Equity Research Consumer 02 June 2011 Zimbabwe

Innscor Africa Limited

The quintessential consumer play

Innscor, still experiencing solid top-line growth

Innscor Africas 1H11 results for the 6 months ended 31 December reflected continued revenue and volume growth across the diversified business. Profitability improved as evidenced by higher margins achieved, The EBITDA margin increased from 9% to 10% h-o-h, whilst the PBT margin increased from 8% to 9% h-o-h; due to both revenue growth and improved conversion efficiencies. Revenue at $255.5mn was up 22% versus prior comparable period, whilst EBITDA at $26mn was up 31% versus prior comparable period. PBT rose 51% from $16.1mn to $24.2mn h-o-h, whilst EPS rose a significant 116% from 1.21 cents to 2.61 cents. The group continued to display strong operating cashflows, with cash generated from operating activities rising 158% to $26.8mn from $10.3mn h-o-h. A highlight of 1H11 was the unbundling and subsequent listing of the groups crocodile operation, Padenga, via a dividend in specie to Innscor Africa shareholders.

Market Data
Report Date Bloomberg Ticker Rating Current price $ Target price $ Market Cap $mn EV $mn Market Weight Common Shares Outstanding mn Freefloat % Average Daily Vol. $000s Last Dividend declared Dividend Yield 02-June-11 INAF: ZH BUY $0.63 $0.88 329 350 7.24% 540.12 56% 103.12 08.10.10 2% 10.4x 4.7x 22%

Benefitting from increased consumer incomes

Innscor is both a diversified and vertically integrated FMCG (fast moving consumer goods) business. We believe that it is well positioned to benefit from rising consumer incomes as given by the current growth in GDP per capita. GDP per capita in 2010 was estimated at $594, this is projected to grow by 22% to $725 in 2011, before eventually drifting towards $1040 in 2016E. It is currently estimated that the Zimbabwean consumer spends 23.8% of their income on food, we therefore anticipate increased spend by the Zimbabwean consumer particularly in the FMCG space as incomes continue to grow. This trend is already evident in Innscors 1H11 volumes growth. We further believe that Innscors vertical integration, both backward and forward, translates to reduced supply side constraints, better cost management and improved conversion efficiencies. This will continue to result in improved margins and rising profitability.

PER (+1) EV/EBITDA (+1) Share price perfomance YTD

Innscors 1 year share price performance

$0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20

Attractive Valuation
Using our revised earnings forecasts, we now estimate Innscor trades on PER (+1) 10.4x placing it at a discount to weighted emerging market comparables at PER 19.17x (2012E). The group is on an EV/EBITDA (+1) 4.7x to 2012E, placing the stock at a discount to weighted emerging market comparables at EV/EBITDA 12.6x for 2012E. We forecast gross revenue growth of 23% to $493.5mn for 2011E and then a further 18% to $580mn for 2012E. We forecast EBITDA growth of 76% to $51mn for 2011E and then 37% to 70mn for 2012E. We expect FY11 net income of $24.9mn versus FY10 net income of $15mn, an increase of 66%, which will rise 27% to $32mn 2012E. Using a weighted combined multiples valuation method (PER & EV/EBITDA), we have arrived at a target price of $0.88 for Innscor Africa, implying upside of 40%. We therefore maintain our coverage of Innscor Africa Limited with a Buy recommendation.

$0.10 $Oct-10 Nov-10 Mar-10 Jul-10 Mar-11 May-10 Jun-10 Jan-11

Apr-10

Aug-10

Sep-10

Dec-10

Apr-11

Feb-11

Disclaimer
This document has been prepared by IH Securities to provide background information about the securities and (or) markets mentioned herein, the forecasts, opinions and expectations are entirely those of IH Securities. This document was prepared with the utmost due care and consideration for accuracy and factual information; the forecasts, opinions and expectations are deemed to be fair and reasonable. However there can be no assurance that future results or events will be consistent with any such forecasts, opinions and expectations. Therefore the authors will not incur any liability for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Neither will the sources of information or any other related parties be held responsible for any form of action that is taken as a result of the proliferation of this document.

