OREANDA-NEWS. November 28, 2011. Renaissance Capital, the leading emerging market investment bank, has initiated research coverage on Zambeef in Zambia and Seed Co Limited in Southern Africa.

Renaissance initiated coverage on Zambeef with a target price of ZMK4,289/share (GBP0.536/share), a BUY rating on the company’s Zambian listing (ZAMB.LZ) and a HOLD rating on its London listing (ZAM LN).

Zambeef is one of the largest food producers in Zambia, a country with significant potential for food production due to its sizeable and highly-productive, undeveloped arable land and large water resources, according to Renaissance. Zambeef owns the largest irrigated row-cropping farms in the country and is an integrated agri-business involved in activities from grain production to food processing, as well as distribution and retail, with large market shares in meat, oil and dairy.

The acquisition of Mpongwe farms will increase the cereals output of the Group to 131.4kt by FY13, from an average of 47.5kt over FY07-FY10. A lack of soya and volatility in other crops has been a key issue for Zambeef’s oil (Zamanita) and feedstock production. Renaissance believes an increase in the Group’s harvest will substantially improve its volume growth potential and the profitability of these segments, and should also benefit the company’s meat and dairy production.

Given Zambeef’s strong volume growth in Zambia and West Africa, Renaissance expects revenue and EBITDA to rise at respective compound annual growth rates (CAGRs) of 17% and 57%, respectively, over FY10-FY13. However, Renaissance regards its forecasts as conservative and sees many areas for potential positive surprises on revenues and margins.

Renaissance has also initiated research coverage on Seed Co Ltd, the dominant seed producer in Southern Africa. Seed Co is the biggest seed house in Zimbabwe with a 70% market share and also has operations in Zambia and Malawi, with a 50% market share in each of these countries. Renaissance expects Seed Co’s strong research capabilities and its growing reputation and knowledge of African markets to aid its expansion ambitions into the rest of Africa.

East Africa will be the Group’s next growth hub, Renaissance believes. These markets are potentially much bigger than Seed Co’s existing markets and Seed Co is already selling in this region and has recently commenced local production. In Kenya it is only selling seed suitable for lowland areas but the real growth opportunity lies in the highlands market, according to the Firm.

Renaissance sees upside to EBITDA margins coming from economies of scale, localised production in East Africa, enhanced processing capabilities and ongoing development of higher-quality seed varieties. The Firm also thinks a potential alliance with Monsanto will help it keep abreast of modern developments and should prepare it for when genetically manufactured organism (GMO) seed comes to Africa.

Renaissance initiated coverage on Seed Co with a HOLD rating and a target price of USD 1.10/share. The target price is derived from multiples-based and DCF valuations and is in line with Seed Co’s current share price of USD 1.07/share (as of 16 November).