South African wine and spirits company Distell is feeling the impact of SA’s flat economy in its core domestic market, but its Africa business is going from strength to strength.
Africa’s contribution to Distell’s foreign revenue has been climbing steadily. In 2014 the region contributed 39% to foreign revenues, which collectively accounted for 12% of group earnings. In its results for the six months to December, the region contributed 62.4% to foreign revenue and its (Africa’s) contribution to group revenue rose to 15.6% in the period.
Overall Distell’s group revenue for the six months rose 7.3% to R14.4 billion, with operating profit rising 3.8% to R1.9 billion. Of this Botswana, Lesotho, Namibia and Swaziland (BLNS) contributed revenue of R1 billion and profit of R209 million, while the rest of Africa contributed revenue of R1.2 billion and profit of R194 million.
Distell grew its domestic market revenue by 7.8% with sales volumes down by 2.1% in the period. In comparison, its African markets delivered comparable revenue growth of 21.1% on sales volumes that were up by 12.7%. Focus markets on the continent outside the Southern African Customs Union – Kenya, Nigeria and Angola – delivered revenue and volume growth of 43% and 34.1% respectively.
Volumes in international markets outside Africa declined by 6.5%, largely because Distell reduced its product portfolio by 30% as it cut unprofitable lines. However margins are improving as a result of the higher quality portfolio.
Headline earnings and headline earnings per share, including discontinued operations of the prior year, increased by 12.1% to R1.3 billion and 570,7 cents respectively.
“This is a good performance given the challenging conditions in SA,” says Distell CEO Richard Rushton. “In Africa, we have worked up a head of steam in Kenya and other priority markets. Kenya’s revenue and profit have doubled and tripled respectively – our goal is to replicate this model and build more Kenyas in Africa,” he says.
In 2017 Distell took its stake in KWA Holding East Africa Ltd (KWAL) from 26% to 52.4%. “We used the first phase to integrate the businesses, build confidence and develop the local brands and routes to market. The result is that local brands are showing growth – but we have some way to go,” says Rushton. “There are 14 000 outlets and we are now visiting half regularly – we will ramp this up.”
A strong tailwind, of course, is the buoyancy of the East African economies.
The company hasn’t yet put much effort into seeding Distell brands in the market. “We will start to complement the local portfolio with our brands,” says Rushton. “In the meantime what is happening is that we are building confidence in our model for Africa as a result of these successes.”
Distell’s stake in Best Global Brands, headquartered in Angola, is also delivering returns. BGB provides the company with a pan African platform for its ambitions – namely a well-established pan African spirits brand (whisky, gin and a cream liqueur) that has scale in Angola and Nigeria and significant growth opportunities in Mozambique, Kenya and Zambia. It also has local production facilities in Angola and Nigeria.
It hasn’t been smooth sailing all the way, with trading conditions in Angola and Zimbabwe remaining challenging with currency devaluations and liquidity restrictions impacting on operating performance.
The second half of this year will see new production facility and product launches in Nigeria and Kenya.
Rushton says management is not expecting conditions in SA to improve soon. “SA will be tight and tough for a while. However our broad product portfolio and geographic footprint will see us through this.”
The business is in a strong position financially to weather unexpected hurdles. Net cash generated from operating activities increased by 35.8% to R2.4 billion. The group has reduced its gearing and now has a debt-to-equity ratio of 19.3% (2017: 32.5%).
This means the group is open to organic and inorganic opportunities, but will remain disciplined in the deployment of its capital.
Friday saw the share price rise by R4.52 to close at R124.52. The share has risen by 15.3% in the year to date.