National foods holdings limited’s 6 months results to 31

December 2009 were a pale shadow of expectations as

the company posted a revenue of $79,9m operating on

paltry EBITDA margins of 0,02% which gave them an

EBITDA of a mere $19,032. Depreciation and

amortization of $842,442 pushed them into negative

territory as they posted an operating loss before interest

and tax of $823,410. The group incurred interest

expenses of $885,580 and also earned some equity

accounted earnings of $298,733 resulting in them posting

an LBT of $1,4m. A tax credit of $402,148 saw them

achieve a loss for the period of $1m representing a loss

per share of 1,47c. At the end of the reported period the

group’s total assets were up from June 2009 value of

$62,5m to $71,3m whilst their NAV was down from the

June 2009 value by $1m to $44,9m as a result of the loss.

The group however ended the period in a positive cash

position of $106,704.

Operational review

Overall the group’s volumes were up by 10% to 140000mt

however pressure from imports squeezed margins as the

group’s operational units sacrificed margins for volumes.

Further management highlights that the group faced

higher costs as a result of plant inefficiencies coupled

with weakness in internal controls however these have

been addressed through a restructuring and full

reactivation of IT systems as well as the rehabilitation of

critical plant and equipment with management

anticipating benefits to filter through in H2.

Flour Milling The group hopes to have new equipment

installed in H2 2010 and believes that this will improve

yields and process flow. For the H1 flour sales were at

48,800mt up by 13%.

Maize Milling Though the operation sacrificed margins for

volumes the capacity utilization is still a paltry 14%of

installed capacity.

Oils and Meals Performed poorly as a result of power

outages coupled with plant breakdowns and a shortage of

critical inputs.

Stock feeds Strategically targeted low margins and high

quality to enjoy bigger market share and this paid off as

sales volumes for the reported period stood at 44,100mt up

142% on the previous six months, while the operation’s

capacity utilization stands at 32%.

Natpak Achieved production of 10,6m2, was profitable but

management believes that a recapitalisation and

operational rationalisation is necessary for maximum

benefits to be reaped from the operation.

General Prepacks Current period sales volumes up 36% to

19,700mt while several of their brands enjoyed brand

leadership on the market.

Depot Network The group enjoys a distribution network

with 21 depots across Zimbabwe.

Properties They are currently sitting on 169,000m² of real

estate under their portfolio.

Recommendation

The group’s major operational challenge has been the

depressed margins due to pressure from imports as well as

the low capacity utilisations in some potential cash

generating operations like maize milling. We are unclear as

to the financial requirement for the recapitalisation of

some of their operations and the impact the

recapitalisation will have on their operational efficiencies.

However, it is our view that on a long term basis capacity

utilization will improve. In addition, they should regain

market leadership once import duty and tariffs on basic

commodities are reintroduced. Being the biggest food

processing company in Zimbabwe, with a strategic

shareholder like Innscor that controls over 20% of the retail

sector and Tiger Brands that controls a very significant

portion of food exports to Zimbabwe, National Foods

remains a prime candidate for long term investors. LT BUY