Overview

Against the background of trading a full financial year under the Covid-19 pandemic, Simbisa delivered an excellent performance. Key highlights for the year include:

• The Group recorded improved operating profit margin despite the impact of Covid-19 on customer counts, which is testament to the success of efforts to improve operating efficiencies.
• Net growth of 32 stores during the year and an increase of 4 stores in the last quarter. The Group continues to reinvest profits into continued growth.
• A 43% increase in food delivery volumes year-on-year as a result of the Group’s elevated focus on this sales channel which ameliorates the impact of the pandemic and aligns the business with evolving customer behaviour. Along the same vein, the Group opened an additional drive-thru restaurant.
• Sustainable shareholder returns with a dividends growth rate of 472% year-on-year, ahead of the inflation rate of 107%.

Operating Environment

Amongst other challenges, the following matters had a significant impact on our business during the period under review:

i. Covid-19 impact on operations

All our restaurants experienced limited trade in FY21, with Mauritius being under full lock-down for 3 weeks from 9 March 2021 to 31 March 2021 (FY20: 10 weeks from 20 March 2020 to 30 May 2020). In our key markets, lost trading hours were as follows:

Further to the direct impact on trading hours, the markets we operate in experienced depressed socio-economic activity. As further explained in the Chief Executive Officer’s report, the Group’s response focused on growing and improving the efficiency of its delivery and drive-thru offerings and extending various value offerings across its operations. Responses on the cost-side resulted in the Group maintaining profit margins. Simbisa is confident that some of the lessons and efficiencies gained over this difficult period will be carried forward into the post-pandemic era.

ii. Foreign exchange rate disparities in Zimbabwe

Whilst the foreign exchange supply has improved in Zimbabwe, the pricing mechanism and allocation of foreign exchange on the foreign exchange auction remain deficient as evidenced by the significantly divergent, multiple exchange rates in the economy which create opportunities for arbitrage between the different markets and platforms. The Board would like to urge the government to address the deficiencies in the foreign exchange auction and allow for efficient price discovery and distribution of foreign currency in the economy.

iii. Local currencies depreciation

Depreciation of emerging market currencies remains a significant risk in all our businesses. In FY21, the most affected currency was the Zambian Kwacha which lost 25% of its value against the USD between 30 June 2020 and 30 June 2021. This impacts our customers’ disposable incomes in real terms and increases cost pressures on raw materials, capital items and services. The Group consistently manages its treasury and working capital positions to manage this risk across its markets. The Board, however, notes the recent significant recovery of the Zambian Kwacha following the August 2021 election and reaffirms its strategic intention to continue investing in that market.

Key financial reporting matters

i) Compliance with International Accounting Standard (“IAS”) 21 “The Effects of Changes in Foreign Exchange Rates” requirements

Reference is made to the adverse opinion of the Independent Auditors on the financial statements. One of the reasons for this opinion is the use of an exchange rate other than the exchange rate derived from the Reserve Bank of Zimbabwe weekly Foreign Currency Auction System (“Auction Rate”). The Group translated foreign currency monetary assets and liabilities for Zimbabwean Operations to ZWL using transactions-based exchange rate. The Simbisa transaction-based exchange rate was also used on the same date in translating the results of foreign operations to ZWL. The auditors believe that this treatment is not compliant with the financial reporting framework, International Financial Reporting Standards (“IFRS”), as they believe the auction rate to be a “Spot Rate” compliant with the requirements of IAS 21, and therefore IFRS.

The Directors however believe that the Auction Rate is deficient with regards to IAS 21 and cannot be considered as Spot Rate for the following reasons, amongst others:

1. A regulatory prerequisite for bidding at the weekly foreign currency auction is that bidders must not have positive foreign currency balances in their foreign currency accounts (FCAs) that are equal to or more than the bid amount. This requirement disqualifies the Group’s Zimbabwean Operation from bidding because of daily USD sales inflows into its FCAs, which makes the auction rate inaccessible, and therefore fails to meet the accessibility criteria required by IAS 21;
2. It does not offer immediate delivery of foreign currency transactions occurring on the auction system. It has been made public by the Reserve Bank of Zimbabwe that auction transactions remain unsettled for lengthy periods, exceeding 12 weeks in some cases. The Directors do not believe that Simbisa would, in the event that it could participate in the auction, be prioritised ahead of other bidders and get immediate settlement of the foreign currency;
3. The foreign currency made available through auction system is insufficient to meet all the requirements of those who want access to it. The Directors do not believe that Simbisa would, in the event that it did not generate its own foreign currency from sales, meet all its foreign currency needs from the auction.

