At the market with Tetrad

An impressive performance built on Trust


By Brian K Mugabe

THE industrial index finally took a breather on Tuesday and Wednesday this week, shedding a combined 20,202 points to cl

ose Wednesday at 567 427 points.


This was after it had peaked on Monday at a record 58 629 points, following the at times nerve-wracking and seemingly gravity defying vertical surge in July that saw the index more than doubling to close the month at 571 168 points.


As the table shows, the herd mentality firmly took hold of the bulls, with every single counter recording a gain of some sort. The presence of three mining counters in the top five performers certainly comes as a surprise given the well-documented problems bedevilling the industry, while Century at pole position is even more of a shock.


With results from the banking sector likely to be amazing as intimated by those of Trust, it will be interesting to see whether Century, which has significantly underperformed its peers in recent years, can justify its current billing. The reporting season has continued to pick up steam with the announcement this week of financial results by Caps, Dairibord and Trust.


I will begin with those of the latter, by virtue of the bank having produced a truly staggering interim performance for the six months to June. The group’s performance was driven by the strong showing from all its businesses, but in particular the flagship Trust Bank Corporation, which contributed the bulk of bottom line earnings at 85%. The group’s ability to access cheaper funding via its expanding retail bank deposit base, as well as its strong-structured lending competency saw net interest income going up by 666% to $16,9 billion compared to the first half of 2002.


A 630% rise in net trading income to $5 billion, profits on investments which at $2,9 billion were 48 times higher than last year and a 181% increase in fees and commission income to $4,1 billion, all helped boost operating income which leapt from $4,3 billion to $28,8 billion. Operating expenses growth at 396% was kept at well below that of revenues and this saw the cost to income ratio improve to 24% from 32% during the comparative period. The bad debts provision was up just 64% to $964 million, a factor, which was attributed to the fact that approximately 40% of the loan book consist of “self-liquidating structured lending”. Operating profits of $21 billion were recorded, up 780%.


Income from associates of $45 million, arising mostly from Tristar Insurance, with a negligible contribution from the Malawian venture, as well as a reduction in the tax rate from 31% to 28% resulted in attributable earnings for the half year of $15,1 billion being attained. This was 817% ahead of the first half of 2002 and 150% ahead of the full year! The balance sheet has experienced impressive growth from the year-end courtesy of inflation, movements in the exchange rate and new business, with total assets having gone from $99 billion to $203 billion.


With the regional operations expected to make more of a contribution in the second half, movements in the currency and inflation likely to continue moving one way, and the continued expansion of the business through strategic partnerships and organic growth, the group is confident of eclipsing this performance in the remainder of the year. On the basis of these results, who would I be to argue with that? Caps has continued on its recovery path, producing a solid performance for the half year to June 30. Turnover growth at 286% to $10 billion lagged inflation somewhat. This reflected not only the negative impact of price controls on the group’s products during the first half of the year, but also a new focus away from turnover and towards margins.


This strategy saw operating profit before interest and exchange rate adjustments increasing by 640% to $3,5 billion, representing a margin of 35%, virtually double the 18% achieved at the same stage in 2002. With the company generating sufficient forex such that manufacturing subsidiary Caps Rallis, for the first time in its history did not have to source currency from the market, the group actually recorded an exchange gain of $698 million against a loss of $716 million. An operating profit of $4,2 billion was thus realised, compared with the loss of $246 million in 2002. On the back of this operational performance, attributable earnings of $2 billion were generated, a noteworthy turnaround from the loss making position of $597 million at the prior half year, and like Trust, exceeding the full year to December 2002 which had recorded a net profit of $536 million. Given the challenges that faced the dairy industry during the first half of the year, in particular, price controls and the effects of the agrarian reforms, Dairibord’s interim results were nothing short of praiseworthy.


With the price of milk having been frozen at below inflation levels for five months of the reporting period, and a 27% decline in raw milk supplies which was insufficient to meet both local and export demand, turnover growth of a sub-inflation 298% to $22,6 billion was recorded. Despite having to sell milk at a loss, operating profits increased by 582% to $3,9 billion, thanks to the strategy to diversify away from plain milk based products to non-milk and high margin value added milk products, which contributed 49% to group earnings.


The changed sales mix and stringent cost controls saw operating margins improve by 7% to 17%. Net finance charges of $107 million were incurred, compared with a net interest income position of $47 million in the previous year, as the group took advantage of the concessionary borrowing facilities to help fund working capital requirements. The latest addition to the group in the form of associate Charhons, made a contribution of $709 million, resulting in profits before tax increasing by 627% to $4,5 billion. With outside shareholders registering a 989% increase in profits attributable to them, bottom line earnings growth was somewhat diluted to a still impressive 612%, with $3,2 billion being realised.


On the basis of these results, and with the inflation figure for July expected shortly, one could only anticipate that the slump this week recorded by the stock market should prove very temporary. Is this bull market sustainable? Who knows?

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