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At the Market with Tetrad

Viability concerns tie down Cable exports

By Brian K Mugabe

THE stock market seems not to have recovered from its pre-holiday hangover, continuing to reflect bearish sentiment upon r

e-opening on Wednesday wishing perhaps, like many of us, that the whole week had been a public holiday!

Volumes remained relatively depressed as the industrials shed 13 953 points (1,57%) to close at 873 144. While of the 47 counters that traded, those that experienced a price advance were comfortably ahead of those that declined, at 21 versus eight with 18 trading unchanged, the presence of big caps such as Old Mutual and Delta in the losing camp meant that the index dipped on the day.

Leading the bears in last week’s trading was cable manufacturer Cafca which closed the week to August 6 49% weaker having published dire results the previous day. Like Pioneer before it, these had been anticipated following the issuance of a profit warning but not to the extent reflected in the published accounts.

Turnover for the six months to June was up just 96% to $15,4 billion, being price driven as local sales increased 211% against a 44% volume decline. Exports were down both in value and volume terms by 27% and 64%, respectively. The performance of exports was negatively affected in a material fashion by the unviable blend rate that prevailed during much of the first half of the year which led at one stage to their suspension. The net impact on volumes was a reduction of 53%.

While the exchange rate remained static and local demand was depressed, thereby minimising sales, costs were not affected in the same way as local inflation continued to rise. In fact, the extent of the increase in costs led to the company recording an operating loss of $2,6 billion compared with a profit of $3,3 billion during the same period of 2003.

One positive feature of the income statement was the decrease in finance charges of 70% to $80 million, down from $262 million. This was due to the company being able to access the productive sector facility, enough to meet most of its financing requirements.

Nevertheless, the bottom line still reflected a loss for shareholders of $2,7 billion, attributable earnings of $2,1 billion having been earned in the first half of last year.

While conceding that the environment will remain tough in the second half, the company has begun adopting strategies to improve its situation which include a retrenchment exercise to contain the cost side. Efforts to encourage prepayments from export customers have been made, thus bringing some viability to exports to promote revenue growth on the income side. A return to a more “normal” performance is only expected in the first quarter of 2005.

Kingdom became the first of the banks to produce its interim results to June 30 2003 this week and as expected, the results reflected less of the speculative “derivative and other income” that has dominated the revenue streams of banks over the past three or so years as the spread between lending and borrowing rates drove interest income growth.

Net interest income was up 1 184% to $93 billion. This contributed 83% to total income compared with a contribution of 37% last year. Other contributions to revenue arose from dealing profits of $5,8 billion which were down 32% while “other income” was up 228% driven by fees receivable growth and a $2,5 billion profit on the sale of the group’s investment in Investrust of Zambia. Total income of $112 billion was recorded.

Cost containment as with all companies this year remained a challenge, expenses increasing eight-fold to $51 billion, with the cost to income ratio deteriorating from 33% to 46%. After accounting for a bad debt provision of $2,6 billion which left cumulative provisions at 6% of the advances book, and $734 million worth of equity earnings from the Malawi investment, profit before tax of $59 billion was recorded. Attributable earnings of $32 billion were attained for the period – a 274% increase on last year.

With the monetary policy review indicating an expectation for lending rates to fall in line with falling inflation targets and the general reduction in speculative activity revenues such as forex and the stock market expected to continue, the second half will prove challenging for all banks, not just Kingdom. This will be compounded by the recently approved salary adjustments for the sector of 220%, backdated to July, plus a further 55% in October. To this end the group will look at boosting its capital, grow its book size to offset lower margins as well as consolidate its position possibly by merger or acquisition to try and at least maintain its performance going forward.

Talking of consolidation in the financial services sector, First Bank and Sare shareholders approved on Wednesday the acquisition of the latter by the former. To facilitate the deal, First Bank was restructured from a purely banking institution to that of bank holding company through the reversal of First Bank into FBC Holdings, enabling it to separate the roles between the bank and the holding company. This will allow the former to focus on core banking activities while the latter will seek to explore other consolidation initiatives – one being the acquisition of Sare.

The transaction will see Sare members being entitled to 21 new FBC Holdings shares for every 10 Sare shares already held. After completion, Sare shareholders will effectively own 16% of FBC Holdings.

Benefits for the reinsurer will be that its capacity constraints will be addressed, allowing Sare to grow its balance sheet and by so doing increase its underwriting capacity. Other cross-selling opportunities will be exploited between the company and the bank and it is envisaged that significant cost savings will be realised in the medium to long-term.

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