Astra paints not so rosy a picture

By Admire Mavolwane


“ALCOHOL may be hazardous to health if consumed to excess, the operation of machinery or driving after the consumption of alcohol is not advisable.” This caption accompanies all advertisements from Delta Be

verages and Afdis.


The same is also appended to the price list of lager beers published regularly by the former in the daily papers. A look at the recently published recommended price list shows that it now cost 50% more to partake in the waters of wisdom than it did a week ago.


The merry waters join the catalogue of other basic and not so basic commodities that have become dearer since the little rain showers of the last weekend of September.


Early into October, mobile phone operators, Econet, Net*One and Telecel started the ball rolling by announcing an average 66% tariff increase.


This is despite the fact that service levels from some of the networks has deteriorated markedly and it now takes more effort and patience to make a call than it used to do a few months ago. As happens when the infrastructure breaks down, an inverse relationship manifests itself. Quality goes down whilst prices go up.


Zimpost and Tel*One also increased their prices, by a margin well above 50%. In short, everything that went up in price this month appreciated by more than 40% if one is to be conservative. In other words, before taking into account the peripheral items in the CPI basket like scotchcarts, bicycles, audiovisual equipment etc, the month-on-month inflation rate for October should at least be above 35%.


The unfortunate thing though about the increase in the price of beer is that it has become so expensive that one has to think twice before trying to drown one’s sorrows in the usual haven, alcohol.


It is most likely that in addition to the HIV/Aids problem the country will be faced with a possible breakout of hyper-tension (high blood pressure), and psychiatric illnesses, as well as a general lack of wisdom and bravery. After all, alcohol is not called “waters of wisdom” or “Dutch Courage” for no reason. In any case, it soon may be unnecessary to include the caption cited earlier as very few will be consuming alcohol at all, let alone to excess.


The September reporting season kicked off with the results for the 12 months to August 31 2006 from the former Astra Corporation Ltd siblings Astra Industries and Cairns. Starting with the former, revenues increased by 1 004% to $3,6 billion with growth driven mostly by inflationary pricing.


Aggregate sales volumes within the group, which comprises Paints, Steel and Chemicals, declined by 30% on the back of raw material and stock supply shortages. The now famous phenomenon of “shrinking disposable income” did not help Astra’s case.


Unlike manufacturing entities that reported in June, it appears margin growth is becoming more and more difficult. For Astra, operating margins were more or less maintained just managing a two percentage point push to 31%. Consequently, operating margins grew just ahead of turnover at 1 075% to $1,1 billion.


Although, it is too early to say it would appear that volumes and margins are now starting to converge. In fact, margins should in the near future start to contract and when that happens the wheat will be separated from the chuff.


The current set of results also shows a marked slow down in cash generation by the group with inflows from operations of $313 million being recorded. In growth terms, this amounts to a measly 373% increase. The offshoot from this is a rather weak finance income growth of 228% to $49 million, a development which saw a watered down growth in the bottom line to $798,9 billion.


The group is largely dependent on foreign currency for raw material importation and it is apparent that taking account of where the economy is headed in that regard, management is not anticipating an easy 2007 financial year.


Judging by the recent lukewarm set of results Cairns certainly appears to have had a more difficult time. For much the same reasons, volumes for the food and wine manufacturer declined 26%.


Had it not been for shortages of raw materials, export volumes would have surpassed the 6% increase registered this year. Group sales at $6 billion represented an 806% increase compared with the previous year. The growth figure is in line with average year-on-year inflation for the period September 2005 to August 2006 of 815,6%.


Operating profits grew by 762% to $1,7 billion as corresponding margins retreated marginally from 31% to 29%.


It is evident that margins will remain under severe pressure from the hyper-inflationary environment and reduced pricing power. The group was borrowed for most of the year, a situation which resulted in the company incurring a net financing cost of $62 million. The increase of 1 455% registered in the outflows partly reflects the increase in interest rates in the February to May period as well as the inflationary growth in working capital requirements.


After appropriations to the taxman and minority shareholders, $901 million was all that was left for shareholders. This works out to a sub inflation return of 720% on earnings but share pricewise, one would not complain about the massive 1 500% year-on-year growth in value.


“Prospects of achieving real growth for the group in the short term remain a challenge, – read near to impossible – but the group will employ strategies that will continue attracting customers by delivering value for money products.”


This is what the Board had to say, rather candidly, about the future. We, however, have reservations on the optimism expressed in the last part of the sentence, especially the value for money part. The Zimbabwe dollar continues to lose value so what direction will “quality” be taking at Cairns?