National Foods Ltd

15 October 2021
FMCG – Equity Research

FY21: Improved market presence across product portfolio

Margins soften on account of expected cost-corrections Market Data
FY21 provided some respite for businesses as inflation moderated down to the double digits for the first time in
almost two years. The relatively stable operating environment allowed for increased focus on enhancing product Report Date 15-Oct-21
portfolio and optimising the business models in the respective units for National Foods rather than preserving Bloomberg Ticker NTFD: ZH
value on the Statement of Financial Position. Aggregate volumes for the group grew 15% y/y to 525,430 tonnes
Rating SELL
underpinned by recovering consumer spend on the back of a good harvest. Volumes in the flour division
increased by 43%, buoyed by a strong performance in the pre-pack segment. Maize meal volumes remained
depressed at a 32% decline relative to the prior period largely due to competition from an influx of cheap imports Current price $ 1,496.04
from neighbouring South Africa and market adjustments that took place following the conclusion of the subsidy Target price $ 479.92
program as well as intense competition from imported maize meal. In the stockfeeds segment, volumes were
Market Cap $mn 102,329.28
up 33% driven by uptick in the poultry feed. The groceries division reported a 74% positive shift in volumes,
whilst the snacks and treats category closed 57% higher from a mix of competitive pricing and marginal recovery
EV $m n 100,946.81
in consumer appetite. Complying with IAS 29, National Foods presented inflation adjusted results, however, for
the purpose of our analysis historical financials were considered for the period under review. Revenue grew by Market Weight 8.31%
343% to ZWL$28.07bn, whilst EBITDA slowed down in real terms on account of correction of the cost lag with Common Shares Outstanding mn 68.40
increases in key expenditure lines such as rates, fuel and staff costs. The group reported a 92% increase in
EBITDA from ZWL$1.72bn in FY20 to ZWL$3.30bn in the period under review, pressure from escalating cost Freefloat 14.88%
lines in nominal terms led to EBTIDA margins declining from 27% to 12% y/y. PAT grew 81% to ZWL$2.61bn
Average Daily Value Traded $000’s 666.03
from ZWL$1.44bn in the prior comparable period with the group’s headline earnings per share registering at
ZWLc3,659.10 from ZWLc2,112.36 in FY20. National Foods’s balance sheet remained healthy in the period Last Dividend declared FY21
under review with asset growth of 186% y/y to ZWL$ 11.17bn. Cash generated from operating activities grew Dividend Yield (+1) 1.05%
to ZWL$1.77bn, an above inflation improvement from $401.236mn in the prior comparable period. Resultantly,
cash and cash equivalents increased 204% to ZWL$1.12bn from ZWL$369.74mn in FY20 with an OCF/EBITDA PER (+1) 26.58
54%. National foods declared a final dividend of ZWLc296.49 translating to a dividend yield of 1.16% and EV/EBITDA (+1) 21.39
bringing total dividend for the year to ZWLc1,099.76. The dividend payable to shareholders registered at close
of business on the 15th of October 2021.
Share price performance YTD 2,389.25%

Marginal gains in volumes expected

Heading into 1H22, we foresee a maintained volumes recovery path for National Foods on account of a
relatively more enabling environment. We believe that increasing consumer liquidity combined with the festive
season demand and specialization of business units will positively impact volumes growth for the company’s
discretionary goods segments. Volumes sold in the maize segment are however likely to remain weak in the
12m share price performance (ZWL$) v. All Share
short term due to flooding of the product on the domestic market from the bumper harvest. Government has
since moved to ban imports of maize and products to support the local industry whilst management has since
remodelled the business model for the Maize unit to ensure that it continues to make a sustainable contribution.
The Board approved the purchase of a new state of the art Flour mill, which will be installed as a replacement
for the existing mill at the Bulawayo Basch Street site, at an estimated cost of US$ 5mn. Commissioning is
scheduled for late 2022 and is set to contribute to increased efficiencies in FY23 going forward. Lowered margins
for the Group at full year are still above historical averages so we anticipate further correction and normalisation
as we head to FY22. We have therefore forecasted EBITDA margin to ease from 11.7% in FY21 to circa 10%
in FY22. We however acknowledge that another run in inflation numbers will see margins surging again due to
the sizeable pre-payments made to secure a steady supply pipeline. The key focus highlighted by management
going forward are improving operational efficiencies, management of working capital and cash flow models and
ensuring interest costs are at kept at sustainable levels.

Update to SELL recommendation on demanding multiples.

We estimate that National Foods’s topline will grow 68% y/y to ZWL$47.20bn at FY22 versus ZWL$28.07bn at
FY21. We forecast EBITDA will close the year at ZWL$4.72bn up 43% from the previous comparable period.
We estimate National Foods is trading on a PER (+1) to FY22 of 26.6x versus its peers at 11.8x, and EV/EBITDA
(+1) to FY21 of 21.4x compared to peers at 8.16x. Using a blended DCF and multiples-based valuation method
we now arrive at a target price of ZWL$479.77 for National Foods. At current levels, we therefore update our
recommendation to a SELL rating.

