargins, resulting in increased profitability going forward, we estimate that the EBITDA marginwill rise from 10% at present to 13% in 2015E. Innscors strong operating cashflows allow thegroup to fund the bulk of their capex requirement from internal resources, thus maintaining lowgearing. Using a weighted combined multiples valuation method (PER & EV/EBITDA), wehave arrived at a target price of $0.88 for Innscor Africa Limited, implying upside of 40%. Wetherefore reiterate ourBuy recommendation on the group.

Table 1: Valuation Table

Source: IH Estimates, Company Reports

Investment Case

Leveraging on the Zimbabwean consumer

The lost decade (1998 2008) was characterized by the erosion of disposable incomes dueto hyperinflation and the subsequent decline of the Zimbabwean consumers purchasingpower. It is estimated that Zimbabwes GDP fell 60% during that period, manufacturers werehamstrung by price controls, severe exchange control regulations and the absence ofdomestic liquidity. Since dollarization in late 2008 we have seen the re-emergence of theZimbabwean consumer, the country has witnessed aggressive GDP growth, 5.7% in 2009,8.1% in 2010 and projected growth of 9.3% in 2011. GDP per capita in 2010 was estimated at$594, this is projected to grow by 22% to $725 in 2011, before drifting towards $1040 by2016E. It is estimated that the Zimbabwean consumer currently spends 23.8% of income onfood, the second largest constituent of the consumer basket after housing and utilities at37.1%. With the normalization of consumer incomes (post dollarization), pending wageadjustments in most sectors and improving domestic liquidity from exports growth, weanticipate accelerated consumer spend in the FMCG sector. We further believe that in thelocal universe of consumer sector companies, Innscor Africa Limited will be the mostsignificant beneficiary, as is already evident in their volumes growth over the past year. In our

opinion, the comparative advantage offered by Innscors value chain in the manufacture,

Investment Summary

Revenue EBITDA

Net

Income

EPS

($)

EBITDA

Margin EV

Net

Debt EV/Sales EV/CF EV/EBITDA P/E P/CE P/Bk EV/IC011E 493.48 50.95 24.85 0.05 0.10 349.97 20.50 0.67 4.11 6.44 13.26 10.21 2.51 1.88

012E 580.24 69.85 31.60 0.06 0.12 346.58 17.10 0.57 2.83 4.70 10.43 7.65 2.16 1.50

013E 632.72 81.63 35.69 0.07 0.13 314.38 -15.09 0.52 2.90 4.02 9.23 6.49 1.87 1.40

014E 687.83 87.92 39.43 0.07 0.13 273.95 -55.52 0.48 2.84 3.74 8.36 6.00 1.62 1.29

015E 739.72 93.83 43.30 0.08 0.13 229.25 -100.2 0.44 2.64 3.50 7.61 5.63 1.42 1.18


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processing and sale of both protein and cereal goods, is best positioned to leverage off theZimbabwean consumers improving purchasing power and per capita consumption .

Diversified and vertically integratedInnscor through strategic acquisitions and organic growth has not only become a welldiversified company within the FMCG sector, but also significantly forward and backwardintegrated. The group is strongly positioned in the primary and secondary manufacture,wholesale, distribution and retail of most proteins and cereals within the country. This integratedvalue chain is reflected in the structure of the groups 3 main silos;

Milling and manufacturing silo, Distribution and wholesale silo Retail silo.

Through its milling and manufacturing silo, the group has backward integrated into the supply ofbroilers and table eggs, pork and pork related products as well as cereals and stockfeeds.Innscors controlling stakes in Irvines Zimbabwe Ltd, Colcom Holdings Ltd and National FoodsLtd (combined the countrys largest producers of protein and cereals) give the group significantsupply side efficiencies and influence over their cost structure. National Foods carries aninstalled capacity of 1.9mn tons per annum, whilst Colcom carries a slaughterhouse capacity of260,000 pigs per annum, Irvines Zimbabwe has the infrastructure to produce 8.9mn birds ayear. Innscors bread making unit, which has been a key area of investment is expected to havethe capacity to produce 350k loaves of bread per day (128mn loaves p.a) by September 2011.The group through its distribution and wholesale silo possesses the capacity to wholesale anddistribute its own products, this silo houses a transport division, which gives the group directcontrol over its own logistics. Innscors retail silo forward integrates the group, all owing it todirectly market its products to the final consumer, the Spar retail network is the third largestfood retailer in the nation with over 30,000 sqm of retail space. The fast foods division (retailsilo; 158 counters) retailing direct to the final consumer also benefits from the groupsbackward integration via access to raw material inputs like chicken, eggs, edible oils and flour

