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Taking Stock – with Barbican Asset Management

Tax exemptions, exchange rate too late for Cottco

Introduction COTTCO focuses on the production of cotton, its processing and marketing of the by products which mainly include lint and cotton seed. The group recently

qualified for inclusion into a lower tax bracket, a reward for its ability to export more than 60% of its total output volumes.


Two of its export processing zone operations were recently granted tax exemptions.


Financial performance


Profit before tax went up 456% from $2,9 billion to $15,8 billion, well ahead of inflation, which stands at 269%. Earnings per share also shot up to 1 792 cents up from 313 cents, a staggering 473%. Dividend per share made a remarkable increase, up from 130 cents to 896 cents.


It is however interesting to note that all this was achieved on a paltry 67% increase in turnover, up from $15,8 billion to $26,4 billion during the year ended March 31 2003. It is no doubt the cost effectiveness of the group that saw it report respectable profits on the back of marginal increases in turnover.


Extraordinary items


Tax exemptions:

During the year under review, two export processing zone operations were granted tax exemptions. The groups’ ability to export more than 60% of total output enabled it to qualify for a lower tax bracket, further reducing the overall costs of the group.


Foreign asset revaluation:

The introduction of a favourable exchange rate to exporters which saw the local unit being devalued to $824 units to a single US dollar enabled the group to realise a revaluation profit of $4 billion.


Strengths


International lint prices:

Lint prices on the international market have been on the upside in the past four months, this together with the devaluation of the local dollar for exporters is a very welcome development for the group. The increase in exports volumes to more than 60% of total output volumes complements very well the firming of lint prices and the devaluation of the dollar.


Lifting of price controls:

Price controls on ginned seed and lint were lifted last month. This is also another positive development, the group can now control it’s pricing in line with production costs.


Diversification:

The acquisition of a 34,75% in Seed Co enabled the group to diversify into the cereals. Seed Co already has a well-developed market in the region and has spread its wings as far as Egypt, Tanzania and Sudan. These avenues, if well exploited by Cottco should enable the group to quickly market its products that far.


Forecast


In the next reporting period, Cottco is expected to report higher profits. It should be noted that most of the benefits came late in the trading year hence the group did not benefit much from the incentives during the year under review. In the next trading period, the incentives should reflect their impact on the groups performance.


Conclusion


A buy is recommended.

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