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At the Market -Tertrad Group

Gloria, gloria in exCelsys for stock market investors?

IN a month that saw the industrial index trade in a largely lacklustre and sideways pattern, the listing of Celsys by way of introduction on Wednesday April 30 provi

ded some excitement to the market.

Of course speculators who had bought into Falgold as high up as $12 in anticipation of a reverse listing that in the end did not come to fruition no doubt felt an emotion somewhat different from excitement! On its first day’s trading, the company went as high as $17 before eventually closing at $16,05 which was in line with market expectations.

Celsys became the second “tech” stock after Econet to list on the local bourse. The company commenced operations as Cellular Systems (Pvt) Ltd in 1996 when it was primarily in the business of retailing mobile handsets and ancillary accessories. This business grew until in August 2000 the decision was made to pursue a mobile retail operator (MRO) model whereby Celsys began branding and packaging handsets with lines and airtime for local distribution both on a cash and credit basis.

In November 2001 a bulk supply agreement was entered with Econet, whereby Celsys was to secure a minimum of 15 000 lines as well as airtime from the network, in exchange for $600 million which was to assist Econet in upgrading its network. In April of 2002 the company then diversified its business through the acquisition of printing company, NCR/Systemedia, whereupon it underwent a restructuring exercise splitting itself up into retail and printing divisions.

Following these events and the conclusion of three private placements during the course of the periods just reviewed the company then sought and achieved its listing on the ZSE so as to “facilitate implementation of its identified future growth strategy”.

In terms of its financial performance the company has exhibited impressive growth over the last five years going from earnings of 0,24c/share to 42,44c/share. The latter figure represented interim earnings per share for the half year to January 31 2003 and just below those for the full year to July 31 2002 as the group began to unlock the synergies that flowed following the acquisition of NCR/Systemedia.

The printing division is likely to prove the main growth area for the business with value having already begun to be unlocked, as evidenced by the fact that the recharge card printing business has seen production surge from approximately 400 000 cards per month to about four million in the space of 12 months. The division, according to the company’s estimates, currently holds 65% of the cheque printing market and 70% of the recharge card printing market in the country. It is looking to expand further both organically and through acquisition into the local and regional markets. Going forward, the company is looking to further diversify its revenue streams by developing a mobile payphone service as well as mobile payment systems.

Risks do exist for the group of course. These include the availability and cost of forex which is essential for the importation of handsets etc; interest rate risk, in particular with the company having been geared to the tune of 90% at January 31 and rates trending upwards; and of course the risks relating to the reliance on networks and their ability to grow their operations given the prohibitive costs of capital expansion. The latter not only impacts on the ability of the networks to issue additional lines but also on the demand for recharge cards.

Research by Mobile Metrix, an applied business and consumer research and consulting company that was established in Sweden to fulfil the needs of customers involved in the global mobile telephony industry, has listed the following factors as being amongst the most critical in the success of the MRO model: a strong brand or brand building capabilities; a large existing customer base; strong marketing ability (marketing in its full sense not just market communication but also the ability to understand customer needs and act upon these needs); large cash resources or investment commitment and good distribution ability or distribution chain.

Celsys has gone some way towards meeting most of these challenges. Further aided by the diversification of operations and revenue streams and the fact that it is currently by far the most dominant player, locally at least, in its two main lines of business suggest that the company certainly has the potential to grow from strength to strength.

Turning to other news, Rio Tinto published its quarterly production report for the first quarter ended March 31 2003. This showed a marked decline in output across the board. Gold output from Renco Mine declined by 31% to 5 471 ounces compared with the first quarter of 2002 whilst Patchway Mine recorded a 63% decline to 1 009 ounces. The decline in the total amount of gold produced, which was down by 39% to 6 480 ounces, was attributed to foreign currency shortages in the Gold Fund which affected supply of essential stores in January, an industrial action in February and the impact of cyclone Japheth in March. The company estimates that approximately 30 days production was lost due to the aforementioned factors. In addition to the abovementioned reasons the closure of the Camp Dump Retreatment plant also went some way towards accounting for the decline in production.

Production from Empress Nickel Refinery at 1 078 tonnes was down by 605 tonnes on the first quarter of 2002. The refinery was closed for most of March this year following a furnace breakdown which resulted in the cessation of matte deliveries at BCL in Botswana.

The last few weeks have seen a spate of cautionary announcements being released by various companies, namely ZSR, Clan and Zimsun.

We start with ZSR which subsequent to the announcement on April 10 2003 advised shareholders that the group had started negotiations regarding the acquisition of another business, and that agreement in principle had been reached. If satisfactorily completed, which depends upon the results of a due diligence exercise as well as other conditions precedent, the agreement will give ZSR an interest of 75% in Advance Wholesalers (Pvt) Ltd. The acquisition of the Bulawayo-based wholesaler coming soon after the acquisition of Bhadella Wholesalers by Red Star, the wholesale division of the group, should see ZSR gaining a stronger foothold in that particular business sector and further reduce reliance on the price sensitive sugar business.

The leisure group, Zimsun, also advised shareholders that, further to previous announcements regarding its unbundling, the requisite applications to the relevant authorities were still pending.

Clan, further to its cautionary published on April 8, advised shareholders that the requisite applications to the relevant regulatory authorities were still ongoing. Speculation of a reverse takeover by a company linked to the new shareholder continues to make the rounds in the market.

In all instances shareholders were advised to continue to exercise caution when dealing with their shares.

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