through group synergies with subsidiaries Irvines and Natfoods. The groups diversificationstrategy includes country diversification with operations extending into the region, through Spar(Zambia) where the group holds 4 wholly owned corporate stores and 3 franchised stores andFast foods with 199 counters in Kenya, Ghana, Senegal and Nigeria. Currently 20% ofInnscors turnover is generated from regional operations, thus diversifying its revenue streams outside of Zimbabwe. We believe that overall this diversified and integrated value chain leads tobetter cost management and improved conversion efficiencies, which bodes well for operatingand PBT margins within the group.

Strong brand recognitionInnscor through its well recognized brands is fairly dominant within the consumer sector space.Through its distribution and wholesale silo, the company holds the local distribution rights forinternational brands such as Kellogs, Unilever, Colgate, Eveready, Johnson & Johnson andTiger Brands. The group also controls strong brands of locally manufactured goods like Gloria

Flour, Pearlenta Maize Meal, Red Seal Cooking Oil, Homepride and Gold Seal. In the retail silo,their Inns under the Fast Foods division are the most dominant brand in the local fast foodspace. Colcom holds the premier brands in pork products, whilst Irvines carries strong marketrecognition in frozen chickens and table eggs. The groups Spar brand similarly carries strongmarket recognition in the food retail space, placing the company amongst the top 3 food retailchains in the country. We believe that Innscors brand power enhances market penetrationwhilst enabling the group to defend its market share against competitive pressure.


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Key risks

Competition from importsGovernment currently has a suspension on import duties for basic finished goods like maizemeal, flour and cooking oil. This policy handicaps local industrys ability to price competitivelyagainst foreign imports that are more efficiently produced. With the currently high local cost ofproduction, Innscors capacity to manufacture and distribute, particularly its cereals, effectivelyagainst competitively priced imports will be negatively impacted.

Cost pressure driven by wages, utilities and commoditiesIncomes currently remain low relative to living expenses, as a result industry pressure for wageadjustments is high, with 25 of the 47 industrial councils currently involved in wage disputes.Power and water shortages remain a challenge in Zimbabwe exerting downward pressure onindustrial capacity utilization. These factors combined with upward price risk in globalcommodities combine to negatively impact operating costs for local manufacturers.

Regulatory environmentZimbabwes Indigenisation and Economic Empowerment Act enacted in March 2010 requiresall local enterprises to be 51% indigenous owned (indigenous as defined in the Act). There isstill some uncertainty over how the Indigenisation Bill will be implemented exerting an elementof political risk on the group. In addition the pending elections may lead to changes in theregulatory regime governing Innscors businesses. This may be of particular concern for acompany operating in key industries such as food and food processing.


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Table 2: Summary weighted valuation

Weighted Valuation2011E/2012E

blend Weighting 1-year valuation

EV/Sales 0.86 10% 0.09

EV/EBITDA 1.02 45% 0.46

P/E 0.75 45% 0.34

Innscor weighted valuation 0.88

Implied upside/downside 40%


We derive a YE12 target price for Innscor Africa Limited using a blended EV/Sales,EV/EBITDA and PER valuation with implied multiples derived from emerging marketcomparables. EV/Sales is apportioned a lighter weight of just 10%, whilst EV/EBITDA andPER have been apportioned 45% each. Our emerging market universe EV/Sales, EV/EBITDAand PER multiples are 1.2x, 19.17x and 12.6x for 2012E respectively. Using our revisedearnings forecasts for FY11/12 after Innscors 1H11 performance, we es timate that the grouptrades on EV/Sales (+1) of 0.6, PER (+1) of 10.4x and EV/EBITDA (+1) of 4.7x. Thus wederive a 1 year target price of $0.88 a share reflecting upside of 40% and therefore assign aBUY recommendation.

