At The Market with Tetrad

Exchange gains help drive the bull run train


By Brian K Mugabe

AS alluded to in last week’s article the expected rise in the rate of inflation yet again provided

added impetus to the bull run prevailing on the stock market.





The industrial index, week-on-week to this Wednesday, gained 8% to close at 227 683 with 51 counters gaining against just 12 declines.


The May inflation figure came out at 300,1%, a month-on-month increase of 30,9%, spurred by increases in the average price of beverages, public transport and fruits and vegetables.


While the industrial index as a whole, with an annualised return as at Wednesday of approximately 240%, is now lagging the rate of inflation, astute stock pickers would have managed to outperform inflation if they had held counters such as ZSR, Apex, General Beltings, Gulliver and Powerspeed which have returned year to date gains in excess of 600%.


Financials have been among those to show some upward momentum during the week with ABCH, CBZ, Kingdom, and Century all firming by over 20%.


Also firm but to a far lesser extent was Finhold which recently published a pleasing set of interim results for the period ended March 31 2003.


Net interest income was up 261% to $5 billion despite the net interest margin falling from 71% to 53% as the cost of funding increased with the general rise in interest rates experienced during the period.


Along with a 147% increase in other income to $2,4 billion and fair value adjustments of $143 million, total income was up 224% to $7,5 billion.


The cost to income ratio improved significantly from 65% to 46% as cost increases were limited to a commendable 130%, well below the rate of inflation.


Provisions were up over 18 times to $731 million reflecting the 490% growth in the loans and advances book, and total operating profit increased 332% to $3,3 billion.


Attributable earnings for the six months attained were $1,9 billion, which translated to growth of 355%.


Also reporting interim results in recent times was clothing and furniture retailer Tedco.


Net turnover was up 241% to $5,7 billion as exports from the furniture manufacturing division helped offset reduced demand for the retail division, the latter having begun to take steps to change its credit business model, which tends to suffer in a hyperinflationary environment.


As has been the trend with most retailers, replacement cost pricing led to an increase in operating margins from 24% to 31% and operating profit growth of 340% to $1,8 billion.


Attributable earnings of $1,1 billion were the result of the strong operational performance, a 411% improvement on the same period in 2002.


Borrowings to fund working capital requirements as well as the acquisition of three retail properties and an investment into a clothing manufacturer led to gearing levels increasing considerably from 26% to 44%.


Assuming interest rates continue to remain negative in real terms, these gearing levels should be more than compensated for by the growth in operating earnings. It remains a figure that needs to be watched however.


Going forward, the group expects to further reap the benefits of its export drive with the opening of an Export Processing Zone (EPZ) at its Modfur factory in Bulawayo.


Four new retail stores should be opened in the second half, while the exploitation of synergies with the new clothing manufacturing subsidiary should see, as has been traditional, a much improved second half performance.


Blue chip Meikles continued to impress its diversified portfolio of assets ensuring that full year earnings grew well in excess of the rate of inflation.


Turnover was up by 255% to $74,9 billion, 66% of which came from the supermarket division. In growth terms, the hotels division with a turnover increase of 482% to $12,3 billion was the most impressive as room rate integrity and the revised exchange rate on the local market, while above expectation room rates and occupancies at the Cape Grace in Cape Town, had a positive impact on revenues.


A stock holding strategy and the aforementioned exchange rate movement ensured that income increased at a far superior rate than costs and this saw operating margins jump 8% to 19%.


Exchange gains of a staggering $37 billion relating to the group’s offshore assets, namely the Cape Grace and its shareholding in Rebserve, as well as the US dollar loan advanced to the Reserve Bank of Zimbabwe were reported.


The group’s accessibility to the latter proved a bone of contention among analysts, but management were of the firm view that based on history, they would have no problems getting those funds as and when they are required.


Along with a $1,3 billion share in the profits of Kingdom, profit before tax of $50,5 billion was recorded and bottom line earnings of $42,1 billion were attained, an increase of 609%.


Lastly we look at the above expectation results of Cottco for the year ended March 31 2003, which again reflected the benefits to exporters of the movement in the exchange rate from $55:US$1 to $824:US$1.


Growth in turnover was restricted to a lowly 67% to $26,4 billion, as the 2001/2002 drought took its toll on the group’s seed cotton intake, which declined by 45%.