It’s difficult to know what to make of Distell’s shareholders — they’re either a particularly forgiving bunch or they don’t see much connection between executive remuneration and profits.

At the recent AGM, 99% of them backed both the board’s remuneration report and the implementation report. This means it wasn’t just Remgro and the Public Investment Corp (PIC), each of which holds 31.4%, that voted in favour of a scheme that seems not to have produced the goods for the past several years.

The company’s returns have been in consistent decline. It achieved low single-digit volume declines in its first quarter to September, but thanks to price increases it was able to report a single-digit rise in revenue. Return on equity, which had peaked at 21% in 2008, is now only 12%.

Anthony Sedgwick of Abax Investments is irked by the fact that in terms of returns only executives have benefited over the past seven years.

Over that period the compound average growth of dividends was just 5.3% and the share price has also edged up by 5.4%. However, executive remuneration has had an 18.5% compound average increase over the same period.

"It’s been disappointing. There was a lot of talk and a lot of investment in capacity, but shareholders are still waiting to see the benefits — while the executives are getting paid very well," Sedgwick tells the FM. He adds: "It’s like a lot of companies where mediocre performance is well rewarded."

Remarkable, given shareholders’ ringing endorsement, is chair Jannie Durand’s acknowledgement at the meeting that the incentives need to be tweaked. At present short-and long-term incentives are largely focused on revenue and earnings before interest, tax, depreciation and amortisation (ebitda). Return on invested capital has only a 20% weighting.

Durand’s comments on possible changes may have been an attempt to ward off the mounting anger of smaller shareholders and analysts, who have waited for years for the group to deliver on the company’s perceived value.

Their expectation reached almost fever pitch over the past five or so years as the group’s control structure was reorganised — though thanks to special voting rights, control remained with Remgro — and new leadership was put in place.

Cleaning up of the group’s decades-old three-way control structure in 2017 resulted in Remgro remaining as a major shareholder, Capevin Holdings disappearing and SA Breweries (SAB) offloading at a never-to-be-seen-again R180 a share to the PIC. The restructuring ended with an extra 31% of shares coming onto the market, which should have helped underpin the sort of liquidity needed for a buoyant share price.

The appointment of former SAB executive Richard Rushton encouraged hopes of profit performance in line with Distell’s global peers. Durand told the AGM that in the past few years more former SAB executives had been hauled in to beef up management.

Chris Logan, CEO of Opportune Investments and a long-term Distell shareholder, tells the FM he was initially encouraged by the restructuring and the new leadership. "This group has wonderful brands, but for years it seemed incapable of realising its potential apart from the cider market, where it was a world-class player," says Logan. The restructuring and new leadership were expected to change that. But nothing happened. As Logan told the shareholders’ meeting, "returns have been in structural decline for at least a decade".

He says return on capital employed has been falling since at least 2009, when it was 25%; it now sits at 13%.

Not only has Distell failed to increase margins during the past decade, ebitda and operating margins are both low relative to competitors. It’s not just poorly performing acquisitions; Logan says sharp increases in employee costs are a major reason why Distell has not been able to grow margins over the past decade. "Employee costs as a percentage of sales have risen from 10.6% in 2009 to 15.8% in 2019."

An analysis by David Holland of Fractal Value Advisors links the long-term structural decline in Distell’s profitability to the emphasis placed on growth in revenue and ebitda in the group’s incentive scheme.

"Revenue and ebitda can be grown [even when] investing in projects and acquisitions that destroy value," says Holland. A notable example of this destruction is the R524m impairment that had to be taken in 2019 on the Best Global Brands acquisition. The impairment is equivalent to about two-thirds of the value paid for the asset just two years earlier.

An analyst who has abandoned coverage of Distell was concerned about its expansion plans being primarily focused on Africa.

"It’s made some good moves, like closing production facilities and moving some facilities to Gauteng, but I’m going to wait until I see signs of progress," says the analyst, who does not want to be named.

Durand urges shareholders to be patient. He says since 2012 the group has spent a lot of money optimising its production facilities and modernising its route to market. "We had probably neglected the assets. Now we must leverage this investment and get margin growth."

But it could be a long wait. Durand foresees some opportunities three or four years down the line but cautions it could be longer.

"We’re not in it for the short term; it’s for the next generation," he says.