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We take a look at the latest trading statement released by Distell (DGH) for the year ended June 2019. It looks like their results were negatively affected by events in two African countries they have operations in.
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About Distell (DGH)
Distell is the only South African-owned and operated alcoholic beverages company and Africa's leading producer and marketer of wines, spirits, ciders and RTD's, sold across the world. We are becoming a geographically diverse group that is building long-term platforms to unlock growth in various geographies. Markets outside of South Africa are contributing almost a quarter of revenue.
Wines:
Distell's wines, with their rich heritage, have built significant mainstream and premium opportunities and are sold on every continent.
Spirits:
Amarula is ranked as the world's second-largest cream liqueur and Distell is South Africa's leading producer of brandy. Klipdrift is one of South Africa’s best-loved, well-crafted brandy spirits. For more than 77 years, Klipdrift has been made by stripping away the head and tail of the finest brandy to keep the part that really matters; a golden liquid so smooth and refined, we call it the Heart of Gold. The best friendships are made the same way. Whether old or new, celebrate the friends that really matter to you with a truly South African icon in hand; neat, on ice or with your favourite mixer.
Ciders and ready to drink (RTD's):
We pioneered the cider category in South Africa to become the second-largest producer of ciders worldwide. Ever since its inception, Savanna has been a brave and confident brand. Since it’s launch in 1996, we have won over the hearts and funny bones of South Africans with our dry humour, distinctly shaped bottle and well known previous pay-off line “It’s Dry. But you can drink it”. Savanna is one of the world’s largest selling ciders and South Africa’s leading cider export, available in more than 60 countries. Take your pick from our delicious variants, including Savanna Dry and Light.
We are building an empowered, high-performance organisational culture that encourages innovation from a diverse pool of talented professionals.
Wines:
Distell's wines, with their rich heritage, have built significant mainstream and premium opportunities and are sold on every continent.
Spirits:
Amarula is ranked as the world's second-largest cream liqueur and Distell is South Africa's leading producer of brandy. Klipdrift is one of South Africa’s best-loved, well-crafted brandy spirits. For more than 77 years, Klipdrift has been made by stripping away the head and tail of the finest brandy to keep the part that really matters; a golden liquid so smooth and refined, we call it the Heart of Gold. The best friendships are made the same way. Whether old or new, celebrate the friends that really matter to you with a truly South African icon in hand; neat, on ice or with your favourite mixer.
Ciders and ready to drink (RTD's):
We pioneered the cider category in South Africa to become the second-largest producer of ciders worldwide. Ever since its inception, Savanna has been a brave and confident brand. Since it’s launch in 1996, we have won over the hearts and funny bones of South Africans with our dry humour, distinctly shaped bottle and well known previous pay-off line “It’s Dry. But you can drink it”. Savanna is one of the world’s largest selling ciders and South Africa’s leading cider export, available in more than 60 countries. Take your pick from our delicious variants, including Savanna Dry and Light.
We are building an empowered, high-performance organisational culture that encourages innovation from a diverse pool of talented professionals.
- Distell maintained B-BBEE level 4 status (up from level 8 in 2016).
- We strive to further socio-economic development and make meaningful contributions to the communities we operate in.
- In 2018 the Distell Development Trust disbursed R7,5 million to 12 programmes.
The image above shows a few of Distell's best known brands
So lets take a look at the group's financial results
- Hunters Dry
- Nederberg Wine
- Savanna
- Drosty-Hof
- Durbanville Hills
- Klipdrift
- Richelieu
- Old Brown Sherry
So lets take a look at the group's financial results
Trading statement
TRADING STATEMENT
Distell is currently finalising its financial results for the year ended 30 June 2019, which are due be released on SENS on or about 28 August 2019. In terms of the Listings Requirements of the JSE Limited, companies are required to publish a trading statement as soon as they are reasonably certain that the financial results for the period to be reported on will differ by more than 20% from that of the previous corresponding period. During the period the Group’s results were negatively impacted by two events:
1. The significant devaluation of about 50% of the Angolan kwanza, as disclosed later, and its impact on the Angolan economy has negatively impacted the earnings of Best Global Brands Limited (BGB), the owner of the Best brand, in which Distell acquired a 26% interest in 2017. Although BGB has grown volumes and maintained market share since Distell’s investment, the Group has decided it would be prudent to impair about two-thirds of the value of its 26% investment in BGB.