Figure 1: Top-line development, 2011E to 2015E


As reflected in Figure 1 we believe that Innscor Africa will continue to experience solid top-linegrowth driven by normalizing consumer patterns and forecasted increase in disposableincomes. We estimate that revenue will grow at a conservative compounded annual growthrate of 8% between 2011E and 2015E. The main anchor of this revenue growth will be theRetail silo, which has traditionally been the largest contributor to the groups total revenue(typically above 35%), in our opinion this silo will continue to dominate revenue, growing at aconservative compounded annual growth rate of 9% over the same period. Figure 2 belowshows a breakdown of our expectations per silo leading up to 2015E.

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Figure 2: Silo contribution to total revenue 2011E to 2015E, $mn


We estimate that Innscors regional operations will contribute 21% to total revenue for 2011E.The group holds four wholly owned Spar corporate stores in Zambia and three franchisedstores, two further franchised outlets are due to open in the second half of the year andanother two potential sites for corporate stores are currently under consideration. The group

holds 199 fast food counters in the region spanning Kenya, Ghana, Zambia, Senegal andNigeria, customer count in 1H11 was 4mn with an average customer spend of $4.50. Regionalfast foods will benefit from an aggressive expansion program that will see between 40 and 50fast food counters added per year for the next five years both locally and in the region. Webelieve that regional contribution to total revenue could drift towards 25% in 2015E.

Figure 3: Regional contribution, 2011E


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One of the key drivers in the positive performance we expect from Innscor going forward willbe a marked improvement in profitability to accompany top-line growth. The group hasstreamlined operations in most of its SBUs and continues to do so mostly via staffrationalization. Conversion efficiencies continue to improve aided by the advantages ofvertical integration and capex spend within the group, measures have further been taken toimprove interrnal controls particularly within Spar. This strategy has resulted in improvingmargins at operating level resulting in higher net margins for the group.

Figure 4: Margin development, 2011E to 2015E


Figure 4 displays the gradual growth in margins that we anticipate within the Innscor groupbetween 2011E and 2015E. We believe Innscor will achieve an EBITDA margin of 10.3% for2011E which will gradually rise and peak at about 12.9% in 2013 before it begins to plateauand drift toward 12.7% in 2015. We believe that a net margin of 5% will be attained for 2011Ewhich will drift towards 6% by 2015E. Overall we expect actual EBITDA to grow at acompounded annual growth rate of 13%, 2011E to 2015E and attributable profit to grow at acompounded annual growth rate of 12% over the same period.

We estimate that the group will spend $36.4mn in capex FY11 and a further $36.9mn in capexfor FY12. The funds will be spent on fixed asset refurbishment, maintenance programmes andsite expansions. The refurbishment of existing fast food counters and addition of new counters

as well as the expansion of retail space under Spar will be key priorities for the group.Investment in the milling and manufacturing silo to continuously improve conversionefficiencies should also be an important theme of expenditure going forward. We do, howeverestimate that capex spend will begin to decline in 2013 thus improving free cash flows andallowing for increased dividend flows. Capex spend is depicted in Figure 5 below.

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Figure 5: Capital expenditure vs Operating cashflows, 2011E to 2015E


The group plans to fund the bulk of its capex plans from internal resources using its in housetreasury. Innscor traditionally has strong operating cashflows due to the nature of itsbusinesses (1H11 operating cashflows were up 158% to $26.7mn). The existence of Innscorstreasury has allowed the group to deploy its own cash resources internally to its various

SBUs, thus minimizing the need for loan capital. Through this method of self financing Innscorhas generally managed to maintain its gearing at around 10%, management as a policy do notintend to allow gearing to exceed 25% going forward. Figure 6 below depicts the groupsgross debt position versus debt/EBITDA from 2011E to 2015E.

Figure 6: Gross debt vs Gross Debt/EBITDA, 2011E to 2015E


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Per capita on the rise but still below SSA averageSince dollarization in 2009, Zimbabwe has seen positive economic growth which has resulted

in income growth, with GDP per capita rising from $351 in 2008, to $594 in 2010. As shown inFigure 7, the growth in incomes is expected to continue, with GDP/capita forecast at justbelow $1000 by 2015.

Figure 7: Growth in Zimbabwean GDP per capita, 2007 to 2015E

Source: IMF

It must be highlighted, however, that on average, Zimbabwean incomes remain relatively lowcompared to other countries in the region. The country had GDP per capita lower than 30% ofthe $2,258 average for Sub-Saharan Africa in 2010. As demonstrated in Figure 9 , ZimbabwesGDP per capita places most families incomes below the poverty datum line. As at December2010 an annual per capita income of $934 was required to meet the poverty datum line, afigure much higher than the $594 achieved. We believe that the lower incomes currentlyreceived in Zimbabwe restrict most consumers to spending on basic foodstuffs. We however,foresee an opportunity for well positioned businesses like Innscor as Zimbabwes GDP percapita begins to converge with SSA.

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Figure 8: GDP per capita: select African countries

Source: IMF

Figure 9: GDP per capita: select African countries, 2009 to 2016E

Source: IMF, CSO and IH estimates

As displayed above the gap between the poverty datum line and GDP/capita has narrowed,from $438 in 2009, to $339 in 2010 and is expected to end 2011 at $259. Applying inflationforecasts for the country to the poverty datum line in 2010, we extrapolated the poverty datumline to the medium term. The graph suggests that whilst the average Zimbabwean willcontinue to live below the PDL in the medium term, the population will find itself increasinglycapable of affording necessities. With average GDP/capita set to remain below the PDL, webelieve the fastest growth in consumption will continue to take place in the necessities such as

food, housing, transport and communication, placing food producers and retailers at asignificant advantage.

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The opportunity; increased protein consumption expectedWithin the food sector, we believe that the Zimbabwean diet is likely to shift to a less starch-

driven diet, with increased consumption of other foods, including proteins such as meat, eggsand milk, as well beverages. As shown by figure 10, staples constitute a lower percentage offood intake, by caloric value in higher income countries in the region, including South Africaand Botswana., than in lower income countries. We therefore expect that as the Zimbabweaneconomy continues to grow, we will see a shift towards other foods in the Zimbabwean diet asthe Zimbabwean consumer increases the overall intake of food.

Figure 10: Diets in Southern Africa

Source: FAO

Figure 11 below depicts Zimbabwes protein consumption per capita versus peers within theregion, we have also included Brazil as an emerging economy and USA as a developedeconomy for comparative purposes. Whilst Zimbabwes protein consumption per capita sitsabove Zambia and Mozambique, it has clearly lagged behind remaining Southern Africanpeers, we believe this is an indication of the potential upside in consumption as consumer

patterns in the country continue to normalise

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Figure 11: Protein consumption per capita

Source: FAO

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Zimbabwean consumers are also faced with low access to credit which limits the consumersability to spend. Credit from banks remains minimal, with households taking up 8% of the

$1.7bn loans in the banking system as at December 2010. Retailers have begun to offer crediton purchases of items such as clothing and furniture, freeing up income for expenditure onother goods such as food. However, the scale at which such credit is available to consumersremains minimal. Going forward we believe that increased economic growth as well asongoing improvements in the banking sector will lift consumer access to credit in the mediumto long term. This development will consequently increase the disposable income available forexpenditure on food items.

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FMCG focused firms, similalry to other industries in the country are faced with certainchallenges at this time. Firstly, cost pressures arising from wage demands, with an estimated25 of 47 industrial councils in wage disputes as at the beginning of this year, pose significantdownside risk to margins. Increasing utility prices, particularly power further add to costpressures, again, negatively impacting margins. Most Zimbabwean companies import theirinputs, as well as finished products from the region, and South Africa in particular. Therefore astronger rand directly impacts costing and competition in the Zimbabwean FMCG sector. Aspreviously discussed, disposable incomes in the country are rising, but still remain relativelylow on average. Consequently demand for higher margin goods looks set to remain subduedin the short to medium term.

With an estimated 36% of Zimbabwes population living in urban areas, and the rest of thepopulation living in rural and peri-urban areas, it is critical that producers are able to accessmore remote areas of the country efficiently. Such access will increases sales capabilities,and reduce the cost of placing end products with the end user. There are a limited number ofcompanies within the country with the necessary distribution channels to limit the logisticalcosts of domestic distribution. Innscor through its distribution and wholesale silo holds a

comparative advantage in logistics over its competitors, National Foods controls a strategicdepot network enabling it to easily move basic commodities in bulk, thus contributing toprofitability.

