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Published On: Wed, Sep 14th, 2016

Innscor – losing lustre and value after spin-offs

HARARE,– Since 2010, Innscor has basically split into four distinct companies, having grown into a behemoth conglomerate through strategic acquisitions.

It became a darling of investors on the stock market in the same vein as heavies Delta and Econet. Its interests spanned from consumer facing food business, retail, distribution, agriculture and through associates, food processing. Its interests spread beyond the borders into over 27 countries across Africa, clearly diversifying risk within an already diversified portfolio.

In 2014, Innscor became the first Zimbabwean company to pass the $1 billion mark in revenue generated. But even then, signs of disintegration were evident from a slowdown in operating profit (EBITDA) and a high cost to income ratio. Size was already weighing on the company, affecting profitability — a sign of bad management which Innscor admitted to in its 2014 and 2015 financials.

The group said roles were duplicated and structures had become complicated, especially in the fast foods business (QSR), necessitating a restructuring and and the resultant spin-offs.

Management’s stated goal for the unbundling of specialist units was to unlock investor value. Evidence so far suggests that this is not working. A simple way to look at it is to ascertain how the market valued the business before the unbundling and the performance post the exercise as splits.

Our findings show that Innscor is worse off and has not generated any incremental value for shareholders via the spin-offs.

There, of course, are several factors at play in the market such as the general sentiment, which affect overall valuations, and market direction which are discounted for.

In 2010, the Innscor group composed of the light manufacturing businesses, distribution, wholesale, retail, silo, recreational and crocodile farming, fast-foods and Innscor Zambia businesses. Under the light manufacturing businesses was Innscor Bread, Colcom, Capri and Snacks. National Foods and Irvines were associate companies.

The distribution and wholesale businesses composed of Innscor transport, Distribution Group Africa and Spar Distribution.

The retail side was made up of Spar franchised outlets, Savemor stores, Spar corporate, fast foods which included in-store bakeries — Bakers Inn, Chicken Inn, Creamy Inn and Nando’s — and TV Sales and Home.

The export business then was made up of Nilotecus, which was discontinued pending the spin off of what later came to be known as Padenga, a present day listed company involved in the ranching of crocodile and is one of the world’s leading producers of exotic skins.

Nilotecus had Kariba crocodile farm, Ume crocodile farm and Nyanyana crocodile farm. Bakaya Hardwoods and Shearwater, which was an associate, were also part of the export business. Regional fast-foods took similar brands with one associate Fontana adding to the list.

In 2010, Innscor subsequently spurn Nilotecus which was listed separately as Padenga on the 26th of November, debuting at a price of 4 cents — valuing the company at $21,66 million.

innscor

Padenga’s market capitalization almost six years on now stands at $67,68 million having last traded at a price of 10,65 cents. This is a growth of 166 percent. Padenga’s topline has grown at a constant average growth rate of 46.7 percent in the past 5 years.

Since the listing, the net asset value of the company has grown tremendously by 56% between 2010 and 2015 while the return on equity ratio has firmed from 0.12 to 0.15 over the same period. It is quite evident from the matrices above that Innscor without doubt succeeded in unlocking value through unbundling Padenga.

Innscor has sought to repeat the Padenga magic through the unbundling of 2 more businesses under its retail, manufacturing and distribution segments, with more said to be in the pipeline.

On November 6, 2015, Simbisa Brands — its quick service restaurants (QSR), including regional counters — separately listed on the ZSE.

Just over six months later, Axia — comprising Innscor’s former Specialty Retail and Distribution businesses together with other relevant subsidiaries — listed separately on May 17, 2016.

The differentiating factor between the 2010 and the latest unbundling lies in that Innscor then was on a sustainable profitability path. The latest unbundling moves were expedited when Innscor’s consolidated operations had begun showing signs of weakness from a profitability point.

A like for like comparison of the 2014 financial results shows that Innscor’s earnings (PBT) were lower than the previous year even as the topline was spurred by the consolidation of Natfoods and Irvines’ results, an accounting phenomena.

The earnings before interest, tax, depreciation and amortization (EBITDA) line was already on a southward trail from 2013.

Both the QSR and the distribution group were operating at higher cost bases which were weighing on overall profitability. The subsequent restructuring exercise saw the QSR business record a 7.3% growth in profit before tax in 2015. Using simple market capitalisation valuation which takes into account the company’s issued shares against the prevailing counter’s market price it is interesting to note that Innscor has indeed lost value on spinning off units.

The ZSE on average has been on a decline, with the benchmark industrial index having shed 14% since the year began. This is mainly due to the dearth in demand for equities by either foreign or local investors. Only a few companies are reporting improved profitability due to a weakening macro environment. It therefore follows that Innscor’s loss in value is not only as a result of spinoffs but also attributable to the general discounting of the ZSE.

But even if the average discount is taken into account, Innscor is still worse off after unbundling. – Respect Gwenzi is an analyst with Equity Axis. And this article was first published by The Source.