We have extracted the financial summary from the interim half year report of Simbisa Brands Limited listed on the Zimbabwe Stock Exchange under the share code SIM.zw. Simbisa Brands Limited is the largest fast-food restaurant operator in Zimbabwe and owns, operates and franchises a selection of well-known Quick Service Restaurant brands.
The following is an excerpt from the interim half year report;
The Company posted positive results, ensuring shareholders continue to earn a return through dividend and sustained share price growth.
GROUP PERFORMANCE OVERVIEW
As aforementioned, the economic instability in Zimbabwe presented a series of challenges during the period under review. Persistent foreign currency shortages, inflationary pressures and the 2% transaction tax that was introduced in October 2018 have increased the cost of doing business. The Group’s response has been to focus on disciplined cost of sales management and controlled price adjustments necessary to maintain our margins. The Group also had to act decisively in order to raise sufficient foreign currency to meet our foreign royalty fee obligations, capex and Intellectual Property-related raw material imports. A decision was made in December 2018 to discount our prices where payable in US Dollars in order to raise the foreign currency to meet these critical obligations.
Through increased customer counts and average spend, revenue increased 55% year-on-year across existing stores with a further contribution from 8 new counters opened during the period to bring total revenue during the six month period to US$ 108,65 m, up 60% on prior year. The Group has managed to maintain GP margins and though disciplined cost management have increased Operating Profit Margins to 22,6% in 1H FY2019 (17,7% in 1H FY2018) resulting in a 105% year-on-year increase in Operating Profit to US$ 24,53 m.
Despite challenges in this market, our experienced management team’s efforts combined with a robust business model have allowed the Group to defend our market share and continue to grow the business. Capex of US$ 7,39 m was outlaid during the period under review to maintain our existing counters to a best in class standard and roll out new counters to close the period with 201 counters. We continue to generate value for our stakeholders through delivery of consistent, quality restaurant experiences to our valued customers.
Revenue generated by our regional operations increased 10% from prior year to US$ 34,62 m (US$ 31,43 m in 1H FY2018). While the region has achieved top line growth and operating margins have remained firm, exceptional income items in the prior year resulted in a 6% decline in Operating Profit to US$ 2,91 m in the period under review compared to US$ 3,09 m in the prior year. The focus on the region has been to streamline the business, defend our market position and ensure existing operations generate positive returns on investment. In the second half of the year we intend to scale up the regional business and grow our market share with particular focus on Kenya’s operations and with the financial impact projected to come through from 1H FY2020.
While our operations in Kenya have benefited from a relatively stable trading environment during the period under review, taxation increases on fuel have put consumers’ disposable income under pressure. The Kenyan Shilling remained relatively stable against the US Dollar during the six month period under review.
The Group increased same-store customers and average spend by 4% and 10% respectively versus the prior comparable period and the opening of an additional 7 counters during the period contributed a further 2% to revenue growth and closed the period with 130 counters.
While performance in our Zambia market has improved, progress has been slower than anticipated. As such, a decision was reached to restructure this market using a phased approach, in order to focus our efforts on this market and to accelerate performance progress. Effective 1 July 2018, we purchased an additional 49% interest in our Zambian subsidiary, and we now own 100% of the business.
Our operations in this market were negatively impacted by unfavourable exchange rate movements. Revenue growth across existing counters increased 13% year-on-year in local currency terms, however during the period under review the average exchange rate of the Zambian Kwacha against the US Dollar depreciated by 18% compared to the prior comparable period, resulting in a 4% year-on-year decline in same-store revenue in US Dollar terms.
The medium-term strategy in this market has been to streamline the business, closing under-performing counters in order to focus efforts on only the ‘A Grade’ sites. As such 10 counters were closed in 2H FY2018 and 25 counters traded during the period under review.
Changes to the VAT Policy in Ghana enacted in August 2018 have impacted the business through an effective 5% increase in cost prices and import duties as well as putting pressure on consumer spend. Exchange rate instability also presented a challenge with the Ghanaian Cedi depreciating 8% against the US Dollar during the six months under review, compared to the prior year. As such, revenue in US Dollar terms dropped 6% versus prior year. No new counters were opened in this market to close the period with 20 counters.
Stable macro-economic conditions in our other regional markets have supported business performance and we have grown revenue across all other regional markets.
Our Mauritius operations registered moderate revenue growth whist our Namibian business achieved double-digit growth in revenue versus the prior year. As at 31 December 2018, 16 counters traded in Mauritius and 8 in Namibia. We intend to build scale in these markets from 1Q FY2020.
We continue to operate our business in the DRC under a master franchise arrangement; the business is performing well, and operations have been expanded into Kinshasa through the opening of 4 new counters in 1H FY2019. We have a good relationship with our franchisee and former partner in this market and remain confident of the DRC business’ future prospects.
As outlined in the FY2018 report, our key strategic objectives are to continue to grow the core QSR business in existing and new African markets, to develop and acquire other brands in the QSR and casual dining segment and to enhance our service offering through technology development.
Significant progress has been made on these initiatives in 1H FY2019. We have developed and expanded existing brands and acquired the master franchise rights for selective casual dining brands which we believe will be successful in enhancing our existing customers’ experience as well as expanding our offering to a wider market demographic. The most recent brands to be added to our portfolio, Rocomamas and Ocean Basket, are performing well and new sites have been identified for further expansion of the Rocomamas brand as well as the new Grilll Shack brand which will be opened in Kenya in 2H FY2019.
We launched our new Dial-a-Delivery mobile application in Zimbabwe in October 2018 which has delivered results in enhancing and making more convenient our customers’ experience whilst also reaching out to a previously under-serviced online market. We are on track to roll the application out in Kenya in 2H FY2019, followed by our other regional markets.
We expect challenges in our trading environment to persist, particularly in Zimbabwe where further price increases, labour unrest and continued uncertainty continue to disrupt the normal course of business. However, as in the period under review we remain confident that our experienced management team will continue to take pro-active measures to ensure we grow the business and deliver value to all of our stakeholders. Intensified focus on the regional business has already begun to yield results and we are confident that the region’s contribution to Group performance will continue to grow.