Currency devaluations and liquidity restrictions hit Distell Group’s full-year earnings

Distell Group, South Africa’s largest spirits, cider and wine producer with operations in several African countries including Nigeria reported a 45.5% drop in earnings for the full year ending on 30th June 2019. Net profit fell to R909.8m rand, from R1.7bn in the previous year.

Despite an 8% revenue growth in the full-year to R26.2bn (US$1.7bn), from R24.2bn in the previous year, sales volume in its home market declined by 0.9%. The drop was blamed on low consumer confidence as disposable income remained subdued and with increased value offerings by competitors, particularly in beer.

Distell derived 74% (R19.4bn) of its revenue from its home market.

In African markets outside of South Africa, revenue rose 20% to R4bn on a 10.3% volume lift. Focus markets on the continent, outside the South African Customs Union (SACU), saw 40.6% revenue growth, boosted by a 28.6% rise in volumes, which greatly benefitted from the establishment of strong local partnerships, local production, and end-to-end RTM platforms. The company notes that all categories delivered double-digit volume and revenue growth, led by Nigeria, Kenya, Zambia, Ghana, and Mozambique.

The ready-to-drink (RTD) growth came from Hunter’s and Savanna while the spirits category growth was led by Kibao and Hunter’s Choice Whisky in Kenya.

However, Distell said that trading conditions in Angola and Zimbabwe remained challenging with currency devaluations and liquidity restrictions amidst tough economic conditions impacting on operating performance, specifically in the second half of the financial year. As a result, it took an Impairment charge of R524m, about two-thirds of the value of its 26% investment in Best Global Brands (BGB), with the majority of its operations in Angola, as well as recognise a credit loss provision of about 80% on its US dollar-dominated savings bond with the Zimbabwe Reserve Bank. Despite the challenges, the company remains confident in a turnaround in its Angolan business given that the volumes and market share continue to improve.

BLNS countries (Botswana, Lesotho, Namibia and Swaziland) in South African Customs Union (SACU) delivered low overall revenue growth.

The Africa region contributed 59.6% to foreign revenue, growing its overall contribution to Group revenue to 15.5% in the period.

In the rest of the world and outside of Africa, volumes declined by 10.6% with comparable revenue remaining constant. The company said it was in line with its expectations as it shifts away from low-margin wine and RTD categories towards high-margin premium wine and spirits portfolio. It exited various markets and categories such as RTDs, as well as distribution agreements being rationalised.

Looking forward, the company said it will continue to defend and grow its South African business with a targeted increase in market share across its portfolio while seeking to drive category growth through innovation. It will continue with its network optimization programme to build a world-class local production footprint.

In the rest of sub-Saharan Africa, the group aims to accelerate sustainable growth in select markets on the continent through investment in local brands and the expansion of its local production and RTM platforms.

The company said it also plans to split its international operations into three business units: international spirits, exports, and premium wine through Libertas Vineyards and Estates. This will create three highly specialised businesses, focused on their respective strengths. It believes this gives the group the best opportunity to grow premium spirits and wines in key markets and drive brand premiumisation in line with consumer demand.

Distell said it aims to become an African drinks champion and benefit communities in which it operates.

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