eBusiness Weekly
Tawanda Musarurwa
Milk processor Dairibord Zimbabwe Limited’s deal to import raw milk from neighbouring Mozambique could be scuttled by foreign currency shortages, analysts have warned.
The Government recently said it had granted the company a special dispensation to import raw milk from Manica Province in Mozambique to increase production at its Chipinge plant.
Although analysts at Akribos Research Services view the development as a game-changer for Dairibord and more broadly the country’s diary industry, they said prevailing foreign currency shortages could affect the implementation of the deal.
For the past couple of years, Zimbabwe has been facing foreign currency shortages with most manufacturers that are holding Real Time Gross Settlement (RTGS) bank balances struggling to make external payments for raw materials and machinery.
Said the analysts: “For Dairibord, improved milk intake will benefit the Liquid Milks category and also reduce dependence on imported milk powders. The major risk is that foreign currency constraints are expected to continue and this presents significant risks on product supply and cost of inputs.”
The country abandoned its own currency in 2009, adopting the use of multiple currencies, largely underpinned by the United States dollar.
In 2016, Government issued “bond notes” to help ease cash shortages, pegging the bond note at 1:1 to the US dollar.
However, there has been a proliferation in illegal foreign currency trading.
Industry representative body, the Confederation of Zimbabwe Industries (CZI) has called upon the Government to set up a foreign currency trading platform to curb the parallel forex market.
“There is need for a foreign exchange trading platform so that foreign currency is traded at a fair value. This will enable product availability, price stability and business viability.”
“If there is no drastic change in policy direction foreign currency shortages will persist and the 1:1 exchange rate is affecting availability of forex. Low levels of capacity utilisation means companies are eating into capital,” said CZI chief economist Tafadzwa Bandama.
Akribos, however, believes that to some extent, the Dairibord’s special dispensation to import raw milk from Mozambique can have long-term benefits for the company.
“Nonetheless, we continue to like the strong demand dynamics for milk in Zimbabwe (milk supply deficit of circa 60 million litres) and we think Dairibord is set to benefit from any improvements in raw milk supply given its market positioning and unique brands such as Steri and Chimombe.
“Generally, consumer companies such as Dairibord provide an avenue for investors to tap into a country’s economic growth given the defensive nature of consumer products (proteins).
“The stock is trading on a historic PER of 38.9x which looks demanding. However, the various milk supply initiatives are set to boost performance and valuations should unwind.”
The milk producer has been taking the initiative in terms of sourcing for raw milk supply. Last year Dairibord said it had engaged with potential investors from New Zealand over a potential joint — venture arrangement with strategic investors to venture into green-field milk production projects.
