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TETRAD – What a difference a year makes!

By Brian K Mugabe

THE stock market’s performance over the month of September makes grim reading as it continued the trend set in August when the Industrial index shed 2,71%. This time it lost a further 2,95%

, or 26,457 points, to close at 871,124 points.

The apathy among investors reflected the continued difficulties being faced by industry as evidenced by most of the results published in September which marked the end of the June/July reporting season. Corporate profitability, in most instances, is at distressed levels with declining volumes, rising costs and a severely overvalued Zimbabwe dollar.

Whilst these factors have to some extent been offset by access to cheap productive sector funding, this has not been enough to mitigate the fall in profitability for most companies. Furthermore, though the stock market appears unbelievably cheap in terms of earnings valuations, uncertainty ahead of an election year has made forward projections increasingly difficult, as historically economics have tended to take a back seat to politics at such times, thus introducing risks that are unquantifiable in value terms.

The other factors contributing to poor sentiment are the third quarter monetary policy review, expected this month (October), the advent of which has been a trigger for profit taking in the past two reviews, as well as the September 30 deadline for financial institutions to meet their new capital requirements, failure over which would lead to closures or forced mergers and acquisitions.

The continued inability of the forex auction to adequately satisfy demand has also put a damper on things, as would have been the reappearance of fuel queues towards the end of last month. With money market interest rates firming slightly on the back of an illiquid market also joining the fray, such an environment is not naturally conducive to a stock market rally.

September 30 also brought with it the end of the third quarter of 2004, a quarter during which the industrial index gained a mere 25,7%. The huge changes that the economy has undergone, in particular relating to official measures to reduce speculative activity, becomes apparent when this is contrasted with the industrial index’s performance in the third quarter of last year as shown in the table, when it gained a massive 134%!

Highlighting the sustained downturn in economic performance are the results of Tedco as well as a dismal profit warning from the troubled PGI.

Tedco’s results for the six months to June, published soon after the conclusion of the rights issue which was 70% subscribed, without doubt made unpleasant reading to shareholders.

Turnover grew from $5,7 billion to $31,2 billion, as the retail division was caught holding huge stocks of expensive and slow moving electrical items whilst the manufacturing arm was affected by the appreciation in the local currency which rendered its exports unviable.

The sluggish growth in revenue was not matched by a corresponding slowdown in operating expenses and this saw an operating loss of $2,3 billion being recorded, attributed mainly to the decline in margins in the retail division. The group found itself in a vicious circle in which huge interest payments made it impossible for it to restock and therefore continue trading.

In-house trading between manufacturing and retail further exacerbated the problems as the latter could not pay for merchandise supplied, thereby further crippling the former. Against this background, net interest charges of $11,4 billion were incurred resulting in a loss attributable to shareholders of $15 billion.

Part of the funds raised in the rights issue will be used to retire some of the non PSF borrowings, whilst the disposal of non-core assets and properties is expected to augment the recovery measures that have been instituted by the board. However, these steps together with the improvement in trading expected in the second half, will not be enough to cover the losses incurred to date.

PG Industries in its cautionary statement advised shareholders that the difficulties experienced by the group in the first three months of the year are yet to be overcome. These included foreign currency shortages, high interest rates and low domestic demand, particularly in the furniture and construction sectors.

Export viability has continued to be eroded as operating costs have continued to increase without a corresponding increase in revenues due to the virtually static exchange rate. In addition to the above, the group has not been able to convert all its debt to cheaper concessionary funds. Debt levels have in fact increased beyond those originally anticipated. Thus the group’s performance for the half year to September 30 will show significant losses.

The change in the fortunes of PG shows what can happen in just 12 months. This time last year PG was a high flyer trading at $375, a far cry from yesterday’s close of $35.

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