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Higher volumes, good prices and RBZ incentive increase Padenga’s F16 profits

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Higher volumes, good prices and RBZ incentive increase Padenga’s F16 profits

HARARE – Crocodile skins and meat producer Padenga Holdings Limited, says the business’ export orientation thrust insulated it from the difficult local operating environment, resulting in it achieving a steady growth. The company dynamically surpassed its targeted skin sales volume.

In the alligator business in the USA; Chief Finance Officer, Oliver Kamundimu told analysts that while the unit had a good outing in the year ended 31 December 2016, the proposed shutting down of the Mexican border by the newly inaugurated Donald Trump Administration will affect labour costs. He said competition for labour is very stiff with the minimum wage already high there.

Revenue for the year under review went up 14% to $31.27 mln compared to $27.49 mln in prior year largely as a result of increased sales volumes which went up 26%, increase in the price per centimetre of skins sold and the benefit from the 5% export incentive amounting to $1.39 mln.

Kamundimu said profit before tax increased 11% over prior year to $11.04 mln compared to $9.95 mln. However, cash flow from operations went down 68% to $4.41 mln from $13.66 mln in 2015, largely as a result of culling which was done during Q3 of the year in response to market preferences.

There was also an increase in debtors, to $8.07 mln, which emanated from culling into Q4 and shipping the skins just before the year end and an increase in biological assets excluding fair value adjustments of $793,672.

Kamundimu said the group invested $3 mln into operations, with $1.7 mln going into the production facility at the alligator farm in USA while the balance was largely invested at UME farm particularly to install a solar plant which replaced a costly diesel plant that was being used to power operations. The solar unit is expected to generate more renewable power as the skies clear.

In the year, Zimbabwean contract skin sales increased 4% to 47,909 from 46,025 in prior year, with revenue standing at $26.8 mln compared to $24.88 mln in 2015.

Meat volumes were 237,702 kgs with revenue of $648,049 being realised, while Backstrap revenue was $77,089; bringing total revenue in Zimbabwe to $27.52 mln and increase from $25.74 mln in prior year.

In the USA, contract skin sales reached 20,835, resulting in revenue of $3.58 mln being realised, representing an increase of $1.51 mln in prior year. Meat and wild skin revenue, at $19 754 and $136 479 respectively, resulted in US operations gross revenue reaching $3.74 mln, up from $1.74 mln in 2015.

In terms of expenses analysis, Zimbabwe’s staff costs dominated at 42% with other overheads standing at 18%. Feed costs accounted for 26%, repairs, maintenance and energy at 10% while hatchling and livestock costs were 1% and 3%.

In America, hatchling and livestock costs of the alligator business accounted for 57%, followed by feed costs at 12%. Kamundimu said focus will be on reducing Zimbabwean operations staff costs to at least 12% which is the share of the cost in America.

Group assets went up to $71.45 mln compared to $61.64 mln in prior year due to the $4.3 mln invested as capex. According to the FD, $2.2 mln was invested in Zimbabwe grower pens to address the issue of quality and stock density. At least $433,000 was spent on solar project at EME farm. In the US, the group constructed 6 new production pens which doubled the capacity of operations there.

After considering available cash reserves against working capital and capital expenditure requirements, Kamundimu said the company increased the dividend payout ratio to 50%. He said with the company having made a profit of $8.5 mln, at least $4.2 mln will be paid as final dividend to shareholders.

To cater for delays in foreign payments, Kamundimu said the company increased stock holdings with raw materials costs increasing by $1 mln.

Meanwhile, chief executive, Garry Sharp, said the group maintained YOY revenue and profit growth despite decrease in average skin size to meet customers’ requirements.
On other hand, meat export volumes were down on prior year as the company was not able to export for six months due to the failure to meet some requirements while the Asian market was closed.

Sharp said the investment in solar at UME farm will result in a saving of at least $100,000 per year, from the primary source of diesel powered generators.

He said total skins produced in Zimbabwe, at 47,909, were consistent with sales at the same level as there were no damages. Average skin size was 34.2 centimetres while the percentage of first grades was 95% down from 96% in prior year. Total meat sales were at 238 tonnes from 290 tonnes in 2015.

The culling period commenced during the second quarter, with Sharp saying the company has a customer in France who dedicates his production on Zimbabwe’s skins during that period. Culling peaked in Q3.

The Zimbabwean operations had a total 106,220 crocs in stock. These consist of yearlings (12 months) at 46 466, 24-month olds at 39,354, 36 months at 15 346 immature and mature breeders at 1 400 and 3 654 respectively.

In terms of egg production, domestic eggs accounted for 71% and wild eggs 29%. Hatchlings per 12 months decreased to 97 from 108 on account of the temperatures during the period.

According to Sharp, alligator skin sales in the US surged 143% compared to prior year. He said watchband skin prices were depressed due to perceived market oversupply following record egg collection in FY16.

Sharp said the overall result was diluted by 7,944 low quality skins from prior period which were the last of the previously compromised stock.

He said a new water heating plant was installed at the US farm, with three new wells being commissioned, resulting in 24,966 hatchlings inducted into the barns.

A total 12 891 skins were produced in the year, but total sold was 20 835 owing to 8 586 carry over skins from prior year. Average skin size was 28 centimetres.

Looking ahead, Sharp said the Zimbabwe operation is targeted to produce and sell 46,000 premium quality skins. It will also construct 80 new grower pens to reduce stocking densities and increase skin quality, improve growth rates and enhance animal welfare

In the USA, the company will complete the transition to a focused medium sized skin production model and there will be no medium size skin sales in 2017 as the production cycle is two years.

 

OUR THOUGHTS ON PADENGA

Padenga are one of the few companies in town which make real money and is still one of the two or three businesses with a high quality of earnings ratio and healthy dividend yield. These results are supported by volume increases in skin sales that were met by firming prices. Most key numbers of the company are up to spec, with the fair value adjustment on biological assets being one of the few issues of particular concern. The adjustment saw the value of biological assets declining from $3.2 mln to ($289k), a move which shrank the profit before tax margin from 36% to 35%.

Trump’s relentless efforts in building the ‘Mexican Wall’ are however likely going to result in labour supply shortages in Texas, which will raise the minimum wages and transmit the same effect to the company’s salary expense. The rising inflation in Zimbabwe is likely to induce upward pressure on input and staff costs.
As meat continues to pose difficulties to move it in higher end and Asian markets, the company must consider diversifying into new markets such as Canada, DRC and Mauritius. Cheaper croc meat exports from countries like Vietnam. Malaysia and Cambodia will continue to make the Asian market unviable. While the increase in local meat sales, from 129 tonnes to 156 tonnes, is commendable, the sharp reduction in price to push volumes means that sales did not grow much as margins narrowed down significantly.

Padenga also seems to be narrowing in how to bring the cycle forward by 6 months by starting off with a much better quality of hatchling (good skin, less blemishes), which will also shave a significant amount of cost off what was a 30 month feeding programme. All of this means better margins and increased profits.
The new investment targeting to replace the costly diesel plant with solar renewable energy is going to also ease pressure on the bottomline with substantial reductions being realised in the expenses.

 

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