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Reviving Zambeef adapts to changing African landscape

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Zambeef has encapsulated in the two halves of one financial year the popular conception of investing in Africa – that it offers big rewards, but large risks too.

In the October-to-March half, the Zambia-based company fell into the red by $6.3m, compared with a profit of about the same amount the year before.

The slide reflected headwinds such as an outbreak of African swine flu, which prompted a ban on animal movements, and a 15% fall in Zambia's currency, the kwacha, besides the hangover from a furore last year, when the group was hit by government claims of formaldehyde tainting in beef imports.

Lower ag commodity prices left a dent too, as with many other ag groups.

Year of two halves

However, in the April-to-September period, the second half of Zambeef's financial year, it showed a marked recovery, achieving a $2.7m profit, led by a revival in its core beef, chicken, pork, milk and egg operations – its so-called "cold chain" products.

"We put a lot of effort into driving this business," said Carl Irwin, flagging the change of management which has placed him as Zambeef joint chief executive, allowing his co-CEO, Francis Grogan, to focus on improving the group's operational performance.

"We have historically dominated in that part of the business, and it is a part of the business in which want to remain dominant," he said.

The recovery has been marked, with gross profits in eggs and milk up more than 20%, in dollar terms, in the second half of the financial year compared with the first, those in beef up 53%, while those in pork more than double.

'Never in my wildest dreams…'

But can it last?

"We have been operating for 21 years," and as to the string of setbacks last year and early in 2014," never in my wildest dreams did I think it could happen", Mr Irwin told

"I hope I never have to see anything like that again."

As Zambeef investors might do too.

Not that they appear that convinced, with Zambeef's London-listed shares hitting a record low of 12.0p after Wednesday's results, before recovering to close unchanged on the day, at 121.875p.

The stock peaked at 67.0p in July 2011, shortly after its flotation.

Dividend ditched

One worry for shareholders had been the failure to restore the dividend, which was initially pencilled in for return in the latest financial year after its withdrawal to fund a spending programme which the group in 2012 termed a period of "unprecedented capital investment".

Broker VSA Capital said in a note after the results that "given the issues over the past year, it is no surprise that no dividend will be paid in respect of 2014, a previous target".

As to when the payout might return, Mr Irwin said that there was "no doubt of our commitment to returning Zambeef to being a strong cash generating business.

"That is an absolute priority."

Dollar vs kwacha

However, another concern for investors is that Zambeef could again return to being prey to another unforeseen danger, say, another African swine flu outbreak.

Sure, "the government I think learned a lot from the latest outbreak, and an outbreak in future would be better controlled," said John Rabb, a former head of South Africa's Wooltru Group, and an agriculture graduate, who serves as a Zambeef non-executive director.

But the group is also redoubling its own efforts to limit damage from factors within its own control.

These include, for instance, moves to convert some of its dollar-denominated working capital facilities into kwacha ones which, while some 10 percentage points more expensive, cut the exchange rate risk.

'Best farm in the continent'

Then there is the drive to cut debt overall, with Zambeef stressing its willingness to consider asset sales to realise gains besides releasing capital.

The potential for sales was applicable in "parts of the business where are not sure we will be the best owner", as opposed to areas "where we have a competitive advantage", Mr Irwin said.

Assets included in the latter pot, and looking less open for sale, include the group's Mpongwe farm, which Mr Irwin termed the "best farm in the continent, giving us the best yields, which gives us an enormous advantage over everybody".

The competitiveness of the group's meat production operations are largely determined "by the price of maize and soya," which is in turn a reflection of harvest success.

"Mpongwe is an absolute jewel, an absolutely core part of the business."

Core, or not?

Zambeef's retail network is also an "absolutely core part of the business", Mr Irwin said, stressing the so-called cold chain operations too in the likes of chicken, pork and eggs.

Operations outside the net that Mr Irwin outlined would appear to include the processing businesses, in areas such as edible oils and feed and milling, although the group would not be drawn on what assets in which it would be more receptive to offers.

Still, the group was "open" to ideas, Mr Rabb said, "not that we are looking to sell, in terms of long-term strategy, not for selling anything that is core to the long-term strategy".

'Much more sophisticated'

In fact, a move to a less integrated structure, from seed to feed to distribution, would fit in with the changing dynamics of Zambia.

The country, being ranked ninth in the IMF league of fastest-growing economies, still offers much for the investor, such as GDP growth expected at 7.3% this year, rapid population growth, and access to countries from Egypt to South Africa through trade blocs.

But it has also become a "much more sophisticated" place to do business too, Mr Rabb said.

When Zambeef started two decades ago, it was forced, for instance, to arrange its own logistics as "there was not a distribution network.

"There was no feed availability for poultry."

Lower capital needs

Now, however, there was potential to find external suppliers at low cost, enabling Zambeef "to outsource, free-up capital and grow that way", Mr Rabb said.

"We do not see the same enormous demands on capital" to enter areas which would, historically, have required large investment.

"Going forward, our capital requirements are not going to be as large as they would have been over the last five years," he said.

Perhaps when the dividend does return, this time it will stay for good.


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