At The Market with Tetrad

Bulls continue reacting to the red flag

Brian Mugabe

AS has become a mid-monthly occurrence, the announcement of the latest inflation figure for the month of June last week of 364,5%

proved to be the red flag to further enrage the bulls on the stock market and this saw the industrial index smashing through the 400 000 mark to close Wednesday at a record high of 403 470 points. (A record likely to have been eclipsed by the time this article is published!).






Comments from the country’s chief executive during his Parliamentary opening address to the effect that interest rates would in all likelihood be in fact reduced from the current levels, also gave further impetus to the market rally.


These two factors allied with the onset of the June reporting season saw the index jump a massive 22% in the week to Wednesday. Share price declines were hugely in the minority, with only five of the 80 listed counters retreating, while 70 showed a gain of some sort and five traded unchanged.


The losers were Afdis, Rio Tinto, BAT, Finhold and Hippo, while the gainers were led by Falcon, Zimnat Lion, Zimpapers (!), OK and Clan, with gains of between 358% and 89% in that order. The presence of the likes of perennial underperformer Zimpapers in the top five for the week again underscores the amount of speculative activity that is prevalent in our market with share prices at times responding to invisible fundamentals to the detriment of the witless investor who buys at the top of a speculative rally and is left holding the can when the price drops and returns to where it rightfully belongs.


Such is the nature of stock markets I guess, that when someone is making money, there has to be a fall guy on the other side taking a knock.


Also receiving “special” mention in the president’s speech was the financial services sector which contrary to the ubiquitous “situation on the ground” vis-a-vis our struggling economy continues to make impressive profits by taking advantage of the economic anomalies.


The hawkish attention the sector continues to receive, which culminated in the introduction of a 5% levy on financial institution profits in the 2002 budget, seems a bit unfair given that exporters for example, have at times produced results that outperformed the financials.


Perhaps it is this attention, as well as the continued debate on the sustainability of forex transaction related income and the fact that any economic meltdown or sudden return to economic fundamentals such as real interest rates would hit banks hard, that has seen the share prices of most in the sector lag the industrial index over the past one and a half years as the chart shows.


No doubt the current shortage of cash and generally poor service availed to customers in many a banking hall against a backdrop of ever-rising charges does not help to engender positive sentiment towards the sector by potential investors either! But having been largely ignored for the past 18 months, one suspects a re-rating of the sector could occur sooner rather than later.


Pelhams this week issued a statement to analysts and fund managers where it updated the market on its performance for the quarter ended June 30 2003.


Volumes on major lines were down 5% on budget and 30% on the same period in 2002, and consequently net sales for the quarter at $3,1 billion, grew by only 230%, as resistance to inflation-driven prices began to be felt.

Although the growth in net sales lagged behind the average inflation for the period of 311,3%, gross profit margins improved by 8,82%, courtesy of an improved sales mix. The increase in overheads inclusive of provisions and bad debts of 314%, which was in line with average inflation for the period, was offset by finance charges income described as “satisfactory” and exchange gains on foreign currency holdings. This resulted in a 428% growth in operating profits.


Net interest payable at $220 million, represented a negative turnaround on last year following the group’s decision to finance working capital requirements out of borrowings, which stood at $2,3 billion at the close of the quarter. Attributable earnings for the quarter at just over $1 billion were up more than four times on last year’s $240 million.


Although the debtors’ book has more than doubled to $4,6 billion, quality has been maintained with arrears kept to below 1%. However the intended securitisation of the book has not yet come to fruition, as its fixed interest nature is proving unattractive to financiers, which is understandable given the hyperinflationary scenario. In an attempt to retire portions of the book early, the company will in future be offering early settlement discounts.


Going forward the company anticipates that new branches to be opened over the remainder of this year will lead to volumes picking up. The strategy to hold stocks together with the ongoing salary reviews and the big spend associated with the festive season should see more of the same for

Pelhams going forward.


The reporting season kicks off in earnest next week with Interfresh set to be the first to report to the market by way of an investor presentation to be held on July 30 2003. These results will probably set a benchmark as to whether the market’s expectations as witnessed by the current rally are justified. We thus await these results with bated breath.

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