Research Team
Dzika Danha +263(772) 573 083 ddanha@ih-group.com Christine Mhongo +263(774) 171 262 cmhongo@ihsecurities.com Lloyd Mlotshwa +263(772) 936 677 lmlotshwa@ihsecurities.com

Contact Details
IH Securities (Pvt) Ltd 4 Fleetwood Road Alexander Park Harare Zimbabwe Tel +263 (4) 745133/139 Fax +263 (4) 745879

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Investment Summary
Innscor Africa through its strategic focus on Fast Moving Consumer Goods has become the largest producer and supplier of protein and cereal goods in the country. With GDP per capita rising 22% from $594 CY10 to $725 projected for CY11 and the average Zimbabwean consumer spending 24% of income on food, we anticipate consistent growth in volumes for Innscor. This trend is already evident in the groups 1H11 results; in the milling and manufacturing silo, Natfoods (milling) posted volumes growth of 17% h-o-h to 31 December 2010, whilst Colcom (meat processing) posted revenue growth of 17% supported by volumes growth in its brands. Innscor bread division posted volumes growth of 54% supported by increased capacity and improved efficiencies from 3 new plants commissioned in the year. Chicken sales at Irvines Zimbabwe improved 54% h-o-h, whilst sales of table eggs and day old chicks improved 81%. In the distribution and wholesale silo, volumes processed through the distribution centre were up 64% in 1H11 versus prior comparable period, this was achieved against an estimated loyalty rate of 30% from the independent Spar stores reflecting the potential upside in volumes going forward. The retail silo continued to contribute the most to total group turnover (34%) based on strong performance in the fast foods business, local customer count increased 19% h-o-h. The group intends to introduce 40 to 50 new fast food counters per year over the next 5 years in both Zimbabwe and the region. Capex spend in FY11 will amount to $35mn and a similar amount ($35mn) has been budgeted for FY12, the funds will be directed towards expansion projects, fixed asset refurbishments and maintenance programs. Improved conversion efficiencies will see the group achieving higher margins, resulting in increased profitability going forward, we estimate that the EBITDA margin will rise from 10% at present to 13% in 2015E. Innscors strong operating cashflows allow the group to fund the bulk of their capex requirement from internal resources, thus maintaining low gearing. Using a weighted combined multiples valuation method (PER & EV/EBITDA), we have arrived at a target price of $0.88 for Innscor Africa Limited, implying upside of 40%. We therefore reiterate our Buy recommendation on the group.

Table 1: Valuation Table

Revenue 2011E 2012E 2013E 2014E 2015E 493.48 580.24 632.72 687.83 739.72 EBITDA 50.95 69.85 81.63 87.92 93.83 Net Income 24.85 31.60 35.69 39.43 43.30 EPS ($) 0.05 0.06 0.07 0.07 0.08 EBITDA Margin 0.10 0.12 0.13 0.13 0.13 EV 349.97 346.58 314.38 273.95 229.25 Net Debt 20.50 17.10 -15.09 -55.52 -100.2 EV/Sales 0.67 0.57 0.52 0.48 0.44 EV/CF 4.11 2.83 2.90 2.84 2.64 EV/EBITDA 6.44 4.70 4.02 3.74 3.50 P/E 13.26 10.43 9.23 8.36 7.61 P/CE 10.21 7.65 6.49 6.00 5.63 P/Bk 2.51 2.16 1.87 1.62 1.42 EV/IC 1.88 1.50 1.40 1.29 1.18

Source: IH Estimates, Company Reports

Investment Case
Leveraging on the Zimbabwean consumer
The lost decade (1998 2008) was characterized by the erosion of disposable incomes due to hyperinflation and the subsequent decline of the Zimbabwean consumers purchasing power. It is estimated that Zimbabwes GDP fell 60% during that period, manufacturers were hamstrung by price controls, severe exchange control regulations and the absence of domestic liquidity. Since dollarization in late 2008 we have seen the re-emergence of the Zimbabwean consumer, the country has witnessed aggressive GDP growth, 5.7% in 2009, 8.1% in 2010 and projected growth of 9.3% in 2011. GDP per capita in 2010 was estimated at $594, this is projected to grow by 22% to $725 in 2011, before drifting towards $1040 by 2016E. It is estimated that the Zimbabwean consumer currently spends 23.8% of income on food, the second largest constituent of the consumer basket after housing and utilities at 37.1%. With the normalization of consumer incomes (post dollarization), pending wage adjustments in most sectors and improving domestic liquidity from exports growth, we anticipate accelerated consumer spend in the FMCG sector. We further believe that in the local universe of consumer sector companies, Innscor Africa Limited will be the most significant beneficiary, as is already evident in their volumes growth over the past year. In our opinion, the comparative advantage offered by Innscors value chain in the manufacture,

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processing and sale of both protein and cereal goods, is best positioned to leverage off the Zimbabwean consumers improving purchasing power and per capita consumption .

Diversified and vertically integrated

Innscor through strategic acquisitions and organic growth has not only become a well diversified company within the FMCG sector, but also significantly forward and backward integrated. The group is strongly positioned in the primary and secondary manufacture, wholesale, distribution and retail of most proteins and cereals within the country. This integrated value chain is reflected in the structure of the groups 3 main silos; Milling and manufacturing silo, Distribution and wholesale silo Retail silo.