Manufacturing

Figure 12: Sectoral growth

Source: IH Estimates

As shown in Figure 12, the manufacturing sector in the country has seen slow recovery, withgrowth in 2010 and 2011, significantly underperforming the growth in sectors such as miningand agriculture. Overall capacity utilization is expected to end the year at between 45% and50%. As shown in Figure 13, capacity utilization in food stuffs is not significantly higher thanthe average in the manufacturing industry. Grain millers are a particular area of concern, withcapacity utilization estimated at 10% within the subsector.

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Figure 13: Manufacturing capacity utilisation, 2009 to 2011E

Source: IH Estimates

Low capacity utilization in the manufacturing sector is partly attributable to insufficient accessto power and water. National demand for power is estimated at 2,200MW, whilst current totalcapacity is estimated at 1320MW. The country is subsequently forced to import electricity fromthe region, but regional scarcity, high costs, as well as financing constrain the extent to whichthis is possible. Government has, however, begun to open the door for private players to enter

the power generation industry, by for example awarding a license to RioZim for the productionof 2400MW at the Gokwe Sengwa coal fields starting in 2014.

Inefficiencies resulting from obsolete machinery, expensive utilities and the feedback effect oflow capacity utilization have negatively affected the FMCG industrys ability to manufacturecompetitive local products. Imports therefore pose a significant threat to local manufacturers.This is particularly evident with basic commodities, where government suspended all duties onthe importation of basic goods, such as maize meal, cooking oil and flour. This developmenthas led to imports taking up significant market share in the food industry, as local producersstruggle to compete with cheaper products, a situation that further suppresses capacityutilization. Industry players including Innscor are currently lobbying government to imposeduties on basic goods imports, thereby creating a level playing field in price competition.

Significant challenges within the food processing sector also emanate from the low productionof the necessary inputs within the country. As shown in figures 7 and 8, the country is unableto produce sufficient quantities of most agricultural inputs versus national demand, leavingfood processors highly dependent on imports. This is one of the primary challenges forNational Foods, with a spill-over effect on Colcom and Irvines caused by limitations in theproduction of stockfeeds. The high proportion of imports in input mixes affects profitability asfreight costs are quite significant. Industry players estimate that logistical costs, includingfreight and insurance can be as high as 40% of procurement costs, depending on sourcemarkets and the type of good.

A key constraint to increased local production of inputs is access to financing. To mitigateagainst this challenge in the countrys agriculture sector, manufacturers are increasing theirsupport for local farmers through financing out-grower schemes and off-take guarantees in abid to increase local production.

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Figure 14: National maize consumption (mns) of tonnes

Source: Ministry of Agriculture, Commercial Farmers Union, IH estimates

Figure 15: National wheat consumption (mns) of tonnes

Source: Ministry of Agriculture, Commercial Farmers Union, IH estimates

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Equity Research

Innscor Africa Limited is an FMCG focused, integrated chain business with interests both locally(Zimbabwe) and in the region. The group reverse listed into Capri (appliance manufacturing) onthe Zimbabwe Stock Exchange in 1998 with an initial market capitalization of USD70mn. Anaggressive growth strategy saw the group acquiring the SPAR eastern region business andopening corporate stores in Harare in 1999, Innscors SPAR division is now estimated to be thethird largest retailer in Zimbabwe with over 30,000sqm of retail space. In 2002, the groupacquired 80% of Colcom Holdings Limited (COLCOM: ZH), the countrys largest producer andprocessor of pork. This, along with their purchase of 49% of Irvines Zimbabwe Limited in 2009,the countrys largest broiler and egg producer, made Innscor Africa, Zimbabwes largestproducer of protein.

The group acquired 49% of National Foods Limited (NATFOODS: ZH) in 2004, again, thecountrys largest milling company (maize and flour milling, prepacking and sale of dry groceries,edible oils, bakers fats and manufacture of stockfeeds). This purchase positioned the group asa market leader in the manufacture of fast moving consumer goods, controlling strong localbrands like Gloria and Red Seal. Innscors fast food division which began in 1987 currently

holds 158 counters in Zimbabwe and a further 199 counters in the region. The groups diverserange of businesses are organized into 3 main silos as follows:

