Unloved African agribusiness Zambeef Products (ZAM:AIM) is one of Thursday's stand-out movers, the share price soaring 50% to 12p as The Commonwealth Development Corporation (CDC) injects US$65 million of new capital into the business and becomes a supportive long-term shareholder.
Shares highlighted the deep value attractions, as well as the risks, of Zameef in December at 7.12p.
Negative sentiment towards the producer and retailer of everything from beef, chicken and pork to stock feed and flour in inflation-hit Zambia has reflected an over-leveraged balance sheet that has constrained investment in the core cold-chain food product and retail businesses.
Investors have also fretted over the significant portion of debt denominated in US dollars, giving rise to unrealised losses with the Zambian Kwacha so weak, not to mention Zambeef's obligation (via a put option) to spend $23.4 million buying back the outstanding stakes in chicken businesses Zamhatch and Zam Chick from joint venture partner RCL Foods.
For debt-laden Zambeef, the largest food producer in Zambia, taking on more debt was an undesirable option while paying for the put option in bombed-out shares would have diluted existing investors out of sight.
So today's sharp re-rating reflects relief that Zambeef has struck such a favourable and transformational deal with the CDC, the UK government's Development Finance Institution, which invests in promising companies in South Asia and Africa and boasts an intimate knowledge of Zambia.
With $65 million raised through the issue of new ordinary shares (at a premium-priced 14p) as well as the issue of preference shares, Zambeef has solved some major problems in one fell swoop whilst limiting dilution.
The tasty transaction will not only enable Zambeef to buy back a 100% interest in Zam Chick and ZamHatch from South Africa's RCL Foods for cash, but also to pay down $38 million of debt and release significant free cash flow to roll out its new macro outlet stores, the growth engine going forwards.
The deal triggers material upgrades from finnCap analyst Raymond Greaves. As Zambeef's interest bill for the year to September 2017 falls from $9.2 million to $3.7 million, his pre-tax profit estimate rockets up 45% to $14.3 million. Greaves reduces his year-to-September 2016 net debt forecast from $69.9 million to $31.7 million and his 2017 estimate from $62 million to $24 million.
