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Cashing in on the ‘consumer’

By Dzika Danha

The recently announced 2005 budget promises to alleviate the plight of the beleaguered Zimbabwean consumer. In light of this, we seek to highlight companies which might be

the direct beneficiaries of the newly-instituted measures and as a result outperform the market in 2005.

The acting Finance minister, whose “populist” budget brought about all manner of reaction, clearly had the Zimbabwean consumer in mind when conjuring up his proposals.

First to be addressed was increasing the tax bracket creep which had seen static tax bands, effectively exacerbating the effect on real disposable incomes as inflation took its toll. Thus the tax-free income bracket is to be widened to $12 million per annum effective January 1 2005, from $9 million.

Coupled with the widening of other tax bands, the minister expects an additional $5 trillion to be released to taxpayers.

However, it did not stop there. In keeping with the spirit of the season the tax-free portion of bonuses was increased from $100 000 to $5 million, effective from November 1. Additionally, for the older members of our community, personal credits are due to be enhanced from $120 000 to $500 000.

The measures, in the main, target the lower income-earning strand of our society. Thus our focus turns first to the food retail sector in the shape of OK Zimbabwe whose focused management and strategy has seen the company perform resiliently in recent times.

The half-year to September saw the debt-free supermarket chain solidify its market position in a hostile operating environment and turnover rose 501% on the prior comparable period to $481,8 billion.

The relatively disappointing profit growth (up 221%) was due to a deterioration in margins (net profit margins declined from 10% to 5% for HY1 ’04 to September) in line with the falling inflation as well as a marked increase in shrinkage to 2% of turnover against management’s target of 1%.

The company is now experiencing a return to its historical margins and has considerable cash resources (approximately $56,4 billion at HY1 ‘04). Consequently, we believe OK to be an excellent defensive play.

Another counter which will surely benefit from the proposals is the highly cash generative Innscor, whose interests include Spar, Bakers Inn, Chicken Inn, Nando’s, and Steers among others.

At the year-end to June, the group was sitting on a $101,3 billion cash pile. In recent years the group has increasingly been active in the region. However the bulk of earnings continue to be derived from domestic operations.

The budget also brought cheer for Delta in the form of the abolition of the 5% duty on carbonated soft drinks (CSD’s). The long-established brewer’s performance has exceeded the market’s now depressed expectations.

The half-year to September saw volumes rise by 17% resulting in a turnover increase of 455% on the prior period to $789,2 billion for the half-year to September.

This increase was driven by a growth in the group’s most profitable SBU, the lager division which experienced a 27% rise in volumes. Management’s overall strategy has been to forsake margins in the search for volume and enhanced capacity utilisation with resounding success.

Delta should benefit from increased sales in the ensuing festive season.

Edgars and Truworths, both South African-based clothing retailers and manufacturers, have performed admirably in the present macro-economic environment.

Both companies employ credit models. Of concern has been the rise in cheap Asian imports, which have negatively impacted on the performance of their lower-end stores namely, Number 1’s (Truworths) and Express (Edgars).

However, from December 1, new customs duties were implemented. Duty on clothes and textiles is now $100 000 a kilogramme plus 60% of the value of the goods. There will clearly be some lag effect before local retailers feel any positive effects, as the cheaper imports are gradually stocked out.

With the apparent easing of pressure on disposable incomes, there are still a number of hindrances to the performance of retailers as a whole.

Chief among them being the availability of stock, particularly imports which continue to be constrained by the limited foreign currency availability.

In addition, the actual auction rate, which has lagged inflation has ground informal sector exports to a halt.

In short, Zimbabwean goods have essentially become expensive in relation to our neighbour’s products thereby limiting the “informal” cross-border trade.

The week saw the release of the latest inflation figures for November.

Year-on-year inflation declined from 209% in October to 149,3% for November.

Perhaps of more significance, month-on-month inflation dropped from 10,1% in October to 7,8% for November.

Whilst there is no doubt that the rate of inflation growth has come down, due in no small measure to the overvalued foreign exchange rates, it is a worry that the weightings of the price index are really becoming skewed.

The latest figures show that communication costs (post & telecommunications) rose a whopping 2 975,6% (Y-o-Y), at a quite unbelievable weighting of only 0,3%!

This leads us to our final “consumer” stock, the country’s leading mobile operator, Econet.

The start of the year saw the regulator grant permission to the network operators to institute viable tariffs — up 500% to U$0,12, in a move towards regional levels.

This gave Econet the opportunity to begin network expansion on the back of increased revenues.

The group’s estimated subscriber base is now at over 240 000 from approximately 160 000 at the start of the year. The omnipresent Buddie will continue to spearhead growth. And who would bet against the purchase of more lines courtesy of a well-disposed budget?

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