THE current low global tea prices pose a significant challenge to Tanganda Tea Company's prospects for a robust recovery, despite the potential for an improved 2024/25 agricultural season, according to Morgan & Co.
The growing stockpiles in major tea producing countries like China and Kenya have resulted in the global price of tea facing significant downward pressures.
“We anticipate that the price of tea will likely remain at current levels, if not lower, in the second half of Tanganda's FY24 (financial year) 2024 and possibly in FY25 as well,” Morgan & Co said in its analysis of Tanganda’s financial statements for the half year ended March 31, 2024.
“Tea production will likely remain constrained considering the impact of El Niño which continues to wreak havoc in Zimbabwe's agriculture sector.
“Although increased rainfall is being forecasted in the coming season, the low global tea price will challenge Tanganda's chances of a strong rebound.
“The price of other commodities, macadamia nuts and coffee, has been firming globally but the contribution of these crops to Tanganda's top line remains too low to upend the challenges in tea sales.
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“That said, we opine that Tanganda will likely see net margins improve on the back of slower inflation since the introduction of the new currency in April 2024,” it said.
In the period under review, Tanganda reported a 6% decline in total revenue to US$11 million on the back of lower tea production and a weaker tea price.
El Niño was the key driver to lower volumes, while growing stockpiles of tea globally weighed on the price. Coffee export volumes and prices were firmer, but not enough to upend the challenges in bulk and packed tea sales.
Operating costs were higher because of inflation, and this watered down the business' net margin.
The seasonality of the business resulted in higher inventories, which were largely made up of raw materials and agricultural produce.
A combination of capital expenditure, debt repayments and net operating cash outflows underpinned the lower cash generated in the half year, which was only supported by additional debt.
In the outlook, Tanganda said the operating environment was expected to remain complex due to rapid policy changes and escalation of costs.
It noted that tax measures adopted in the 2024 budget have an impact of increasing the cost of production.
“The demand for our products remains relatively strong despite the impact of complex macro-economic factors on the local, regional and international markets,” the company said.
“Sustainable market diversification will continue to be pursued to expand the regional and international markets.”
Tanganda is optimistic that it has put in place mitigatory strategies to navigate the difficult terrain.
It said focus would be on improving efficiencies across the company by re-engineering all processes and managing costs.