TETRAD – Delta results balanced to market satisfaction


By Admire Mavolwane

THE last week should be a really memorable one for stock market investors. The industrial index was in positive territory for five consecutive days, the first time th

is has happened since July 19. Friday’s close of 895 102 points reflected a week on week gain of 7.61%. The main drivers of the upward movement were blue chip Delta and foreign currency hedge stock PPC which gained 33% and 28%, to $1 400 and $250 000 respectively. Other counters to trade positively were Innscor, Nmb, Astra, and SeedCo with gains ranging from 13% to 20% in the same order.


The bottom five were anchored by TA, which lost 21% to $110, followed by Ariston, David Whitehead, and Zimplow. The price of Zimplow came under pressure following the publication of an unfavourable cautionary statement in which shareholders were advised that whilst local volumes had declined by 30% year on year exports had increased by a similar margin. However, the year on year increase in the value of the exports has not translated into profits due to the static exchange rate, against local inflation induced increases in costs. Consequently earnings for the five months to November would be substantially lower than for the same period last year.


The rally turned out to be a five-day wonder as most of the past week’s gains have been reversed. Since Monday successive losses have been recorded such that by close of trading on Wednesday the industrial index had lost 5% to close on 849 750 points. The main villain was Delta which lost 22%, or $250 to $1 099 in the three days. The other culprit was Cottco which lost 25% in the same period. The latter’s fall followed the release of six months to September 30 results which came out way below even the most pessimistic analyst’s expectations. Delta’s price weakness was a result of profit taking ahead of interim results which were unveiled to the market on Wednesday afternoon. The two sets of results are the ones we will review this week, together with those from leisure group Zimsun.


Beginning with Cottco, turnover growth, at 471% to $421, 5, was significantly ahead of September year on year inflation of 251,5% and even the average inflation rate for the period of 379,5%. This was attributed to the increase in the volume of seed cotton purchased which rose from 145 000 tonnes to 195 000 as well as favourable international lint prices and the inclusion of $52,1 billion of SeedCo’s sales revenue. The seed house is now being consolidated as a 44% owned subsidiary.


Cost of sales grew at a below revenue growth rate of 385%, driven by a 350% hike in producer prices from $450/kg to $1800/kg. On the other hand, overheads’ increases of 579% were ahead of inflation. The combined effect, was a dilution in the increase of operating profits which grew by 448% to $147,1 billion. Margins were, however, more or less maintained losing only one percentage point to 35%.


Of the operating profits, 72%, or $106,3 billion were paid to the banks in the form of interest charges as the company’s borrowings ballooned from $61,9 billion at the end of March to $467,8 billion driven by the need to fund increased seed cotton purchases and working capital requirements. Only a fifth of the borrowings attracted concessionary rates and the late disbursements of offshore facilities, that would have enabled the conversion of local borrowings to US$ denominated debt did not help Cottco’s case.


The balance of $40,9 billion was apportioned, among the taxman who got $6,3 billion, outside shareholders, $3,4 billion, and $31,2 billion to shareholders. A meager 42% gain on the $21,9 billion attributable earnings achieved in the same period last year.


The sun is yet to shine for Zimbabwe Sun Ltd and the last couple years would be really unforgettable. Turnover for the group grew by 512% to $72,3 billion whilst operating costs surged ahead by 674% to $65,7 billion. The result was a measly 51% growth in operating profits to $6,5 billion and a decline in margins from 37% to 9%. Revenue growth was bolstered by a five fold increase in revenue per room, to $202 807, and the inclusion of The Grace hotel which was acquired early this year. Conversely, electricity charges, local authority tariffs, royalties, insurance, wages and salaries, and transport and communication costs were the main force behind the increase in operating expenses.


Income from associates, decreased from $164 million to $22 million, as margins in the food operations were squeezed as a result of the failure to pass on increased raw material costs to customers. Finance charges increased from $135 million to $1,6 billion. The group is still benefiting from yesteryear losses and has no tax liabilities. This saved the bottom line which came out at $5 billion, from further erosion. Compared with attributable earnings of $4,4 billion realized in the corresponding period 2004 shows a standstill position in earnings.


Delta saw its revenues grow by 455% to 789,2 billion, courtesy of a strong recovery in volumes across most brands. Carbonated soft drinks recorded the highest increase of 30%, on the back of increased demand due to a generous pricing policy, followed by lager beer at 27% and sorghum beer at a marginal 4%. Malting and Megapak had negative growths in sales volumes of 4% and 8%, respectively.


The group deliberately abandoned its previous year’s aggressive pricing strategy, opting to drive volumes through holding back price increases. This initiative proved successful as evidenced by the uplift in volumes, and the decline in operating margins from 33% to 22%. Operating profits thus grew by 277% to $175,8 billion.


Strong cash generation, again as a result of buoyant volumes, saw the group recording inflows from operations of $90,6 billion. Consequently, net interest inflows of $1,4 billion were recorded compared with a $3,3 billion charge in 2003. The group closed the period with net cash resources of $35,2 billion.


Equity accounted earnings more than doubled to $6,5 billion. Attributable earnings of $124,7 billion were realized, 281% up on 2003. To underline this praiseworthy performance the Board declared a dividend of $34 per share which amounts to $32 billion. The dividend will be paid after the group has made good PSF borrowings worth $32 billion, in line with the governor’s pronouncements.


The upcoming festive season, parliamentary elections, as well as the anticipated relaxation of tax bands, point to a much better second half for the group as increased merry making and imbibing normally accompanies the former two events.