While local businesses face headwinds due to effects of the coronavirus (Covid-19) pandemic, agro-industrial giant National Foods Limited is expected to keep its head above water on firm demand for staple foods.
During its half year to December 30, 2019, the firm experienced challenges emanating from the foreign currency shortages and falling demand due to low disposable incomes, which subsequently resulted in overall volumes dropping 32 percent compared to the same period in the prior year.
The same challenges witnessed during that period are expected to continue this year and will be worsened by the obtaining global pandemic, Covid-19, which is expected to bring economies into recession.
The agriculture output is also projected to fall significantly due to disturbances to production. The World Bank already sees agriculture output for the sub Saharan Africa region significantly falling driving millions into poverty and in need of food aid.
This means the manufacturing industry may need to import more raw materials for production, which may also be problematic if travel and trade restrictions remain due to the pandemic.
Countries that export grain may also look at preserving grain to boost their reserves in the face of the Covid-19 pandemic.
Analysts, however, see companies like National Foods overcoming the challenges due to its strong product range, with demand for staples driving demand for its products.
“We see some comparative advantage as National Foods tends to perform better under such circumstances in which they can leverage their balance sheet to import at scale; however, foreign currency shortages, as well as the current global pandemic, naturally pose a serious threat to the group and country’s capacity to import grain creating some downside risk,” said IH Securities.
“The company’s business model is anchored in staples which adds a defensive layer to the business during the Covid-19 pandemic in which the market will lean heavily towards essentials.”
During the half year, National Foods experienced declines in volumes on depressed demand across all segments apart from the maize meal where demand remained firm, a situation that is projected to continue for the remainder of the year and the near future.
While there are concerns on challenges on importing maize due to the pandemic, management at NatFoods remain upbeat of the maize category, anticipating very high demand as the company has embarked on a significant maize importation drive and have re-opened both the Mutare and Masvingo maize mills.
“Overall, we anticipate some downside risk to volumes, as consumer incomes continue to be eroded by inflation,” said IH.
NatFoods has also indicated it will continue with its growth strategy with expansion in the snack, biscuits and cereals categories, which are logical forward integration opportunities from the basic milling portfolio.
Although demand is still low for these categories, the work on broadening the offering in these segments will continue, developing the company’s repertoire for improved economic circumstances.
In terms of revenue performance, it is seen jumping to $3,3 billion for the FY20, implying an uptick of 490 percent year on year driven by higher product pricing due to inflation.
Earnings before interest, tax, depreciation and amortisation is seen jumping 919 percent to $835 million.
A target (share) price of $50,92 is projected for NatFoods with IH upgrading the company to a buy recommendation.