Furthermore, in April 2021, the International Accounting Standards Board (“IASB”) released an exposure draft on a proposed amendment to IAS 21 (ED/2021/4), ‘Lack of exchangeability’. IAS 21 specifies the exchange rate to use in reporting foreign currency transactions when exchangeability between two currencies is temporarily lacking. The proposed amendment addresses what an entity is required to do when a lack of exchangeability is not temporary. Paragraph 19A of the proposed amendment stipulates that when exchangeability between two currencies is lacking, an entity shall estimate the spot exchange rate at that date. The Directors believe that this amendment speaks to the current Zimbabwean economic environment.

In the considered view of the Directors, the use of transactions-based exchange rate for the translation of foreign currency monetary balances and the translation of foreign operations presents a fairer view of the Group’s financial performance, financial position, and cash flows and disagree to use the Auction rate. The performance and financial position reflected by this basis of preparation has resulted in the Directors declaring a full year dividend of ZWL 132 cents per share (ZWL 53 cents interim dividend, ZWL 79 cents final dividend), for which the company has sufficient cash resources to settle.

The impact of the use of the transactions-based exchange rate on the financial statements is as follows:

ii) Impact of International Financial Reporting Standard (IFRS) 16: Leases

The Group implemented the new accounting standard on leases, IFRS 16, with effect from 1 July 2019. This standard has a material impact on the Group’s results as it operates the majority of its stores under operating lease agreements. The new standard aligns the presentation of leased assets more closely to owned assets, bringing both a right of use asset and lease liability on the balance sheet. Rental expenses previously recorded on a straight-line basis are now replaced by depreciation on the Right of Use Asset, straight-lined over the term of the lease, and interest expense on the lease liability which reduces over the lease term. In the earlier years of the leases, IFRS 16 accounting has a significant dilutive effect on the Group’s earnings.

The Directors believe that it is fundamental and decision-useful to the users of financial statements to consider the Group’s financial statements without the impact of IFRS 16. The Board shall continuously assess the appropriateness and usefulness of complying with IFRS 16, particularly how it affects the usefulness of the financial statements as a whole.

IFRS 16 had the following notable implications on the Group’s results for the year ended 30 June 2021:

iii) Finance Act (Chapter 23:04) amendment (included in Finance Act No. 2 of 2020) – Zimbabwe Operations

The newly introduced subsection (11) of section 4 allows for the rebasing of fixed assets acquired on or before 22 February 2019, and for any acquired in foreign currency from 22 February 2019 to 31 December 2020. This applies to the Group’s property, plant and equipment which were acquired in foreign currency and had income tax values as at 30 June 2020. The income tax values were rebased to the equivalence of ZWL at the ruling exchange rate as at 1 January 2021 (ZWL 81.82: USD 1).

The Group implemented the rebasing of the income tax values for property plant and equipment with effect from 1 July 2020. The deferred tax impact of this was ZWL 724,743,997. As a result, the Group achieved an effective tax expense rate of 0.1% (inflation adjusted) and credit of 8.8% (historical cost).

Financial performance highlights

Key highlights (in inflation-adjusted terms) are as follows:

