Is Zambeef really worth 150% more?

Zambeef swung to a small profit in the six months to March as its core businesses - cold chain meat and dairy products - did well. Cash generation improved dramatically and the sale of its loss-making edible oil subsidiary Zamantia has clearly improved the balance sheet. However, a weak local currency is a huge headwind, and there'll be further translation losses in the second half.

Reporting in US dollars means any drop in the value of the Zambian Kwacha damages the numbers when translated back into the American currency. It fell about 15% in the first three months of 2015, and by a little more year-on-year. Between September and March it slumped by 22%. That meant both a translation effect and impact of foreign exchange losses on stocks held and dollar-denominated debt.

Foreign exchange losses of $7.8 million (£5.4 million) - $3.9 million of which was unrealised - explain why Zambeef made a net loss of $3.4 million following last year's $6.8 million deficit. Revenue fell 7% in dollar terms, although strip out those unrealised losses and the firm made an adjusted profit of $0.1 million versus a $3.2 million loss last time.

"These exchange losses fully vindicate the strategic decision taken by Zambeef to reduce US dollar denominated debt in the group which will result in Zambeef being less vulnerable to rapid exchange rate fluctuations in the future," it said, having just completed the sale of Zamantia for $25.7 million.

A 9% increase in gross profit after margin improved by 560 basis points to 38.3% was driven by the crop farming, beef, poultry, and pork divisions. Broker finnCap has increased full-year forecasts for these businesses, but still thinks they're "on the conservative side". Group numbers have been cut by 5%, however, due to the weak Kwacha. Net debt shrank during the six months from $118.5 million to $93.5 million.

Populations are increasing and real incomes growing rapidly in Zambia, which is a significant driver for Zambeef. Margins and cash look good, too, and the shares trade on a modest 8.5 times earnings estimates for 2016. It's why finnCap still reckons the shares are worth 24p and Panmure Gordon 30p, based on a 40% discount to net assets. And there may be no further exchange rate losses in the second half is the Kwacha remains stable.

But clearly investors remain cautious. Floated in 2011 at 38p, Zambeef shares were worth over 60p at the start of 2013, and 45p at the end of that year. Now, they're roughly where they were at the beginning of 2015, despite a rare outbreak of buying in February.

Selling Zamantia should have been a catalyst, but investors were reluctant to place bets on a recovery and the shares hit a new low at less than 9p. Directors, however, were not shy and loaded up with over six million shares at 10p or less.

We noted the purchases, and also that the sale proceeds would reduce the huge debt burden. But the plunging Kwacha caused us to warn of "an awful lot of risk" and "inevitable sleepless nights for new investors". Despite positive progress at the underlying business, currency issues and other risks associated with so-called "frontier" markets mean Zambeef remains a real high-risk play.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser