Barbican Asset Management

OK Zimbabwe Ltd manages to beat all odds

Introduction OK Zimbabwe Ltd has managed to post fairly impressive results despite the fact that the country is faced with adverse economic challenges.

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The fact that the company managed to stay afloat, and in the process achieving a positive growth in earnings and shareholder value, speaks volumes about the management’s ability.

Background

The origins of OK Zimbabwe Ltd dates back to the 1953 incorporation of Springmaster Corporation. Later on the company had its name changed again to Deltrade Ltd before it subsequently changed to its current name in July 2001.

The year 1942 saw the company opening its first branch on First Street in Harare before opening the second one in Bulawayo 10 years later.

Thereafter Delta Corporation acquired the business operations of OK, which they held before they finally demerged in October of 2001.

Shareholder structure

The top four major shareholders are a consortium of local companies, pension funds, investments and trusts and local nominees who have 25,28%, 20,40%, 18,93% and 14,62% respectively. Worth noting is the significant interest of institutional investors in the counter. This is an indication that the market has lots of confidence in the counter.

Financial performance

With numerous challenges bedevilling the nation in general and the retail sector in particular, year-end results released by OK can only be described as encouraging. The company managed to grow its turnover by 192,9% to $47,7 billion up from $16 billion last year. Operating income surged up by 251 percentage points to $4,5 billion while its attributable earnings increased by 243%.

Interestingly, turnover growth trails behind both operating income and attributable earnings growth. This is an indication of improved operational efficiency which saw the company performing above year-on-year inflation rate.

The company achieved a 217% growth in its attributable EPS of 111 cents compared to 35 cents last year. Its dividend per share (DPS) went up by 244% to 55 cents. This shows that the company is forecasting a marked growth in future earnings to be able to sustain the current increase in DPS.

There has also been an increase in shareholder value as can be seen by the increase in the return on equity (ROE) which rose from 45% in 2002 to 72% in 2003. Additionally, the company managed to efficiently use its total assets as is evidenced by an 8% up moved in return on assets (ROA) to 32%.

The company’s balance sheet also exhibits some interesting features. It achieved a 165% upsurge in its total assets while winding up the year with no interest bearing debt in its books. Worth noting is the remarkably rise in net financing income from a negative $18 million to $184 million. This 1 093% increase was mainly due to firming short-term interest rates on the money market where the company had its savings.

It is also important to note that the company managed to maintain a positive balance in its cash flows despite increased expenditure on property, plant and equipment replacements and additions. Furthermore, it also made $197 million profit following its disposal of its 13,8% stake in Century Holdings Ltd.

Impressive results were achieved despite the fact that the company operated under price controls for the past one and a half years. With price controls dying a natural death, we expect the company to surprise the market in its next reporting.

Stock market performance

Despite commencing the year on a low note, the counter picked up the pace around June showing some upward signs. For a counter that once traded at a low price of 380 cents, its semi-annual peak of 1 000 cents was a move in the right direction. If the current phase of profit-taking on the stock market passes on, the counter is likely to experience a further upward movement.

Strengths

With 36 OK stores, five Bon Marche’ stores and four OK Express in its portfolio, the company has a branch network that covers almost every part of the country. Thus the company currently possesses a bigger percentage of the market share, which if exploited to the maximum, can yield great results.

It has also managed to push its own brands namely OK Pot O’ Gold and the Bon Marche’ Premier Choice to the market. This put it at a better competitive position given that these brands are generally less expensive than most manufacturers’ brands.

Moreover the existence of in-store banking facilities from Century Bank is working to the company’s advantage too owing to increased customer patronage.

Challenges

The impact of fuel and foreign currency shortages, hyper-inflationary conditions, power-cuts among other challenges the country is facing, is also taking its toll at OK Ltd. The erosion of customers’ disposable incomes by inflation has negatively affected the company’s turnover as most people in the low-income groups are now doing without some items traditionally regarded as necessities.

As a result the company might have to structure its prices in a manner that enable it to maintain its customer base and at the same time remaining profitable. However reduced packages on products to enable lower income groups to afford is expected to see turnover remain at respectable levels.

Forecast

Price de-controls which were put in place by the government in February this year are expected to throw a windfall at OK. Now that the company can competitively price its merchandise, we expect it to achieve marginally impressive results in the next reporting period.

Valuation

The counter is currently trading at a historic P/E of 6,7x compared to the sectorial weighted P/E of 8,6x.

The historic P/E figure together with our forecasted forward EPS of 242 cents translates to a forward P/E of 3,09x. Thus the counter can be said to be trading at a relative discount to its intrinsic value.

Conclusion

We believe the counter has the potential to release even better results in the future and hence we recommend a buy.