daniel chigunweSylvester Mupanduki
I found starafricacorporation’s FY2024 results interesting last week and upon review, it seems apparent to me that many would agree this company no longer merits attention.
Despite years of efforts to turn around operations and hire new management, the company has failed to generate significant or meaningful returns for investors, leaving many pondering whether this company’s value lies more in its dissolution than in its continued existence.
starafricacorporation is grappling with significant operational challenges as distribution and administrative expenses have surged far beyond increases in revenue and gross profit.
This has resulted in negative operating margins, erasing any potential gains from any turnaround efforts, particularly in the previous trading period.
Furthermore, the company’s reliance on bank overdrafts to fund operations due to inadequate cash flow underscores its critical working capital deficiency.
Many local businesses are struggling amidst the current macroeconomic conditions, with concerns mounting over unfair competition posed by cheap imports over the past few years. Despite high prices and demand for sugar within Zimbabwe, the prohibitive costs of production prevent local producers from capitalising on these opportunities.
But, before we jump into whether starafricacorporation is more valuable in liquidation, we should recognise the dual nature of growth. A company that achieves organic growth over the long term typically commands higher value than one with stagnant growth.
However, achieving such growth requires substantial reinvestment. The more a company reinvests, the lower the returns to shareholders, increasing stock risk and potentially reduced attractiveness to investors. This is the current challenge facing starafricacorporation.
My analysis of production and sales volumes indicates that despite a 32 percent decline in FY2024 due to raw sugar supply issues in 2023 — subsequently resolved through stakeholder engagements — starafricacorporation has maintained a compounded annual growth rate of 13 percent and 14 percent over the past seven years. Meaning both production and sales volumes levels were 3,6x and 2,5x higher respectively by end of FY2023 and FY2024.
This growth can be attributed to increasing local demand, which currently absorbs all its output, as well as investments in refinery equipment installed in the last few years, alongside introduction of new products.
Historical trends suggest that starafricacorporation has the potential to reach an annual production output target of 100 000 tonnes in the coming three or four trading years.
However, despite all these growth efforts, starafricacorporation still presents itself as an asset play, where the combined value of its assets exceeded its market capitalisation by threefold.
For an investor like Gordon Gekko in the Wall Street Movie, Star Africa is worth more “dead than alive.” Acquiring Star Africa could potentially yield substantial profits through asset liquidation, offering a potential return exceeding 200 percent.
Typically, balance sheets are prepared using the reporting date exchange rates. For starafricacorporation, this date is March 31st. As of March 31, 2024, the official exchange rate for ZWL: USD was around ZW$22,055. Using this rate, starafricacorporation’s receivables, cash and investment in associates amounted to approximately US$1,7 million, US$0,2 million, and US$1,65 million respectively, totalling US$3,55 million.
The company’s market capitalisation on that date was US$8 million. These three accounts alone represented 50 percent of the company’s market cap. After the introduction of ZiG led to a market correction, starafricacorporation’s current market cap is around US$2,57 million.
Star Africa’s investment property, which generated a rental yield of only 6 percent, was estimated to be valued at US$7,5 million as of that date. Despite its significant asset value, rental income from this property contributed just 0,5 percent to the company’s total revenue, indicating its limited revenue impact to the group.
One could therefore acquire the company with the intention of liquidating the investment property portfolio to recoup their entire invested capital within a year and subsequently reinvest internally generated cashflows into rebuilding the sugar refinery business.
Notably, the company had no long-term debt aside from an overdraft and trade payable, which could largely be offset by inventory use — a plus in a scenario where one is considering using an LBO option.
In my view, this question of whether the stock is worth more dead than alive stem from the market price, which has remained suppressed since Takura Capital’s acquisition in 2021. Considering the historical growth of the business and the net asset value compared to the performance of the share price, I believe the stock remains undervalued despite recent declines in volumes.
However, the market is likely to continue to judge the stock harshly based on past challenges. The optimal approach to give back value to pension funds like NSSA, the second largest shareholder in 2023 with a 31,02 percent stake reported at approximately 1,5 billion shares or US$2,4 million in value as of March 31, 2023, US$2,5 million as of March 28, 2024, and roughly US$0,8 million at the time of this article, involves delisting and providing these other shareholders a +200 percent premium.
If NSSA still holds a 31,02 percent stake in starafricacorporation, this implies their investment market value has declined by approximately 68 percent between March 2023 to July 2024 and they would require over 214 percent return to bring their 31,02 percent stake back to its March 2023 valuation.
Disclaimer
The information presented in this article is provided to you for informational purposes only and it is not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities or other financial instruments or any advice or recommendation with respect to such securities or other financial instruments. I do not accept any liability for any loss or damage which may arise directly or indirectly from use of or reliance on this information. Whilst the information provided has been obtained from sources believed to be reliable, I do not attest to its accuracy or completeness. I reserve the right to change my opinions without restriction or notice.
Financial Analyst. Twitter: @SMRI_Institute, LinkedIn: https://www.linkedin.com/in/sylvester-mupanduki
Bongani Ndlovu