2. Distell is a supplier to African Distillers Limited (Afdis) in Zimbabwe in which it owns an indirect 31% interest. Due to the shortage of foreign exchange in Zimbabwe, Afdis was unable to settle all of the trading debt owed to Distell. In the face of further currency devaluations and to protect the value of the trading debt owed to it, Distell accepted payment in local currency and invested the proceeds with the Reserve Bank of Zimbabwe in US dollar denominated savings bonds yielding 7% and maturing at the end of 2020. In light of the uncertainty and economic difficulties facing Zimbabwe, the Group has decided to recognise a credit loss provision of about 80% on the savings bond.
Shareholders are therefore advised that:
- Reported Earnings per share (EPS) for the year ended 30 June 2019 (current period) is expected to decrease between 44% and 49% (330,1 cents and 367,6 cents) over the prior year ended 30 June 2018 (prior period) EPS of 750,3 cents, as a result of the impairment of R524,0 million of its equity accounted investment in BGB, as well as a credit loss provision of R266,1 million for the investment in the savings bonds of the Reserve Bank of Zimbabwe; and
- Reported Headline earnings per share (HEPS) for the current period is expected to decrease between 1% and 6% (6,7 cents and 40,1 cents) over the prior period HEPS of 668,2 cents.
Pro forma information
The results of the Group are impacted by abnormal or non-recurring transactions and the change in foreign exchange rates. The Group therefore also discloses adjusted measures in order to indicate the Group’s businesses’ performance excluding the effect of abnormal transactions and foreign currency fluctuations. These adjusted measures constitute pro forma financial information.
Accordingly, shareholders are advised that:
- Normalised HEPS is expected to increase by between 11% and 16% (79,5 cents and 115,6 cents) over that of 722,5 cents reported in the prior period, based on the adjustments detailed below;
- Normalised HEPS adjusted for currency movements is expected to increase by between 4% and 9% (31,1 cents and 69,9 cents) over that of 777,0 cents in the prior period rebased for the current period’s foreign exchange rates, based on the adjustments detailed below; and
- The above is a result of overall comparable revenue growth of more than 9% and margin enhancement.
Impact of abnormal and non-recurring transactions
Certain abnormal or non-recurring income and expenses are disclosed separately and are added back in calculating Normalised Headline earnings. Normalised headline earnings excludes the after tax impact of the following items:
2019 2018
Headline earnings (R million) 1 466,2
- retrenchment and restructuring costs (R million) 168,6 40,7
- credit loss provision relating to Zimbabwe (R million) 191,4
- losses and write-offs in an associate (R million) - 78,5
Normalised headline earnings (R million) 1 585,4
Effect of foreign currencies
The results of the Group are impacted by the change in foreign exchange rates, mainly relating to the US dollar and Angolan kwanza for both reporting periods. In the prior year comparative period the income of foreign subsidiaries was converted at an average aggregated daily ZAR/US dollar (USD) exchange rate of R12,87 compared to R14,19 in the current year, and the Angolan kwanza devalued from an average aggregated daily kwanza/USD exchange rate of 203,5 to 305,7 in the current year.
The following methodology was applied in calculating the pro forma financial information:
- The income of foreign operations for the prior year was restated using the current year average exchange rates as mentioned above.
- Foreign exchange differences reported in the income statement (net of tax) were added back. The differences relate to realised foreign exchange gains and losses as well as the unrealised amounts on translation of monetary assets and liabilities denominated in foreign currencies to the reporting currency at year-end, including that of associates.
