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Is Zambeef Products plc a falling knife to catch after falling 25% today?

Shares in Africa-focused agricultural conglomerate Zambeef Products (LSE: ZAM) collapsed by as much as 30% in early deals this morning after the company published its figures for the fiscal first half.

Unfortunately, after a strong 2016, fiscal 2017 has got off to a bad start for the company with profits falling from $6.8m to $590,000 for the year to March 31. Still, headline revenue, which many analysts believe is a better indicator of growth, rose around 20% from $98.8m to $118.4m. Gross profit dipped slightly from $39.3m to $38.5m.

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Zambeef is trying to become one of Africa’s largest vertically integrated farm-to-shop retailers. Operating mainly in Zambia, the company also has a presence in Ghana and Nigeria. The company is one of the few pureplay Africa-focused businesses trading in London, offering exposure to one of the world’s last remaining large growth markets.

However, as long-term investors will know all too well, investing in Africa is not for the faint-hearted. As with all frontier markets, the business environment is unpredictable, and even a defensive business like the supply and sale of food can be volatile.

Earnings volatility

Zambeef’s first half figures are a clear example of the company’s volatility. Profits came in below expectations thanks to a slowdown in consumer spending in Zambia after the country’s central bank imposed strict monetary control measures to combat rising inflation. The actions of Zambia’s central bank were made worse by a weak global commodity price environment. To maintain the business’s presence in this hostile environment, Zambeef’s management said today that the company has maintained its market share “at the cost of short term profit”, a decision that should pay off in the long run, but is hardly the kind of news investors want to hear. Nonetheless, management expects profitability to pick up in the second half, and the company continues to invest for growth.

Specifically, according to Chairman Jacob Mwanza’s note in today’s results release, Zambeef will “continue to expand the Cold Chain Food Production capacity to meet increasing consumer demand; complete the build out of the new stock feed plant at Mpongwe and continue to strengthen our balance sheet, through the disposal of non-core assets,” throughout the rest of the year.

Huge opportunity

It’s clear that Zambeef has a huge runway for growth in front of it. Home to over 1.2bn people with steadily growing incomes, but relatively underdeveloped infrastructure, Africa is the world’s last remaining growth market. Zambeef is investing heavily, trying to capitalise on the region’s potential but it will take time for the group to reach its optimum size.

If you’re willing to wait and assume the risk for a potentially huge reward, shares in Zambeef look incredibly cheap. Indeed, based on trailing 12 month figures the shares trade at a P/E of 5.6 and a price-to-sales ratio of around 0.23. Assuming economic headwinds in Zambia dissipate over the next 12 months, the company will be able to return to its historic level of profitability a year from now, offering potentially lucrative rewards for those investors who are willing to take on the risk.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.