Through its milling and manufacturing silo, the group has backward integrated into the supply of broilers and table eggs, pork and pork related products as well as cereals and stockfeeds. Innscors controlling stakes in Irvines Zimbabwe Ltd, Colcom Holdings Ltd and National Foods Ltd (combined the countrys largest producers of protein and cereals) give the group significant supply side efficiencies and influence over their cost structure. National Foods carries an installed capacity of 1.9mn tons per annum, whilst Colcom carries a slaughterhouse capacity of 260,000 pigs per annum, Irvines Zimbabwe has the infrastructure to produce 8.9mn birds a year. Innscors bread making unit, which has been a key area of investment is expected to have the capacity to produce 350k loaves of bread per day (128mn loaves p.a) by September 2011. The group through its distribution and wholesale silo possesses the capacity to wholesale and distribute its own products, this silo houses a transport division, which gives the group direct control over its own logistics. Innscors retail silo forward integrates the group, all owing it to directly market its products to the final consumer, the Spar retail network is the third largest food retailer in the nation with over 30,000 sqm of retail space. The fast foods division (retail silo; 158 counters) retailing direct to the final consumer also benefits from the groups backward integration via access to raw material inputs like chicken, eggs, edible oils and flour through group synergies with subsidiaries Irvines and Natfoods. The groups diversification strategy includes country diversification with operations extending into the region, through Spar (Zambia) where the group holds 4 wholly owned corporate stores and 3 franchised stores and Fast foods with 199 counters in Kenya, Ghana, Senegal and Nigeria. Currently 20% of Innscors turnover is generated from regional operations, thus diversifying its revenue streams outside of Zimbabwe. We believe that overall this diversified and integrated value chain leads to better cost management and improved conversion efficiencies, which bodes well for operating and PBT margins within the group.

Strong brand recognition

Innscor through its well recognized brands is fairly dominant within the consumer sector space. Through its distribution and wholesale silo, the company holds the local distribution rights for international brands such as Kellogs, Unilever, Colgate, Eveready, Johnson & Johnson and Tiger Brands. The group also controls strong brands of locally manufactured goods like Gloria Flour, Pearlenta Maize Meal, Red Seal Cooking Oil, Homepride and Gold Seal. In the retail silo, their Inns under the Fast Foods division are the most dominant brand in the local fast food space. Colcom holds the premier brands in pork products, whilst Irvines carries strong market recognition in frozen chickens and table eggs. The groups Spar brand similarly carries strong market recognition in the food retail space, placing the company amongst the top 3 food retail chains in the country. We believe that Inns cors brand power enhances market penetration whilst enabling the group to defend its market share against competitive pressure.

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Key risks
Competition from imports
Government currently has a suspension on import duties for basic finished goods like maize meal, flour and cooking oil. This policy handicaps local industrys ability to price competitively against foreign imports that are more efficiently produced. With the currently high local cost of production, Innscors capacity to manufacture and distribute, particularly its cereals, effectively against competitively priced imports will be negatively impacted.

Cost pressure driven by wages, utilities and commodities

Incomes currently remain low relative to living expenses, as a result industry pressure for wage adjustments is high, with 25 of the 47 industrial councils currently involved in wage disputes. Power and water shortages remain a challenge in Zimbabwe exerting downward pressure on industrial capacity utilization. These factors combined with upward price risk in global commodities combine to negatively impact operating costs for local manufacturers.

Regulatory environment
Zimbabwes Indigenisation and Economic Empowerment Act enacted in March 2010 requires all local enterprises to be 51% indigenous owned (indigenous as defined in the Act). There is still some uncertainty over how the Indigenisation Bill will be implemented exerting an element of political risk on the group. In addition the pending elections may lead to changes in the regulatory regime governing Innscors businesses. This may be of particular concern for a company operating in key industries such as food and food processing.

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Valuation
Table 2: Summary weighted valuation
Weighted Valuation EV/Sales EV/EBITDA P/E Innscor weighted valuation Implied upside/downside 2011E/2012E blend 0.86 1.02 0.75 Weighting 10% 45% 45% 1-year valuation 0.09 0.46 0.34 0.88 40% Source: IH Estimates, Company Reports

We derive a YE12 target price for Innscor Africa Limited using a blended EV/Sales, EV/EBITDA and PER valuation with implied multiples derived from emerging market comparables. EV/Sales is apportioned a lighter weight of just 10%, whilst EV/EBITDA and PER have been apportioned 45% each. Our emerging market universe EV/Sales, EV/EBITDA and PER multiples are 1.2x, 19.17x and 12.6x for 2012E respectively. Using our revised earnings forecasts for FY11/12 after Innscors 1H11 performance, we es timate that the group trades on EV/Sales (+1) of 0.6, PER (+1) of 10.4x and EV/EBITDA (+1) of 4.7x. Thus we derive a 1 year target price of $0.88 a share reflecting upside of 40% and therefore assign a BUY recommendation.

Figure 1: Top-line development, 2011E to 2015E

800 700 600 500 $mn 400 Revenue 300 200 100 0 Jun-11' Jun-12 Jun-13 Jun-14 Jun-15 Source: IH Estimates, Company Reports

As reflected in Figure 1 we believe that Innscor Africa will continue to experience solid top-line growth driven by normalizing consumer patterns and forecasted increase in disposable incomes. We estimate that revenue will grow at a conservative compounded annual growth rate of 8% between 2011E and 2015E. The main anchor of this revenue growth will be the Retail silo, which has traditionally been the largest contributor to the groups total revenue (typically above 35%), in our opinion this silo will continue to dominate revenue, growing at a conservative compounded annual growth rate of 9% over the same period. Figure 2 below shows a breakdown of our expectations per silo leading up to 2015E.

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Figure 2: Silo contribution to total revenue 2011E to 2015E, $mn

300

250

200 Wholesale & Distribution $mn 150 Region Milling & Manufacturing 100 Retail

50

0 Jun-11' Jun-12 Jun-13 Jun-14 Jun-15 Source: IH Estimates, Company Reports

We estimate that Innscors regional operations will contribute 21% to total revenue for 2011E . The group holds four wholly owned Spar corporate stores in Zambia and three franchised stores, two further franchised outlets are due to open in the second half of the year and another two potential sites for corporate stores are currently under consideration. The group holds 199 fast food counters in the region spanning Kenya, Ghana, Zambia, Senegal and Nigeria, customer count in 1H11 was 4mn with an average customer spend of $4.50. Regional fast foods will benefit from an aggressive expansion program that will see between 40 and 50 fast food counters added per year for the next five years both locally and in the region. We believe that regional contribution to total revenue could drift towards 25% in 2015E.

Figure 3: Regional contribution, 2011E

Region 21%

Zimbabwe 79%

Source: IH Estimates, Company Reports

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One of the key drivers in the positive performance we expect from Innscor going forward will be a marked improvement in profitability to accompany top-line growth. The group has streamlined operations in most of its SBUs and continues to do so mostly via staff rationalization. Conversion efficiencies continue to improve aided by the advantages of vertical integration and capex spend within the group, measures have further been taken to improve interrnal controls particularly within Spar. This strategy has resulted in improving margins at operating level resulting in higher net margins for the group.

Figure 4: Margin development, 2011E to 2015E

14% 12% 10% 8% EBITDA margin 6% 4% 2% 0% Jun-11' Jun-12 Jun-13 Jun-14 Jun-15 Net margin

Source: IH Estimates, Company Reports

Figure 4 displays the gradual growth in margins that we anticipate within the Innscor group between 2011E and 2015E. We believe Innscor will achieve an EBITDA margin of 10.3% for 2011E which will gradually rise and peak at about 12.9% in 2013 before it begins to plateau and drift toward 12.7% in 2015. We believe that a net margin of 5% will be attained for 2011E which will drift towards 6% by 2015E. Overall we expect actual EBITDA to grow at a compounded annual growth rate of 13%, 2011E to 2015E and attributable profit to grow at a compounded annual growth rate of 12% over the same period. We estimate that the group will spend $36.4mn in capex FY11 and a further $36.9mn in capex for FY12. The funds will be spent on fixed asset refurbishment, maintenance programmes and site expansions. The refurbishment of existing fast food counters and addition of new counters as well as the expansion of retail space under Spar will be key priorities for the group. Investment in the milling and manufacturing silo to continuously improve conversion efficiencies should also be an important theme of expenditure going forward. We do, however estimate that capex spend will begin to decline in 2013 thus improving free cash flows and allowing for increased dividend flows. Capex spend is depicted in Figure 5 below.

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Figure 5: Capital expenditure vs Operating cashflows, 2011E to 2015E

80 60 40 20 0 Jun-11' -20 -40 -60 Capex Operating cashflow Source: IH Estimates, Company Reports Jun-12 Jun-13 Jun-14 Jun-15

The group plans to fund the bulk of its capex plans from internal resources using its in house treasury. Innscor traditionally has strong operating cashflows due to the nature of its businesses (1H11 operating cashflows were up 158% to $26.7mn). The existence of Innscors treasury has allowed the group to deploy its own cash resources internally to its various SBUs, thus minimizing the need for loan capital. Through this method of self financing Innscor has generally managed to maintain its gearing at around 10%, management as a policy do not intend to allow gearing to exceed 25% going forward. Figure 6 below depicts the groups gross debt position versus debt/EBITDA from 2011E to 2015E.

Figure 6: Gross debt vs Gross Debt/EBITDA, 2011E to 2015E

$mn

70 60 50

100% 90% 80% 70% 60% 50% Debt Debt/EBITDA

$mn

40 30 20 10 0 Jun-11' Jun-12 Jun-13 Jun-14 Jun-15

40% 30% 20% 10% 0%

Source: IH Estimates, Company Reports

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FMCG Industry: Zimbabwe v. SSA

Per capita on the rise but still below SSA average
Since dollarization in 2009, Zimbabwe has seen positive economic growth which has resulted in income growth, with GDP per capita rising from $351 in 2008, to $594 in 2010. As shown in Figure 7, the growth in incomes is expected to continue, with GDP/capita forecast at just below $1000 by 2015.

Figure 7: Growth in Zimbabwean GDP per capita, 2007 to 2015E

1200

1000

GDP/capita ($)

800

600

400

200

0 2007 2008 2009 2010 2011

It must be highlighted, however, that on average, Zimbabwean incomes remain relatively low compared to other countries in the region. The country had GDP per capita lower than 30% of the $2,258 average for Sub-Saharan Africa in 2010. As demonstrated in Figure 9, Zimbabwes GDP per capita places most families incomes below the poverty datum line. As at December 2010 an annual per capita income of $934 was required to meet the poverty datum line, a figure much higher than the $594 achieved. We believe that the lower incomes currently received in Zimbabwe restrict most consumers to spending on basic foodstuffs. We however, foresee an opportunity for well positioned businesses like Innscor as Zimbabwes GDP per capita begins to converge with SSA.

2012

2013

2014

2015 Source: IMF

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Figure 8: GDP per capita: select African countries

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Namibia Zambia

Figure 9: GDP per capita: select African countries, 2009 to 2016E

1400 1200 1000 800 600 400 200 0 2009 2010 2011 2012 2013 2014 2015 2016

As displayed above the gap between the poverty datum line and GDP/capita has narrowed, from $438 in 2009, to $339 in 2010 and is expected to end 2011 at $259. Applying inflation forecasts for the country to the poverty datum line in 2010, we extrapolated the poverty datum line to the medium term. The graph suggests that whilst the average Zimbabwean will continue to live below the PDL in the medium term, the population will find itself increasingly capable of affording necessities. With average GDP/capita set to remain below the PDL, we believe the fastest growth in consumption will continue to take place in the necessities such as food, housing, transport and communication, placing food producers and retailers at a significant advantage.

Botswana

gdp per capita

South Africa

Nigeria

Kenya

Zimbabwe

Mozambique

poverty datum annualized Source: IMF, CSO and IH estimates

Ghana

Source: IMF

Malawi

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The opportunity; increased protein consumption expected

Within the food sector, we believe that the Zimbabwean diet is likely to shift to a less starchdriven diet, with increased consumption of other foods, including proteins such as meat, eggs and milk, as well beverages. As shown by figure 10, staples constitute a lower percentage of food intake, by caloric value in higher income countries in the region, including South Africa and Botswana., than in lower income countries. We therefore expect that as the Zimbabwean economy continues to grow, we will see a shift towards other foods in the Zimbabwean diet as the Zimbabwean consumer increases the overall intake of food.

Figure 10: Diets in Southern Africa

120%

100%

80%

60%

40%

20%

0% Zambia Africa South Africa Mozambique Zimbabwe Southern Africa Botswana Malawi

other foods

cereal

Source: FAO

Figure 11 below depicts Zimbabwes protein consumption per capita versus peers within the region, we have also included Brazil as an emerging economy and USA as a developed economy for comparative purposes. Whilst Zimbabwes protein consumption per capita sits above Zambia and Mozambique, it has clearly lagged behind remaining Southern African peers, we believe this is an indication of the potential upside in consumption as consumer patterns in the country continue to normalise

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Figure 11: Protein consumption per capita

120 100 80

KCal

60 40 20 0

Zambia

South Africa

USA

Mozambique

Zimbabwe

Botswana

Brazil

Kenya

Malawi

Source: FAO

. Zimbabwean consumers are also faced with low access to credit which limits the consumers ability to spend. Credit from banks remains minimal, with households taking up 8% of the $1.7bn loans in the banking system as at December 2010. Retailers have begun to offer credit on purchases of items such as clothing and furniture, freeing up income for expenditure on other goods such as food. However, the scale at which such credit is available to consumers remains minimal. Going forward we believe that increased economic growth as well as ongoing improvements in the banking sector will lift consumer access to credit in the medium to long term. This development will consequently increase the disposable income available for expenditure on food items.