Normalised headline earnings also excludes the impact of the following foreign currency adjustments:
2019 2018
Normalised headline earnings (R million) 1 585,4
- restatement of income of foreign operations to current year average exchange rates (R million) 17,0
- foreign exchange differences in the income statement added back (R million) 24,7 102,8
Normalised headline earnings adjusted for currency movements (R million) 1 705,2
These adjusted measures represent pro forma financial information and is the responsibility of the board of directors and is presented for illustrative purposes only. Because of its nature the pro forma financial information may not fairly present the Group’s financial position, changes in equity, results of operations or cash flows. The weighted average number of ordinary shares in issue on which the calculations in this announcement is based are 219 542 815 (2018: 219 443 299).
Distell’s results for the current period are due to be released on SENS on or about 28 August 2019 followed by a presentation at Van Ryn’s Brandy Distillery, Van Ryn Road, Vlottenburg commencing at 12.00pm the same day as the results are released.
Webcast and dial-in details can be found on the IR section of its website at https://www.distell.co.za/investor-centre/ T
The estimate financial information on which this trading statement is based has not been reviewed and reported on by the Company’s external auditors.
Distell is currently finalising its financial results for the year ended 30 June 2019, which are due be released on SENS on or about 28 August 2019. In terms of the Listings Requirements of the JSE Limited, companies are required to publish a trading statement as soon as they are reasonably certain that the financial results for the period to be reported on will differ by more than 20% from that of the previous corresponding period. During the period the Group’s results were negatively impacted by two events:
1. The significant devaluation of about 50% of the Angolan kwanza, as disclosed later, and its impact on the Angolan economy has negatively impacted the earnings of Best Global Brands Limited (BGB), the owner of the Best brand, in which Distell acquired a 26% interest in 2017. Although BGB has grown volumes and maintained market share since Distell’s investment, the Group has decided it would be prudent to impair about two-thirds of the value of its 26% investment in BGB.
2. Distell is a supplier to African Distillers Limited (Afdis) in Zimbabwe in which it owns an indirect 31% interest. Due to the shortage of foreign exchange in Zimbabwe, Afdis was unable to settle all of the trading debt owed to Distell. In the face of further currency devaluations and to protect the value of the trading debt owed to it, Distell accepted payment in local currency and invested the proceeds with the Reserve Bank of Zimbabwe in US dollar denominated savings bonds yielding 7% and maturing at the end of 2020. In light of the uncertainty and economic difficulties facing Zimbabwe, the Group has decided to recognise a credit loss provision of about 80% on the savings bond.
Shareholders are therefore advised that:
- Reported Earnings per share (EPS) for the year ended 30 June 2019 (current period) is expected to decrease between 44% and 49% (330,1 cents and 367,6 cents) over the prior year ended 30 June 2018 (prior period) EPS of 750,3 cents, as a result of the impairment of R524,0 million of its equity accounted investment in BGB, as well as a credit loss provision of R266,1 million for the investment in the savings bonds of the Reserve Bank of Zimbabwe; and
- Reported Headline earnings per share (HEPS) for the current period is expected to decrease between 1% and 6% (6,7 cents and 40,1 cents) over the prior period HEPS of 668,2 cents.
Pro forma information
The results of the Group are impacted by abnormal or non-recurring transactions and the change in foreign exchange rates. The Group therefore also discloses adjusted measures in order to indicate the Group’s businesses’ performance excluding the effect of abnormal transactions and foreign currency fluctuations. These adjusted measures constitute pro forma financial information.
Accordingly, shareholders are advised that:
- Normalised HEPS is expected to increase by between 11% and 16% (79,5 cents and 115,6 cents) over that of 722,5 cents reported in the prior period, based on the adjustments detailed below;
- Normalised HEPS adjusted for currency movements is expected to increase by between 4% and 9% (31,1 cents and 69,9 cents) over that of 777,0 cents in the prior period rebased for the current period’s foreign exchange rates, based on the adjustments detailed below; and
- The above is a result of overall comparable revenue growth of more than 9% and margin enhancement.