Revenue EBITDA Net EPS DPS EBITDA

EV Net Debt EV/Sales EV/EBITDA P/E P/Bk Div yield
($mn) ($mn) Income (cents) (cents) Margin
2021 28,074.4 3,296.9 2,612.4 3,819.3 1,099.8 11.7% 101,738.3 (590.9) 3.6 30.9 39.2 28.45 0.74%
2022E 47,199.3 4,719.9 3,850.4 5,629.2 1,576.2 10.0% 100,946.8 (1,382.5) 2.1 21.4 26.6 16.07 1.05%
2023E 69,105.0 4,837.4 4,238.7 6,196.9 2,168.9 7.0% 100,774.4 (1,554.9) 1.5 20.8 24.1 11.21 1.45%
2024E 75,651.0 4,917.3 4,368.2 6,386.3 2,235.2 6.5% 98,887.1 (3,442.2) 1.3 20.1 23.4 8.55 1.49%
2025E 82,824.2 5,383.6 4,797.9 7,014.4 2,805.8 6.5% 97,040.2 (5,289.0) 1.2 18.0 21.3 6.89 1.88%
2026E 90,685.2 5,894.5 5,270.4 7,705.3 3,082.1 6.5% 94,998.3 (7,330.9) 1.0 16.1 19.4 5.68 2.06%
 Equity Research
Financials
15 October 2021
umm

National Foods Financial Summary 2021 2022E 2023E 2024E 2025E CAGR
Statement of Comprehensive Income
Revenue 28,074.42 47,199.33 69,105.04 75,651.03 82,824.18 31%
EBITDA (adjusted) 3,296.94 4,719.93 4,837.35 4,917.32 5,383.57 13%
Net financing charges (120.03) 31.08 237.64 290.60 349.83
Equity Accounted Earnings 261.05 438.88 642.57 703.44 770.13 31%
Net income 2,612.40 3,850.38 4,238.68 4,368.25 4,797.88 16%
Basic EPS 38.19 56.29 61.97 63.86 70.14 16%
Dividend per share 11.00 15.76 21.69 22.35 28.06 26%
Margins
EBITDA margin 11.7% 10.0% 7.0% 6.5% 6.5%
PBT margin 12.2% 10.8% 8.1% 7.6% 7.7%
Net margin 9.3% 8.2% 6.1% 5.8% 5.8%
Statement of Financial Position
Non current assets 1,409.18 1,555.13 1,797.24 2,049.90 2,315.29 13%
Inventories 4,365.97 6,336.35 9,277.12 10,155.89 11,118.86 26%
Trade and other receivables 4,270.40 6,465.66 9,466.44 10,363.15 11,345.78 28%
Bank balances and cash 1,122.72 3,146.13 3,368.55 5,305.81 7,202.70 59%
Current assets 9,759.09 15,948.14 22,112.11 25,824.86 29,667.34 32%
Total assets 11,168.27 17,503.27 23,909.35 27,874.76 31,982.64 30%
Shareholders' equity 3,596.98 6,369.25 9,124.39 11,963.75 14,842.48 43%
Non-current liabilities 56.23 56.85 56.85 56.85 56.85 0%
Short-term borrowings 1,713.66 1,763.66 1,813.66 1,863.66 1,913.66 3%
Current liabilities 7,515.07 11,077.17 14,728.11 15,854.16 17,083.31 23%
Total equity and liabilities 11,168.27 17,503.27 23,909.35 27,874.76 31,982.64 30%
Statement of Cash Flows
Operating cash flow 576.50 3,287.51 2,001.48 3,794.40 4,180.16
Investing cash flow (671.36) (236.00) (345.53) (378.26) (414.12) -11%
FCF (94.87) 3,051.52 1,655.96 3,416.15 3,766.04
Financing cash flow 864.61 (1,028.11) (1,433.54) (1,478.89) (1,869.15)
Change in cash 752.98 2,023.41 222.42 1,937.26 1,896.89 26%
Cash bop 369.74 1,122.72 3,146.13 3,368.55 5,305.81 95%
Cash eop 1,122.72 3,146.13 3,368.55 5,305.81 7,202.70 59%
Growth rates
Revenue 342.8% 68.1% 46.4% 9.5% 9.5%
EBITDA 91.5% 43.2% 2.5% 1.7% 9.5%
EBIT 77.6% 41.7% 2.2% 1.2% 9.2%
Net income 80.8% 47.4% 33.5% 13.4% 13.2%

RESEARCH TEAM
Lloyd Mlotshwa Tatenda Makoni Florence Takaendesa Vanessa Machingauta
lmlotshwa@ih-group.com tmakoni@ihsecurities.com ftakaendesa@ihsecurities.com vmachingauta@ihsecurities.com

Tel: +263 (242) 745 133/139, Email: research@ihsecurities.com

Website: www.ih-group.com
 Equity Research
www.ihsecurities.com

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

Ratings Definition
Buy - Expected 1 year return is at least 20%

Hold - Expected 1 year return of between -10% and 20%

Sell - Expected 1 year return of -10% and below

Disclaimer
This document has been prepared by IH Securities to provide background information about the securities and (or) markets
mentioned herein, the forecasts, opinions and expectations are entirely those of IH Securities. This document was prepared with
the utmost due care and consideration 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 or events will be consistent with any such
forecasts, opinions and expectations. Therefore the authors will not incur any liability for any loss arising from any use of this
document or its contents or otherwise arising in connection therewith. Neither will the sources of information or any other related
parties be held responsible for any form of action that is taken as a result of the proliferation of this document.

RESEARCH TEAM
Lloyd Mlotshwa Tatenda Makoni Florence Takaendesa Vanessa Machingauta
lmlotshwa@ih-group.com tmakoni@ihsecurities.com ftakaendesa@ihsecurities.com vmachingauta@ihsecurities.com

Tel: +263 (242) 745 133/139, Email: research@ihsecurities.com

Website: www.ih-group.com