Tel: +267 318 8627 Dealing +267 318 8622 Fax +267 318 8629 E-mail- [email protected] RESEARCH NOTE: Oct 2016 Interims INTRODUCTION: Tepid results but the future looks bright… Trading & Liquidity Sefalana posted a tepid set of interim results with revenue growing by a Market Cap BWP2.7bn modest 9% to P2.0bn (H15: P1.8bn). Of concern is the decline in Market Cap US$247mn revenue from the main revenue line - the ‘Trading consumer goods’ Shares in Issue 250,726,709 which came in at P1.211bn (H15: P1.22bn). This business segment is the core revenue driver for the group contributing 60% and 48% of Year End April towards revenue and PBT. GP margins from this segment went down to Free Float 100% 5.2% from 5.8%, while GP margins for the group fell to 7.6% from 7.9%. 12 month high P13.80 The decline in margins doesn’t surprise us given the intense competition 12 month low P10.75 in the FMCG sector dominated by Choppies in Botswana. EBITA increased marginally by 4%, while PAT decreased by 1.2% to P57.9mn Target Price P13.42 (H15: P58.6mn). Basic Earnings Per Share softened to 24.96 thebe from PE 16.0x 25.39 thebe, while an interim dividend of 5 thebe was declared, giving a P/B 2.6 52 week rolling dividend yield of 2.1%. Reuters Code SEFA.BT Bloomberg SFLN.BG KEY INVESTMENT THEMES Code Strong performance from Namibia operations. ISIN No. BW 000 000 0157 Potential for growth in Lesotho and South Africa. BSE Code SEFALANA Diversified business model RECOMMENDATION: BUY Very profitable business segments with high margins. Entrepreneurial management team, and strong brand. Presence in strategic locations and within certain major cities. Sefalana PE ratio of 16x is now below the market average PE of 17.2x. Our forward PE ratio is favourable as we expect the group to enter into another growth phase after the acquisition of the biggest wholesaler in Lesotho and the entrance into South Africa through the acquisition of a 25% stake in a yet to be named but existing group. The Lesotho Assign a BUY acquisition is expected to increase Group turnover by P150 million in the recommendation first 6 months of trading and contribute approximately P7 million to profit by the year end. With general elections expected in 2019 1 Sefalana Interim Results Analysis **October 30 2016** Prepared by Motswedi Securities (Pty) Ltd (Posted on 22 Feb 2017) we expect the government to increase its expenditure especially towards social welfare programs and Sefalana will likely benefit from these tenders. Already government has awarded Foods Botswana a provisional tender to supply 3,000 tonnes of Tsabana and Malutu per month for the next three months and these tenders are likely to be renewed. The Delta Dairy plant has been revamped and the plant has More business for been a beneficiary over the years of the children’s milk feeding scheme Foods Botswana and Management is highly optimistic that they will be awarded the lucrative tender going forward. VALUATION AND RECOMMENDATION We derive a value of P13.42 using relevant valuation methods and the stock is trading at a 24% discount to the current price of P10.75. The stock is still in a growth phase with Namibia operations exceeding operations. We see more growth potential in Lesotho and the entrance into the more lucrative but competitive South African market is exciting. Against this background, we assign a BUY recommendation on the stock. OVERVIEW OF OPERATIONS Trading Consumer Goods – steady growth amidst toughening environment Trading consumer goods segment is the core of Sefalana Holdings as it contributed 60% and 48% of Sefalana revenue and PBT. This is down Decline in performance from from the 66% and 57% contribution towards revenue and PBT during the the Trading Consumer Segment same period in 2015. This decline signify the intensity of the level of competition in this segment. Sefalana Cash & Carry contributed 60% to revenue whilst Metro (Sefalana) Namibia contributed 32% to revenue. There were no new store openings during the period under review. Overall profitability for this segment fell 16%. Namibia business doing well… The Namibia business continues to do well, contributing 32% and 22% of the Group’s revenue and PBT. Turnover rose by 24% with PBT Strong performance from Namibia growing strongly by 34%. We remain bullish over Namibia’s operations and we expect the increase in activity to continue going forward. 