At The Market with Tetrad
THE “mini” reporting season for companies with March/April interims or year ends began this week with the publication of year-end results to March 2003 for OK and Pelhams and interi
m results to the same date for Gulliver.
Beginning with the results of OK, the company produced a commendable performance given an environment characterised by falling real disposable incomes, price controls and forex shortages and their resultant negative effects on the volume of spending and merchandise availability.
Under these conditions, unit volumes continued to decline mirroring the trend observed at half year. Thanks to strategic stockholdings that had been built up however, the company managed, through pricing, to increase turnover by 193% to $47,7 billion compared with the year ended March 2002.
Growth in overheads at 152% was contained to below the increase in turnover and this saw the company’s efficiency as measured by overheads as a percentage of sales improve to 13,2% from 15,5%. This, combined with a better product mix which perversely was in part facilitated by the shortage of low margin basic commodities available for sale, boosted operating margins which advanced from 8% to 11%. The growth in operating profits was thus amplified when compared to that of turnover, the former up 252% to $4,5 billion.
Strong cash generation and the uplift in money market rates resulted in the company moving from an interest outflow position in 2002 of $19 million to a positive $184 million. Taxation at 19% was higher than last year’s 12%, and indeed above management expectations, as the company spent less on capex and thus did not realise the expected quantum of tax allowances.
Attributable earnings of $3,8 billion were realised, an increase of 243% on the previous year.
With price controls and freezes largely removed, although the absence of the Statutory Instrument to this effect has left some confusion in the market as to what the new regulations vis-a-vis price monitoring etc actually entail, OK should see an improvement in margins going forward. Volume sales are not likely to see an uplift, however, whilst ensuring product availability, which has hitherto been supported by imports, will continue in the short- to medium-term to present a major challenge to the company.
Furniture credit retailer and former OK stablemate, Pelhams, produced similarly commendable results as it faced much the same operating environment as OK, along with the added challenge of running a credit business in a hyperinflationary environment characterised by negative real interest rates.
Turnover was up 165% to $6,2 billion, pricing again being the major driver of growth, as overall volumes declined by 15%. The decline in volumes would have been higher were it not for a massive third quarter that saw volumes grow by over 50% over the corresponding period courtesy of speculative spending ahead of the budget and the traditional festive season boom.
In a bid to offset the aforementioned effects of inflation as well as negative interest rates on the company’s credit retail model, a deliberate attempt was made to push cash sales. This saw them contributing 35% to turnover compared with 20% in 2002. The effect was a boost in trading profits, which excludes finance charges earned, as a percentage of operating income which jumped from 20% to 39%.
This has a positive effect on margins bearing in mind the fact that finance charges are spread over the length of the credit contract. Thus more revenue was accounted for now, rather than accrued for a later period.
Thus whilst finance charges only increased 104% to $1,4 billion, the above factors, allied with the investment in inventories and resultant ability to reprice as well as tight overhead management that restricted cost increases to just 141%, had the effect of improving operating margins by 9% to 54%. Operating profits of $3,3 billion were made, an increase of 216%.
Attributable earnings for the year at $2,3 billion reflected growth which at 180% was higher than average inflation for the period but lagged the year-on-year inflation figure for March 2003 of 228%.
Looking ahead, the company has continued with its stock holding strategy, with current inventories expected to last an average of three months. The company is also looking into the securitisation of part of its debtors’ book in an attempt to hedge against the effects of hyper inflation on finance charges.
Only a portion of the book will be released however so as not to jeopardise the tax advantages of carrying a credit book. Expansion organically and by way of acquisition both locally and into the region is envisaged as the company sees volume growth as being critical to its success going forward.
Gulliver’s interim results for the six months ended March 31 2003 reflected the benefits of the stability brought about by the reorganisation of the group. This stability was evidenced by the fact that in the past six months, unlike previous years, there were no new acquisitions or disposals.
Turnover for the group at $2,2 billion was up 228% on the corresponding period last year and matched the official inflation figure for March. The star performers for the group were Morewear and Moresteel which recorded close to 20% growth in volumes thanks to a better product mix. Industrial Galvanising & Fabricating, Lysaght Steel Merchants and Megasteel returned solid performances thanks to pricing offsetting the decline in volumes.
Exports however remained low hampered by punitive tariffs imposed by the Zambian authorities and the expiry of the hire contract in Tanzania for tanker wagons which was not immediately replaced. As with many other local companies, Zambia had been the biggest export market for Gulliver.
Operating profits grew by 310% to $504 million, as margins improved by four percentage points to 23%. The improvement in margins was as a result of a greater ability by the group to concentrate on improving pricing structures, productivity and marketing.
Net financing costs went up fourteen fold to $10 million, as the group increased its borrowings to fund working capital and export orders by taking advantage of concessionary facilities. Most of the funds were invested in stocks which reflected an increase of $558 million as at the balance sheet date.
The high tax rate of 35%, a result of reduced capital expenditure during the period, allied with the 919% increase in profits attributable to minority shareholders courtesy of increased profitability at Moresteel, diluted the increase in bottom line earnings to 216%. At $275 million however, this figure surpassed the $213 million achieved the whole of last year.
The outlook for Gulliver which has seen the current economic challenges, especially power outages, result in a 60% loss in production are likely to constrain the group’s operations. The group will continue with the stock holding strategy, given its net importer status.
A speedy resolution to the Zambian embargo and a possible revision of its punitive tariff regime together with targeted railway related work should see Gulliver maintaining the same trend in the second half.