• Revenue increased by 108% (+60% in Zimbabwe and +318% in the Region). The main driver of growth in Zimbabwe was an increase of 34% in average spend with customer counts increasing by 8%. In the Region, excluding the impact of the Zimbabwe dollar exchange rate depreciation, revenue increased by 5% in USD terms from a 2% increase in customer counts and a 3% growth in average spend.
• Operating profit increased by 233% with operating profit margins firmer at 13% (2020: 8%).
• The Group recognised a net monetary gain of ZWL 227 million (2020: ZWL 564 million), mainly attributable to inflation hedging strategies in Zimbabwe anchored on re-investing profits in new stores to hedge against inflation.
• The Group recorded foreign currency exchange and other gains of ZWL 1.1 billion (2020: ZWL 909 million) driven by depreciation of the ZWL against the USD.
• Overall effective tax rate of positive 0.1% (2020: 32.5%) due to once-off tax credit arising from the application of updated tax legislation in Zimbabwe as highlighted above.
• Profit attributable to shareholders and headline earnings increased by 97% and 94% respectively.
• Cash generated from operations was very strong at ZWL 3.0 billion. Of this amount, ZWL 1.8 billion was spent on investing activities.
• The Group’s cash and liquidity position remains strong. Total debt (excluding IFRS 16 liabilities) was ZWL 2 billion. Total borrowings remain below 1x annual EBITDA. The business closed with cash and cash equivalents of ZWL 1.4 billion.

Final Dividend

The Board has resolved to declare a final dividend of ZWL 79 cents per share (FY20: 18 ZWL cents per share). This takes the full year dividend to (historical cost) 132 ZWL cents per share (FY20: 23.07 ZWL cents per share). Furthermore, the Board approved a dividend of ZWL 22,206,299 to the Simbisa Employee Share Trust. The dividend will be payable in Zimbabwe dollars on or about 15 October 2021 to shareholders registered in the books of the Company close of business on 8 October 2021. The last day to trade cum-dividend is 5 October 2021 and the ex-dividend date 6 October 2021.

Corporate Governance

There are no changes to the Board since our last report.

Sustainability

Sustainability is a core part of our business model and is driven by objectives we set across key areas of our environment, people and the community. The Board is consistently reviewing its key targets and improving the way these are measured. In the current year, the key areas under focus included health and safety of employees and customers, energy use and packaging.

In view of the Covid-19 pandemic, our corporate and social responsibility has been focused on supporting the health sector and provision of necessities for the vulnerable. Simbisa Brands donated to Mpilo Hospital after a fire burnt down a doctor’s residence and on a separate occasion donated fridges and other appliances for the hospital functions. Simbisa assisted vulnerable groups (orphans and the elderly) through donations of groceries and other items. These donations ensured food security for a few months for these vulnerable groups. Recognising the critical role of media and public health communications in the fight against the Covid-19 pandemic, Simbisa donated studio and broadcasting equipment to the Zimbabwe Broadcasting Corporation to improve the efficiency of its operations. Our belief is that as a business we exist and grow when our communities are functioning and therefore, we always seek to make a positive impact.

Outlook

The Group’s focus remains on growing our footprint with 92 new stores in the pipeline in FY22 at an estimated investment cost of USD 19.3 million. Of these stores, 8 will be Drive-thru sites in line with increased focus on diversifying the Group’s customer service channels.

Maintaining high standards of health and safety in our stores will remain a priority for the sake of both our customers and our staff. As of the date of this report, restrictions on trading hours and sit-in service remain in place in our key markets, Zimbabwe and Kenya. Despite these restrictions, trading volumes remain strong. We are encouraged by government plans and the increasing availability and uptake of Covid-19 vaccines in the countries we operate in. Currently, over 80% of our Zimbabwe employees have been fully vaccinated. The business is confident of a swift upturn in customer counts as restrictions are gradually relaxed as witnessed earlier in the just ended financial year.

The Group will continue to invest in growing the Dial-a-Delivery (“DAD”) business across all its markets leveraging on a refreshed DAD app, customised tech-enabled logistics management, call-centre platforms and expanded delivery zones.

Appreciation

The past eighteen months have been extremely challenging for our staff members and their families, with many directly affected by the virus and some losing their loved ones. The Covid-19 pandemic has also brought about much uncertainty and anxiety. On behalf of the Board, I would like to thank all members of staff for their unwavering commitment and hard work. I am confident that Simbisa will emerge stronger out of this crisis. I urge all our customers and staff to continue adhering to the recommended Covid-19 health protocols.

I also would like to express the Board’s continued appreciation to our customers, suppliers and business associates for their continued support.

As Simbisa, we will continue to provide convenient, quality and affordable meals to our customers whilst maintaining the highest levels of hygiene and safety.

ABC CHINAKE
Independent Non-executive Chairman
Harare
23 September 2021

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Simbisa Brands Limited 2021 Annual Report