2 Sefalana Interim Results Analysis **October 30 2016** Prepared by Motswedi Securities (Pty) Ltd (Posted on 22 Feb 2017) Key Ratios H 2016 H 2015 GP Margin 7.6% 7.9% ROE 13.9% 14.3% ROA 9.3% 6.4% Current Ratio 1.8 1.7 EBITDA Margin 3.9% 4.1% NAV 5.3% 4.8% Source: Motswedi Calculations Trading - Others The ‘Trading – others business’ which is comprised of Commercial Motors (Pty) Limited and Mechanized Farming (Pty) Limited had a tough year and contributed only 3% to the group turnover and PBT. Its performance is strongly linked to government tenders and we expect this Performance linked to Government Tenders segment to turn a corner in the coming months ahead of the 2019 General elections. More exciting times are also coming as an agreement was entered last year with Botswana Railways to supply 8 locomotives at an undisclosed amount. This is exciting to us, but we are cautious as it is a long term project that will only generate profits for the company in the forthcoming years. The successful fulfilling of this agreement will certainly increase the groups revenue and profitability. Segmental results – Profit Before Tax (P’000) H 2016 H 2015 Change Trading consumer goods - Botswana 38,782 46,281 -16.2% Trading consumer goods - Namibia 17,825 13,292 34.1% Trading – others 2,681 4,762 -43.7% Manufacturing 4,313 980 340.1% Property 9,405 7,757 21.2% Property – Zambia 5,212 3,284 58.7% Total 81,092 80,432 0.8% Source: Sefalana Financials 3 Sefalana Interim Results Analysis **October 30 2016** Prepared by Motswedi Securities (Pty) Ltd (Posted on 22 Feb 2017) Manufacturing The manufacturing business is comprised of Foods (Botswana) and the recently acquired Delta Dairies. Its contribution to the group is slowly growing as it contributed 7% and 5% towards the group’s revenue and PBT. This is double from last period performance largely due to the short The future looks bright for Foods Botswana term orders placed by the government for the various feeding programmes. Some of these tenders had previously been awarded to other companies previously by the government but because of non- deliverance they were taken away and given back to Foods (Botswana). Expectations are high that this time around Foods Botswana will be awarded the tenders as they have a good and strong track record of delivery. Delta Dairies plant has been restored and is fully operational. Manufacture of milk commenced in December 2015 with the supply of Delta Diaries on board the A Star brand of milk to the Sefalana stores. The plant has been a beneficiary over the years of the children’s milk feeding scheme and Management is highly optimistic that they will be awarded the lucrative tender going forward. KEY TAKE AWAYS FROM THE RESULTS Under penetration of retail markets offers opportunities Although the retail market in Botswana is dominated mainly by Choppies and few other players such as Spar and Shoprite, the wholesale market remains very active with a market share between 30% - 40%. In a matured economy, the share of wholesale should be below 20%, hence there is still a gap in the market which Sefalana through their retail business can exploit. The transformation of the economy, coupled with the prevalence of modern shopping malls have afforded consumers access to new shopping experiences, new products and new retail outlets to buy from. Regional Expansion drive Sefalana expansion drive outside Botswana into Namibia is bearing fruits as the Metro Namibia contributed 29% and 10% of the Groups revenue Regional expansion drive gathering momentum and PBT. On the 1st November 2016 Sefalana entered the Lesotho market through the takeover of the country’s largest cash and carry 4 Sefalana Interim Results Analysis **October 30 2016** Prepared by Motswedi Securities (Pty) Ltd (Posted on 22 Feb 2017) outlet, TFS wholesalers which is located in Maseru. This acquisition is expected to increase Group turnover by P150 million in the first 6 months of trading and contribute approximately P7 million to profit by the year end. Sefalana is also at an advanced level to expand into South Africa through the acquisition of a 25% stake in an already existing business. The effective date of entry into the South African market is 1 May 2017, subject to due diligence review. We give management a thumbs up on this strategy to take a stake in an existing business which already have a track record, a stable clientele base and is more familiar with the South African terrain very well. Strong operational team Sefalana have a strong management team with diverse experience in the retail sector, manufacturing sector and property sectors. Sefalana also has a strong board which adheres to good corporate governance. The majority of the Board members are non-executive Directors (5/8) and the Strong team majority of the non-executive Directors are independent. This ensures that no one individual or block of individuals dominate the Boards decision making and this promotes objectivity. Non – executive Directors bring objective judgement and experience to the deliberations of the Board.