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The Zimbabwean FMCG Industry

FMCG focused firms, similalry to other industries in the country are faced with certain challenges at this time. Firstly, cost pressures arising from wage demands, with an estimated 25 of 47 industrial councils in wage disputes as at the beginning of this year, pose significant downside risk to margins. Increasing utility prices, particularly power further add to cost pressures, again, negatively impacting margins. Most Zimbabwean companies import their inputs, as well as finished products from the region, and South Africa in particular. Therefore a stronger rand directly impacts costing and competition in the Zimbabwean FMCG sector. As previously discussed, disposable incomes in the country are rising, but still remain relatively low on average. Consequently demand for higher margin goods looks set to remain subdued in the short to medium term. With an estimated 36% of Zimbabwes population living in urban areas, and the rest of the population living in rural and peri-urban areas, it is critical that producers are able to access more remote areas of the country efficiently. Such access will increases sales capabilities, and reduce the cost of placing end products with the end user. There are a limited number of companies within the country with the necessary distribution channels to limit the logistical costs of domestic distribution. Innscor through its distribution and wholesale silo holds a comparative advantage in logistics over its competitors, National Foods controls a strategic depot network enabling it to easily move basic commodities in bulk, thus contributing to profitability.

Manufacturing Figure 12: Sectoral growth

50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Agriculture Minining 2009 2010 Manufacturing 2011 Source: IH Estimates Tourism

As shown in Figure 12, the manufacturing sector in the country has seen slow recovery, with growth in 2010 and 2011, significantly underperforming the growth in sectors such as mining and agriculture. Overall capacity utilization is expected to end the year at between 45% and 50%. As shown in Figure 13, capacity utilization in food stuffs is not significantly higher than the average in the manufacturing industry. Grain millers are a particular area of concern, with capacity utilization estimated at 10% within the subsector.

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Figure 13: Manufacturing capacity utilisation, 2009 to 2011E

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2009 2010 Food Stuffs Overall 2011 Projected

Source: IH Estimates

Low capacity utilization in the manufacturing sector is partly attributable to insufficient access to power and water. National demand for power is estimated at 2,200MW, whilst current total capacity is estimated at 1320MW. The country is subsequently forced to import electricity from the region, but regional scarcity, high costs, as well as financing constrain the extent to which this is possible. Government has, however, begun to open the door for private players to enter the power generation industry, by for example awarding a license to RioZim for the production of 2400MW at the Gokwe Sengwa coal fields starting in 2014. Inefficiencies resulting from obsolete machinery, expensive utilities and the feedback effect of low capacity utilization have negatively affected the FMCG industrys ability to manufacture competitive local products. Imports therefore pose a significant threat to local manufacturers. This is particularly evident with basic commodities, where government suspended all duties on the importation of basic goods, such as maize meal, cooking oil and flour. This development has led to imports taking up significant market share in the food industry, as local producers struggle to compete with cheaper products, a situation that further suppresses capacity utilization. Industry players including Innscor are currently lobbying government to impose duties on basic goods imports, thereby creating a level playing field in price competition. Significant challenges within the food processing sector also emanate from the low production of the necessary inputs within the country. As shown in figures 7 and 8, the country is unable to produce sufficient quantities of most agricultural inputs versus national demand, leaving food processors highly dependent on imports. This is one of the primary challenges for National Foods, with a spill-over effect on Colcom and Irvines caused by limitations in the production of stockfeeds. The high proportion of imports in input mixes affects profitability as freight costs are quite significant. Industry players estimate that logistical costs, including freight and insurance can be as high as 40% of procurement costs, depending on source markets and the type of good. A key constraint to increased local production of inputs is access to financing. To mitigate against this challenge in the countrys agriculture sector, manufacturers are increasing their support for local farmers through financing out-grower schemes and off-take guarantees in a bid to increase local production.

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Figure 14: National maize consumption (mns) of tonnes

0.7

1.3

Local production

Imports Source: Ministry of Agriculture, Commercial Farmers Union, IH estimates

Figure 15: National wheat consumption (mns) of tonnes

50

300

Local production

Imports

Source: Ministry of Agriculture, Commercial Farmers Union, IH estimates

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Company Profile
Innscor Africa Limited is an FMCG focused, integrated chain business with interests both locally (Zimbabwe) and in the region. The group reverse listed into Capri (appliance manufacturing) on the Zimbabwe Stock Exchange in 1998 with an initial market capitalization of USD70mn. An aggressive growth strategy saw the group acquiring the SPAR eastern region business and opening corporate stores in Harare in 1999, Innscors SPAR division is now estimated to be the third largest retailer in Zimbabwe with over 30,000sqm of retail space. In 2002, the group acquired 80% of Colcom Holdings Limited (COLCOM: ZH), the countrys largest producer and processor of pork. This, along with their purchase of 49% of Irvines Zimbabwe Limited in 2009, the countrys largest broiler and egg producer, made Innscor Africa, Zimbabwes largest producer of protein.

