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High cost of borrowing affects Dairibord



LISTED food processor Dairibord Holdings says despite recording improved margins during the six months ending 30 June 2022, the current high cost of borrowing and short tenures will affect the group’s working capital position.


The group, according to the latest financials, retained its position as the processor with the highest milk intake, albeit at lower levels against the backdrop of stockfeed price hikes.

Dairibord has interest-bearing loans with local financial institutions. The loans bear interest at variable rates. As at 30 June 2022, interest on the loans was between 40% and 60% with an average of 41%. During the month of June, interest rates were revised upwards to 200% per annum with effect from 1 July 2022. Included in the loans and borrowings is a vendor balance of ZW$243 million (R11.1million) relating to manufacturing equipment acquired on credit from a foreign supplier. The loan is payable over four years and bears interest at 8.5% per annum.

The group experienced significant cost increases on account of imported inflation and price volatility arising from exchange rate movements. Cost of sales grew by 37% in inflation-adjusted terms [historical: 183%].

The costs were driven by sharp increases in material costs and utilities. Overheads grew by 30% [historical: 184%]. This increase, according to the financials, was however at a rate lower than revenue growth, benefitting from management’s cost containment initiatives.

 Resultantly, the group’s operating profit grew 140% [historical: 312%] to ZW$1.26 billion [historical: ZW$1.20 billion] compared to ZW$524 million [historical: ZW$292 million] in prior year. The operating profit margin for the period was 7% up from 4% in prior period [historical: 10% from 7% in prior year]. At ZW$462 million [historical: ZW$303 million], net finance charges for the period were nominally higher than last year, driven by an upward trend in interest rates.

“The borrowings of ZW$1.2 billion were invested in capital expenditure projects to increase production output and to fund long working capital cycles. After accounting for finance charges, foreign exchange losses and other incomes, the group posted a profit before tax of ZW$1.1 billion [historical: ZW$836 million],” the group says.

“Cashflows from operating activities were subdued by the significant investments in inventories, prepayments to suppliers and delays in settlement by customers. The business was fairly liquid with a current ratio of 1.6 [historical: 1.2]. Foreign currency obligations were at US$4.3 million, including a long-term loan of US$0.66 million. Most of the obligations were adequately covered by foreign currency assets and expected disbursements of outstanding allotments from the auction market.”

Going into the future, Dairibord says while it sees a silver lining in the economy, the operating environment remains challenging.

“High cost and erratic supply of utilities, mainly electricity and water, are expected to persist. The decrease in the price of fuel remains welcome if sustained,” the group says.

“High cost of borrowing and short tenures will pose difficulty for business to bridge working capital cycle gaps and fund investments in plant and equipment for growth. Inflationary pressures are forecast to subside as a result of government efforts to stabilise the economy.”

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