eBusiness Weekly
Enacy Mapakame
Covid-19 induced supply chain disruptions as well as low raw milk uptake are in the short term likely to weigh on volumes for dairy processors such as Dairibord, experts have said.
With uncertainties surrounding the Covid-19, there are fears the pandemic may cause more supply chain disruptions, if no adequate measures are put in place to contain its spread. Already, a fourth wave has already began in some parts of the world further compounding the challenges that businesses have faced since the outbreak of the pandemic, first detected in China in 2019.
However, for companies like Dairibord, its US$15 million cattle project, in partnership with Zimplats, Palmine is expected to increase milk production by 87 percent to 150 litres from 79,9 million litres.
Under the project, there will be a dedicated 320 hectares of irrigated pasture to guarantee the availability of feed. However, stockbrokers IH Securities opine the benefits will begin to accrue more than a year later after its launch while FY21 raw milk is likely to take a dip.
“This backward integration can potentially alleviate the issue of stock feed prices. However, the company is unlikely to feel the impact of this project in the next 12 months. Raw milk intake is likely to marginally fall for FY21,” said IH Securities in an earnings update.
“In the short term, however, volumes will be hamstrung by low raw milk intake and COVID 19 induced supply chain disruptions.”
Dairibord group chairman Josphat Sachikonye indicated that demand still exceeds supply across the product portfolio, particularly in the liquid milks category which is constrained by raw milk supply challenges.
During the half year to June 30, 2021, raw milk utilised during the period was 1 percent above prior year, while national milk production was 2 percent below same period in 2020.
“Despite the good rains, stock feed prices continued to rise. This again negatively impacted milk supply growth. The group remains committed to supporting local farmers to grow milk supply through actively promoting lower cost operating models in a bid to bring prices back to regional parity in the medium term.
“The long term benefits of increased raw milk production will reduce the dependence on imported milk powders and the associated foreign currency requirement,” said Sachikonye in a statement accompanying the group’s financials for the half year period.
During the half year period, the group achieved a record first half sales volume performance in five years after overall volumes jumped 54,5 percent ahead of same period last year. Liquid milk rose by 22 percent and IH Securities sees this volumes recovery contributing significantly towards the group’s top line in the full year performance as demand continues on improved consumer spending.
Said IH Securities: “The demand side of the equation is on a strong recovery path, the above average agro-season positively impacted consumer liquidity. Export markets present an opportunity for the demand to continue growing once Covid-19 restrictions are eased.
“We forecast double digit recovery in volumes across the product offering for the full year to December 2021 as the environment returns to normalcy. The Group had been over the years implementing a cost reduction and optimisation drive.
“The recent cost drivers have been disruptions in electricity and water supply. We anticipate that operating costs will continue to increase given price adjustments in utility costs and salary increments.”
The business is expected to continue reducing its foreign currency denominated liabilities and working to improving its working capital position. EBITDA margins is expected to remain within historical averages of 8 percent. The stockbrokers forecast a 12 month target price of $17,86.