Table 3: Milling and manufacturing silo

Subsidiary Description Capacity (p.a)Colcom Holdings Limited Pork Producer & Processor 260k pigsInnscor Appliances (Capri & WRS) Appliance Manufacturer n/aInnscor Bread Bread Manufacturer 128mn loavesInnscor Snacks Snack Foods Manufacturer n/aIris Biscuits Biscuits Manufacturer n/aIrvines Zimbabwe Limited Broiler and Eggs Producer 8.9mn birdsNational Foods Limited Miller and Manufacturer 1.9mn tons


Table 4: Distribution and wholesale silo

Subsidiary Description Capacity

Distribution Group Africa FMCG distributor n/aSPAR Distribution Centre Services SPAR stores n/aFreshPro Perishables distributor n/aInnscor Transport Contracted transporter n/aNational Foods Distribution Natfoods FMCG distributor n/aColcom Distribution Colcom products distributor n/aBakery Distribution Bread distributor n/a


Table 5: Retail silo

Subsidiary Description CapacityFast Foods Fast food franchises 158 countersBakery Retail In store bakeries n/aSPAR SPAR retail outlets 30k sqmTV Sales and Home Home appliances n/aPork Shops Pork retail outlets n/a


Com an Profile


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Regional Businesses

Innscor Zambia: The main businesses in Zambia are the SPAR retail operations andthe Distribution business.

Fast Foods Regional: Fast food counters in Kenya, Ghana, Zambia, Senegal as wellas a franchising arm in Nigeria.

Management

Most of the groups seniormanagement team and partners have been with Innscor for wellover 10 years and in addition 55% of the business is owned by the operating management.The group structure is comprised of independent operating units run by a streamlined headoffice.

Shareholding Structure

ZMD Investments,18.8%

HM Barbour,18.5%

Old MutualZimbabwe Ltd,

6.4%

Other, 56%


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Table 6: Innscor Africa Income Statement 2011-2015E, $mn

Innscor Income Statement 2011 2012 2013 2014 2015 CAGRRevenue 493.48 580.24 632.72 687.83 739.72 8%

COGS (311.38) (360.33) (389.76) (427.14) (459.37) 8%

Gross profit 182.09 219.91 242.97 260.69 280.35 9%

Other income 9.50 9.50 9.50 9.50 9.50 0%

Operating expenses (140.64) (159.57) (170.84) (182.28) (196.03) 7%

EBITDA 50.95 69.85 81.63 87.92 93.83 13%

D&A (7.42) (11.49) (15.05) (15.48) (15.20) 15%

EBIT 43.84 58.67 66.89 72.74 78.94 12%

Net interest (3.50) (6.56) (7.46) (6.62) (5.90) 11%

Equity accounted earnings 8.00 8.93 9.30 9.66 10.02 5%

PBT 48.34 61.04 68.73 75.77 83.06 11%

Taxation (12.08) (15.26) (17.18) (18.94) (20.76) 11%

Minorities (10.57) (13.35) (15.03) (16.58) (18.17) 11%

Net income 24.85 31.60 35.69 39.43 43.30 12%

Dividends paid out (7.46) (10.11) (11.78) (13.01) (14.29) 14%

Retained earnings 17.40 21.49 23.91 26.42 29.01 11%

Weighted average shares in issue 540.12 540.12 540.12 540.12 540.12 0%

Share options 1.48 1.48 1.48 1.48 1.48 0%

Basic EPS 0.05 0.06 0.07 0.07 0.08 12%

Diluted EPS 0.05 0.06 0.07 0.07 0.08 12%

Dividend per share 0.01 0.02 0.02 0.02 0.03 14%

Gross margin 37% 38% 38% 38% 38% 1%Operating expenses as % ofturnover 29% 28% 27% 27% 27% -1%

Operating 9% 10% 11% 11% 11% 4%

EBITDA margin 10% 12% 13% 13% 13% 4%

Net margin 5% 5% 6% 6% 6% 3%

Tax rate 25% 25% 25% 25% 25% 0%

Dividend ratio 30% 32% 33% 33% 33% 2%

Financials


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Table 7: Innscor balance sheet 2011E to 2015E, $mn

Balance Sheet 2011 2012 2013 2014 2015 CAGRPPE 82.07 107.48 110.59 108.55 107.05 5%

