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At The Market with Tetrad

Is current bull run a case of history repeating itself

Brian Mugabe

HAD anyone taken up my wager last week that the industrial index would push through the 300 000 mark sooner rather

than later I would have been a happy man indeed given this week’s phenomenal run by the stock market.

The index in the week to Wednesday put on 16,5% or 42 840 points to close at 302 831 points.

As the chart shows, the index has followed a similar trend to that of the same period last year, where notable profit-taking was only experienced in August following a strong rally that saw it cross the 100 000 level. Will this year prove similar or will the market just run on and on and on? My crystal ball remains murky on that one!

Continuing with a review of recent results, one company whose share price has been weak despite the monster rally on the stock exchange is TZI. The company seems to still be suffering from investor weariness following last year’s two seemingly conflicting profit warnings, in spite of steps taken by management to clarify the circumstances surrounding the issue.

The results for the half-year ended March 31 2003, during which the company further diluted its holding in Art, which was accounted for as a discontinuing operation saw turnover for the continuing operations increasing by 402% to $15,4 billion. Continuing operations are now made up of the export horticulture and health and insurance businesses. The former, mainly through Zambian-based Agriflora, was the main contributor to turnover with 69%, this despite low yields caused by severe water shortages and continued underutilisation at Fresca.

Operating profits at $3,4 billion were up 624% as margins gained 7 percentage points to 22%. Of concern however was the fact that this growth stemmed less from core operations than from profits from the sale of subsidiaries and exchange gains on short-term investments which contributed $1,3 billion and $1,2 billion respectively. The share of Art’s profits amounted to $1,4 billion, though this was offset by the interest payable charge of $1,4 billion. The interest charge was eight times higher than in 2002 as further capex was undertaken.

Attributable earnings of $3,1 billion were attained by the continuing operations compared with $259 million in 2002. Taking into account earnings from Art, this translated to bottom line earnings of $4 billion.

The second half should see a stronger performance from TZI as the nature of the agricultural cycle favours the second half of the year. Increased capacity utilisation is also expected to result in higher margins, while any movement in the exchange rate will also naturally translate into greater earnings.

Another agro-export company, Tanganda, produced sterling interim results for the six months to April 2003. The performance was well above market expectations and this saw the price in the tightly-held shares going from $500 on June 19 to its next trading price of $910 on June 25 the day the results were published!

Driven again by the movement in the exchange rate, with export volumes making up 70%, turnover grew by 353% to $7,2 billion. Tea production was roughly unchanged at 7 494 tonnes compared with 7 460 tonnes at half-year 2002 while the beverage division saw lower volumes as price controls and the trade embargo with Zambia had a negative impact.

Operating costs were well-managed, growing by just 113% to $2 billion. Against that backdrop and the exchange rate adjustment, operating margins surged to a staggering 72% from 40% and as a result operating profits went up 720% to $5,1 billion.

Net interest and treasury income was $389 million compared with $14 million last year which went further towards boosting earnings. The EPZ benefits arising from the Tingamira tea processing factory meant that the tax rate remained low at 12,4% and attributable earnings of $4,8 billion were achieved, up 762%.

Like TZI, the second half should remain, as is traditional, the stronger, buoyed up by the removal of price controls on the beverage division’s products, the “substantial” export and stock debtors held at the end of the interim period at “conservative rates” and the completion of a second production line at Tingamira, amongst other factors.

Apex, following from the excellent results of subsidiary Phoenix, produced a similarly impressive performance.

Group sales at $5,8 billion were up 270%, with Phoenix contributing $3 billion, while the communications and printing division came in with $1,6 billion, foundries division $1,2 billion and Falkirk trading, the foreign subsidiary, $325 million.

Operating margins doubled from 15% to 30% and operating profits went up by 647% to $1,7 billion, the margins being driven largely by Phoenix and an above expectation performance from the foundries division thanks to the growth in exports. Also included in operating profits was $142 million relating to the revaluation of Gullivers shares held as an investment by the group.

Interest charged was up 116% to $105 million, and after accounting for goodwill amortisation of $3 million, attributable earnings of $772 million were recorded, up 968% on the 2002 figure.

Going forward, the group foresees greater exports stemming from the foundries division while the outlook for Falkirk continues to look promising. It is anticipated that the balance sheet will be further strengthened by the continual general reduction in borrowings, though efforts to access concessionary exporter finance will continue. The second half should thus yield more of the same for Apex.

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