The group acquired 49% of National Foods Limited (NATFOODS: ZH) in 2004, again, the countrys largest milling company (maize and flour milling, prepacking and sale of dry groceries, edible oils, bakers fats and manufacture of stockfeeds). This purchase positioned the group as a market leader in the manufacture of fast moving consumer goods, controlling strong local brands like Gloria and Red Seal. Innscors fast food division which b egan in 1987 currently holds 158 counters in Zimbabwe and a further 199 counters in the region. The groups diverse range of businesses are organized into 3 main silos as follows:

Table 3: Milling and manufacturing silo

Subsidiary Colcom Holdings Limited Innscor Appliances (Capri & WRS) Innscor Bread Innscor Snacks Iris Biscuits Irvines Zimbabwe Limited National Foods Limited Description Pork Producer & Processor Appliance Manufacturer Bread Manufacturer Snack Foods Manufacturer Biscuits Manufacturer Broiler and Eggs Producer Miller and Manufacturer Capacity (p.a) 260k pigs n/a 128mn loaves n/a n/a 8.9mn birds 1.9mn tons

Source: IH Estimates, Company Reports

Table 4: Distribution and wholesale silo

Subsidiary Distribution Group Africa SPAR Distribution Centre FreshPro Innscor Transport National Foods Distribution Colcom Distribution Bakery Distribution Description FMCG distributor Services SPAR stores Perishables distributor Contracted transporter Natfoods FMCG distributor Colcom products distributor Bread distributor Capacity n/a n/a n/a n/a n/a n/a n/a

Source: IH Estimates, Company Reports

Table 5: Retail silo

Subsidiary Fast Foods Bakery Retail SPAR TV Sales and Home Pork Shops Description Fast food franchises In store bakeries SPAR retail outlets Home appliances Pork retail outlets Capacity 158 counters n/a 30k sqm n/a n/a

Source: IH Estimates, Company Reports

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Regional Businesses Innscor Zambia: The main businesses in Zambia are the SPAR retail operations and the Distribution business. Fast Foods Regional: Fast food counters in Kenya, Ghana, Zambia, Senegal as well as a franchising arm in Nigeria.

Management
Most of the groups senior management team and partners have been with Innscor for well over 10 years and in addition 55% of the business is owned by the operating management. The group structure is comprised of independent operating units run by a streamlined head office.

Shareholding Structure

ZMD Investments, 18.8%

HM Barbour, 18.5%

Other, 56% Old Mutual Zimbabwe Ltd, 6.4%

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Financials
Table 6: Innscor Africa Income Statement 2011-2015E, $mn
Innscor Income Statement Revenue COGS Gross profit Other income Operating expenses EBITDA D&A EBIT Net interest Equity accounted earnings PBT Taxation Minorities Net income Dividends paid out Retained earnings Weighted average shares in issue Share options Basic EPS Diluted EPS Dividend per share Gross margin Operating expenses as % of turnover Operating EBITDA margin Net margin Tax rate Dividend ratio 2011 493.48 (311.38) 182.09 9.50 (140.64) 50.95 (7.42) 43.84 (3.50) 8.00 48.34 (12.08) (10.57) 24.85 (7.46) 17.40 540.12 1.48 0.05 0.05 0.01 37% 29% 9% 10% 5% 25% 30% 2012 580.24 (360.33) 219.91 9.50 (159.57) 69.85 (11.49) 58.67 (6.56) 8.93 61.04 (15.26) (13.35) 31.60 (10.11) 21.49 540.12 1.48 0.06 0.06 0.02 38% 28% 10% 12% 5% 25% 32% 2013 632.72 (389.76) 242.97 9.50 (170.84) 81.63 (15.05) 66.89 (7.46) 9.30 68.73 (17.18) (15.03) 35.69 (11.78) 23.91 540.12 1.48 0.07 0.07 0.02 38% 27% 11% 13% 6% 25% 33% 2014 687.83 (427.14) 260.69 9.50 (182.28) 87.92 (15.48) 72.74 (6.62) 9.66 75.77 (18.94) (16.58) 39.43 (13.01) 26.42 540.12 1.48 0.07 0.07 0.02 38% 27% 11% 13% 6% 25% 33% 2015 739.72 (459.37) 280.35 9.50 (196.03) 93.83 (15.20) 78.94 (5.90) 10.02 83.06 (20.76) (18.17) 43.30 (14.29) 29.01 540.12 1.48 0.08 0.08 0.03 38% 27% 11% 13% 6% 25% 33% CAGR 8% 8% 9% 0% 7% 13% 15% 12% 11% 5% 11% 11% 11% 12% 14% 11% 0% 0% 12% 12% 14% 1% -1% 4% 4% 3% 0% 2%