Impact of abnormal and non-recurring transactions
Certain abnormal or non-recurring income and expenses are disclosed separately and are added back in calculating Normalised Headline earnings. Normalised headline earnings excludes the after tax impact of the following items:
2019 2018
Headline earnings (R million) 1 466,2
- retrenchment and restructuring costs (R million) 168,6 40,7
- credit loss provision relating to Zimbabwe (R million) 191,4
- losses and write-offs in an associate (R million) - 78,5
Normalised headline earnings (R million) 1 585,4
Effect of foreign currencies
The results of the Group are impacted by the change in foreign exchange rates, mainly relating to the US dollar and Angolan kwanza for both reporting periods. In the prior year comparative period the income of foreign subsidiaries was converted at an average aggregated daily ZAR/US dollar (USD) exchange rate of R12,87 compared to R14,19 in the current year, and the Angolan kwanza devalued from an average aggregated daily kwanza/USD exchange rate of 203,5 to 305,7 in the current year.
The following methodology was applied in calculating the pro forma financial information:
- The income of foreign operations for the prior year was restated using the current year average exchange rates as mentioned above.
- Foreign exchange differences reported in the income statement (net of tax) were added back. The differences relate to realised foreign exchange gains and losses as well as the unrealised amounts on translation of monetary assets and liabilities denominated in foreign currencies to the reporting currency at year-end, including that of associates.
Normalised headline earnings also excludes the impact of the following foreign currency adjustments:
2019 2018
Normalised headline earnings (R million) 1 585,4
- restatement of income of foreign operations to current year average exchange rates (R million) 17,0
- foreign exchange differences in the income statement added back (R million) 24,7 102,8
Normalised headline earnings adjusted for currency movements (R million) 1 705,2
These adjusted measures represent pro forma financial information and is the responsibility of the board of directors and is presented for illustrative purposes only. Because of its nature the pro forma financial information may not fairly present the Group’s financial position, changes in equity, results of operations or cash flows. The weighted average number of ordinary shares in issue on which the calculations in this announcement is based are 219 542 815 (2018: 219 443 299).
Distell’s results for the current period are due to be released on SENS on or about 28 August 2019 followed by a presentation at Van Ryn’s Brandy Distillery, Van Ryn Road, Vlottenburg commencing at 12.00pm the same day as the results are released.
Webcast and dial-in details can be found on the IR section of its website at https://www.distell.co.za/investor-centre/ T
The estimate financial information on which this trading statement is based has not been reviewed and reported on by the Company’s external auditors.
Share price performance
The screenshot below taken from Sharenet shows the share price performance of Distell (DGH) over the last 9 months. Below a summary of the performance of DGH shares over various time periods:
- 1 week: -0.79%
- 1 month: -2.25%
- Year to date (YTD): 20.32
- 1 year: 1.81%
Distell (DGH) share price history
Valuation of Distell (DGH) as at 4 March 2019
So what are Distell (DGH) shares worth? They have strong profit margins, very strong well known brands both locally and abroad. They have a solid balance sheet and strong cash generation. Their volumes in their biggest market, South Africa is declining though and with tough competition from international brands and even tougher economic conditions ahead for South Africa we would not be surprised if we see volumes continuing to decline in South Africa for a while still. But in saying that they have a great foothold in SA with strong customer loyalty towards their brands. All things considered we value Distell (DGH) at R140.80 a share
At R140.80 a share the group will trade a PE ratio of 12.8 and a dividend yield of 2.7%. Which even at our lowest valuation of R140.80 a share is not a demanding PE ratio at all for a relatively defensive stock considering their strong brand portfolio.
At R140.80 a share the group will trade a PE ratio of 12.8 and a dividend yield of 2.7%. Which even at our lowest valuation of R140.80 a share is not a demanding PE ratio at all for a relatively defensive stock considering their strong brand portfolio.