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Cost containment to sustain Dairibord

Anthony Mandiwanza - Dairyboard
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While demand for goods and services continue to decline due to waning disposable incomes, cost containment measures coupled with price adjustment is expected to sustain dairy processor, Dairibord going forward, analysts have said.

For the current financial year (FY20), revenue is seen jumping 168 percent on prior year on the back of further price adjustments.

During the FY19, revenue came in at $1,115 billion, which was a growth of 60 percent on prior year figure due to growth in exports.

But costs are expected to rise due to inflationary pressures with major drivers being utilities, although the company has over the years implemented cost containment measures and optimisation.

For the financial year 2019, Dairibord’s overall volumes went down 17 percent on constrained supply chains and market watchers forecast a further decline of 10 percent for the current financial year as consumer spending remains constrained.

But management has also indicated the group’s strategy entails continued import substitution driven by supporting milk production initiatives, cost containment and defending market share.

At industry level, milk production is at 75 million litres against a national requirement of 120 million litres as volumes supply side remains below market needs which can bode well for the dairy processor. During the past financial year, the group’s raw milk intake grew by 10 percent compared to national milk growth of 7,2 percent benefiting from milk supply initiatives targeted at small, medium and large scale milk products.

Brokerage firm IH Securities argues the increase in the local raw milk supply also bodes well for the business as the propensity to import milk is significantly reduced, while Statutory Instrument 85 of 2020 allowing use of free funds for local purchases will also allow the company to earn foreign currency locally, which will offset the impact of foreign currency revenue losses from the subdued export market. 

“Our view is that Liquid Milk volumes will remain steady at a growth of 0,1 percent for FY 2020, offsetting a continued decline in volumes from the Beverages and Food segments that we estimate at 17,4 percent and 22,4 percent respectively.

“Food and Beverages will be adversely affected by subdued disposable incomes as consumers prioritise basic foodstuffs,” said IH Securities in an earnings analysis for  Dairibord.

Figures from the group’s financials for the FY19 show that export market has performed well under a deliberate strategy to grow foreign sales with export revenue doubling to US$3,4 million compared to prior year’s US$1,7 million. The company continued to drive exports in order to increase its regional footprint and to generate foreign currency.

However, the effects of the Covid- 19 may be a huge poser especially in the second quarter of 2020 on the region.

“Foreign sales are likely to weaken in the short term as regional currencies such as the Rand and the Kwacha depreciate which makes foreign entities cautious about taking on the exchange rate risk of purchasing in USD.

“Routes to market have been adversely affected by health precautions such as lockdowns that have suppressed demand and quarantine requirements at the border for cargo that have increased cost of transportation,” said IH.

Dairibord finalised the disposal of its Malawi subsidiary during the quarter of 2019 in a move anticipated to enhance overall profitability as losses from discontinued operations will cease to weigh down the bottom line. 

IH upgraded the firm to a buy recommendation on the local bourse.