Innscor Africa Equity Research

Table 7: Innscor balance sheet 2011E to 2015E, $mn

Balance Sheet PPE Intangible assets Investments Biological assets Non current assets Biological assets Inventories Trade and other receivables Cash and cash equivalents Other current assets Current assets Total assets Ordinary share capital Non-distributable reserves Distributable reserves Equity attributable to equity holders of the parent Minority interest Shareholders' equity Long-term borrowings Deferred taxation Non-current liabilities Short-term borrowings Trade payables Provisions Current tax liability Other current liabilities Current liabilities Total equity and liabilities 10.75 68.73 261.93 10.75 73.98 326.90 10.75 73.79 362.16 10.75 77.42 403.68 10.75 80.78 449.13 0% 3% 11% 118.46 2.21 38.39 40.56 22.69 39.63 143.47 261.93 5.42 45.77 79.92 131.10 29.55 160.65 28.07 4.48 32.55 15.12 40.56 2.31 143.87 2.21 44.42 47.69 49.08 39.63 183.03 326.90 5.42 45.77 101.41 152.59 42.90 195.49 52.95 4.48 57.43 13.24 47.69 2.31 146.99 2.21 48.05 52.00 73.28 39.63 215.17 362.16 5.42 45.77 125.32 176.50 57.93 234.44 49.46 4.48 53.94 8.73 52.00 2.31 144.95 2.21 52.66 56.53 107.71 39.63 258.74 403.68 5.42 45.77 151.74 202.92 74.51 277.43 44.36 4.48 48.84 7.83 56.53 2.31 143.45 2.21 56.63 60.80 146.41 39.63 305.68 449.13 5.42 45.77 180.75 231.93 92.68 324.61 39.26 4.48 43.74 6.93 60.80 2.31 4% 0% 8% 8% 45% 0% 16% 11% 0% 0% 18% 12% 26% 15% 7% 0% 6% -14% 8% 0% 2011 82.07 1.09 35.31 2012 107.48 1.09 35.31 2013 110.59 1.09 35.31 2014 108.55 1.09 35.31 2015 107.05 1.09 35.31 CAGR 5% 0% 0%

Innscor Africa Equity Research

Table 8: Innscor Cash Flow Statement 2011E to 2015E, $mn

Cash Flow Statement PAT D&A Change in WC Other operating cash flow Operating cash flow Capex Other investing cash flow Investing cash flow FCF Dividends Debt issued/repaid Equity issued Financing cash flow Change in cash Cash bop Cash eop (36.47) (14.13) (7.46) 28.00 20.54 6.41 16.27 22.69 (36.90) 13.51 (10.11) 23.00 12.89 26.40 22.69 49.08 (18.16) 43.98 (11.78) (8.00) (19.78) 24.20 49.08 73.28 (13.44) 53.44 (13.01) (6.00) (19.01) 34.43 73.28 107.71 (13.70) 58.99 (14.29) (6.00) (20.29) 38.70 107.71 146.41 (18%) (233%) 14% (173%) (200%) 43% 46% 45% 2011 35.43 7.42 (19.64) -0.88 22.34 (36.47) 2012 44.95 11.49 (6.03) 0.00 50.41 (36.90) 2013 50.72 15.05 (3.63) 0.00 62.14 (18.16) 2014 56.01 15.48 (4.61) 0.00 66.88 (13.44) 2015 61.47 15.20 (3.97) 0.00 72.69 (13.70) CAGR 12% 15% (27%) (00%) 27% (18%)

Innscor Africa Equity Research

Certification The analyst(s) who prepared this research report hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s) personal views about the subject investment(s) and issuer(s) and (ii) no part of the analysts(s) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report. Ratings Definition Buy - Expected 1 year return is at least 20% Hold - Expected 1 year return of between 0% and 20% Sell - Expected 1 year return of 0% and below Disclaimer This document has been prepared by IH Securities to provide background information about the securities and (or) markets mentioned herein, the forecasts, opinions and expectations are entirely those of IH Securities. This document was prepared with the utmost due care and consideration for accuracy and factual information; the forecasts, opinions and expectations are deemed to be fair and reasonable. However there can be no assurance that future results or events will be consistent with any such forecasts, opinions and expectations. Therefore the authors will not incur any liability for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Neither will the sources of information or any other related parties be held responsible for any form of action that is taken as a result of the proliferation of this document.