Padenga’s Dallaglio masterstroke

Tawanda Musarurwa

With the global exotic skins industry facing significant headwinds, particularly with recent bans on exotic skins by some key retailers in the industry, analysts say Padenga Holdings Limited’s acquisition of gold producer Dallaglio Investments (Pvt) Ltd was a masterstroke.

The acquisition of the gold producer comes on the back of the return of gold as the ultimate hedge, with its price circulating around $1 500 per ounce.

And of late, at least with regards to local production of crocodile skins, Padenga’s product risk has been heightened by the low water levels at Kariba Dam, where the company’s operations are based.

Earlier in August, Padenga finalised its acquisition of a 50,1 controlling stake in Dallaglio Investments.

The acquisition was worth US$20 million with transaction structured around capital injection into the expansion of Dallaglio’s operations.

Analysts at IH Securities say the transaction, although “unusual,” is actually value accretive and is line with Padenga’s export oriented business model.

“With 79 percent of sales in 2018 being ultimately to one luxury goods brand in Europe, the crocodile skin producer faces a significant client concentration risk.

Product and customer concentration risk is exacerbated by the nature of Padenga’s core product, with receding water levels in Lake Kariba currently below 20 percent of maximum capacity coupled with increasingly unpredictable and extreme climate conditions posing a threat to livestock farming.

“Recent years have seen increasing pressure from animal rights groups protesting the use of leather in the fashion sector.

The global movement, spear-headed by Chanel which banned the use of exotic skins, begun by the limitation and exclusion of animal furs and it has seen some of the largest players in the global exotic-skin demand chain, such as LVMH, Fendi, Christian Dior and Marc Jacobs, tighten the criteria for exotic leather to improve animal welfare, environmental preservation, working conditions of employees,” said the analysts in a recent note.

In respect to the issue of the global movement against exotic leather, the customer concentration risk for Padenga is real insofar as it currently accounts for nearly 85 percent of the global supply of Nile crocodile skins used for high-end luxury fashion brands.

The analysts also add:

“The transaction also comes against a backdrop of persisting economic adversities, including a shortage of foreign currency in the local environment.

Recently, gold prices have been benefiting from a flight to safety in global markets, as concerns rise about the impact of US-China trade tensions.

The price of gold has recovered from $1 200 an ounce last year to $1 500 an ounce, with momentum expected to remain.

“Padenga has the unique advantage of already holding a profitable foreign currency generating operation.

The group’s current resources provide some scope to develop and grow the mining operation with the prospect of an unbundling and separate listing of the mining operation once the economy stabilises.

This would be in line with an investor value creation strategy, with Padenga formerly a part of a larger group prior to its own 2010 unbundling and Zimbabwe Stock Exchange-listing.

Thus, we believe this transaction would assist the crocodile skin exporter to further garner real assets and increase export revenue, solidifying Padenga’s position as a hedge against current local market conditions.”

The group posted $195,58 million net profit in the six months ended June 30, 2019, driven by fair value gains from biological assets in line with the change in functional currency, from a 2018 figure of US$5,73 million.

Going forward, the Dallaglio transaction is expected to have a positive impact on the group’s financials.

“We project a +43,8 percent growth to US$61,1 million in aggregate revenue for FY19 as Dallaglio’s financials are to be consolidated from July 2019. Consolidated EBITDA is anticipated to be US$23,4 million in FY19, while the EBITDA margin softens to 38,2 percent in FY19 from 42,6 percent in FY18, as a softer margin in the gold mining operation is likely to average down Padenga’s overall margin,” said IH Securities.

“However, we anticipate some upside to our forecasts given medium term plans to increase capacity in both the alligator and crocodile operations. Furthermore, we expect the commissioning of Eureka Gold Mine to boost Padenga’s long-term performance.” — ebusinessweekly.com

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