Intangible assets 1.09 1.09 1.09 1.09 1.09 0%

Investments 35.31 35.31 35.31 35.31 35.31 0%

Biological assets

Non current assets 118.46 143.87 146.99 144.95 143.45 4%

Biological assets 2.21 2.21 2.21 2.21 2.21 0%

Inventories 38.39 44.42 48.05 52.66 56.63 8%

Trade and other receivables 40.56 47.69 52.00 56.53 60.80 8%

Cash and cash equivalents 22.69 49.08 73.28 107.71 146.41 45%

Other current assets 39.63 39.63 39.63 39.63 39.63 0%

Current assets 143.47 183.03 215.17 258.74 305.68 16%

Total assets 261.93 326.90 362.16 403.68 449.13 11%

Ordinary share capital 5.42 5.42 5.42 5.42 5.42 0%

Non-distributable reserves 45.77 45.77 45.77 45.77 45.77 0%

Distributable reserves 79.92 101.41 125.32 151.74 180.75 18%Equity attributable to equity holders of theparent 131.10 152.59 176.50 202.92 231.93 12%

Minority interest 29.55 42.90 57.93 74.51 92.68 26%

Shareholders' equity 160.65 195.49 234.44 277.43 324.61 15%

Long-term borrowings 28.07 52.95 49.46 44.36 39.26 7%

Deferred taxation 4.48 4.48 4.48 4.48 4.48 0%Non-current liabilities 32.55 57.43 53.94 48.84 43.74 6%

Short-term borrowings 15.12 13.24 8.73 7.83 6.93 -14%

Trade payables 40.56 47.69 52.00 56.53 60.80 8%

Provisions 2.31 2.31 2.31 2.31 2.31 0%

Current tax liability

Other current liabilities 10.75 10.75 10.75 10.75 10.75 0%

Current liabilities 68.73 73.98 73.79 77.42 80.78 3%

Total equity and liabilities 261.93 326.90 362.16 403.68 449.13 11%


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Table 8: Innscor Cash Flow Statement 2011E to 2015E, $mn

Cash Flow Statement 2011 2012 2013 2014 2015 CAGRPAT 35.43 44.95 50.72 56.01 61.47 12%

D&A 7.42 11.49 15.05 15.48 15.20 15%

Change in WC (19.64) (6.03) (3.63) (4.61) (3.97) (27%)

Other operating cash flow -0.88 0.00 0.00 0.00 0.00 (00%)

Operating cash flow 22.34 50.41 62.14 66.88 72.69 27%

Capex (36.47) (36.90) (18.16) (13.44) (13.70) (18%)

Other investing cash flow

Investing cash flow (36.47) (36.90) (18.16) (13.44) (13.70) (18%)

FCF (14.13) 13.51 43.98 53.44 58.99 (233%)

Dividends (7.46) (10.11) (11.78) (13.01) (14.29) 14%

Debt issued/repaid 28.00 23.00 (8.00) (6.00) (6.00) (173%)

Equity issuedFinancing cash flow 20.54 12.89 (19.78) (19.01) (20.29) (200%)

Change in cash 6.41 26.40 24.20 34.43 38.70 43%

Cash bop 16.27 22.69 49.08 73.28 107.71 46%

Cash eop 22.69 49.08 73.28 107.71 146.41 45%


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CertificationThe analyst(s) who prepared this research report hereby certifies(y) that: (i) all of the views andopinions expressed in this research report accurately reflect the research analyst's(s) personalviews about the subject investment(s) and issuer(s) and (ii) no part of the analysts(s)compensation was, is or will be directly or indirectly related to the specific recommendations orviews expressed by the analyst(s) in this research report.

Ratings DefinitionBuy - Expected 1 year return is at least 20%Hold - Expected 1 year return of between 0% and 20%Sell - Expected 1 year return of 0% and below

DisclaimerThis document has been prepared by IH Securities to provide background information aboutthe securities and (or) markets mentioned herein, the forecasts, opinions and expectations areentirely those of IH Securities. This document was prepared with the utmost due care andconsideration for accuracy and factual information; the forecasts, opinions and expectations are

deemed to be fair and reasonable. However there can be no assurance that future results orevents will be consistent with any such forecasts, opinions and expectations. Therefore theauthors will not incur any liability for any loss arising from any use of this document or itscontents or otherwise arising in connection therewith. Neither will the sources of information orany other related parties be held responsible for any form of action that is taken as a result ofthe proliferation of this document.

Innscor Africa the Quintessential Consumer Play 02.06.2011

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