At the Market with Tetrad

ZSE and Inflation continue to play their game of tag

Brian K Mugabe

THE year-on-year inflation rate for April increased to 269,2%, gaining 41,2% points on the March rate of 228%.
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The increase came as no surprise to anyone, the only shock in fact being that it wasn’t even higher! The Central Statistical Office (CSO) attributed the rise mainly to increases in the average prices of beverages, fruits and vegetables and meat and clothing.


Surprisingly, transport was not mentioned, suggesting that the latest fuel price increase may not have been factored in whilst, as stated by the CSO, the April CPI did not factor in the recent increases in the price of soft drinks, postage rates, long distance commuter train fares, and telephone charges, “due to timing differences.”


The strong results published by listed companies, along with the continuously increasing rate of inflation against a backdrop of rising but still negative real interest rates, have had a positive effect on the industrial index which this week swept through the 200 000 level to close Wednesday at 208 494 points.


Barring the bouts of profit taking that are bound to accompany such a rally, the index can be expected to continue trekking northward, driven as it has over been over the past two years by the aforementioned inflation and increasingly negative real returns available on the money market.


The Art group’s results for the half-year to March 31 2003 were further testimony to its successful turnaround strategy. Turnover was up 323% to $19,5 billion compared with 2002 as the static exchange rate for much of the period, price controls and the decline in domestic volumes, had the effect of constraining turnover growth.


Growth was thus mainly driven by an increase in export volumes a strategy that saw export turnover as a percentage of total sales increase from 16% to 36%, and inflation.


Operating profit increased 403% to $6,2 billion as margins improved from 27% to 32%. The increase in margins was attributed to the group having been at a competitive pricing level when controls were gazetted, as well as increased efficiencies and cost rationalisation which saw net operating expenses only increasing by 93% to $1,4 billion.


Net finance costs were up 447% as group borrowings increased significantly, mainly to fund pre and post shipment finance in support of exports. With interest rates being negative in real terms, it was felt that leveraging of local borrowings was the appropriate tactic.


Profit before tax of $5,5 billion was achieved, up 398%, inclusive of net exchange gains of $2 billion.


The increased profitability of the regional businesses as well as cross border dividend payments led to an increase in the tax rate from 25% to 31%. This diluted attributable earnings growth to a still impressive 360%, which translated to a bottom line figure of $3,8 billion. The second half looks set to improve on the first, as the removal of price controls and recent movement in the exchange rate will benefit the group’s import parity pricing model.


Another ongoing “turn around” story is that of Zimsun who produced a similarly impressive set of year-end results to March 31 2003.


Turnover was up 285% to $8,6 billion with foreign currency earnings, buoyed by the new rate of $824:US$1, and contributing 56% to the total.

The overall occupancy for the company grew by 2% to 45% with the Beitbridge Express hotel in particular performing outstandingly, its average occupancy of 66% being the highest in the country. Improved cost control measures and a yield management exercise undertaken during the year saw margins at a positive 24%. An operating profit of $2,1 billion was recorded compared with the $136 million made in 2002.


Equity accounted earnings of $69 million, along with a fair value adjustment relating to the Mozambique property of $505 million, added to the bottom line as did net financing income of $422 million, the latter consisting mainly of exchange gains of $404 million.


The finance income position contrasted the charge of $628 million in the prior year and reflected the company’s zero gearing position, compared with the significant debt burden it had carried in recent years.


Accumulated losses from prior years meant there was no tax paid and attributable earnings of $3,1 billion were attained. This compared with a loss of $425 million originally recorded in the 2002 accounts but these were subsequently restated to reflect the profit on the Elephant Hills fire insurance proceeds which the auditors said needed to be accounted for in the year the claim was instituted and not on completion of the rebuild.


The restated 2002 figure reflected attributable earnings of $2,2 billion. The country’s image problem remains the biggest problem for tourism but Zimsun is well poised to take advantage of any upturn.


The desire to reorganise itself so as to unlock the value of its property portfolio is now well under way with board approval for a dividend in specie and an Initial Public Offer of a separate property company having been received. These measures, as well as regional management contract initiatives being pursued, should see Zimsun posting even stronger results going forward.


Saving the best for last, PG Industries released a superlative set of results for the year ended March 31 2003 as the demand for products from the housing, construction and furnishing, sectors remained firm throughout the year. Export volumes continued to grow with export sales contributing 28% to group sales compared with 25% in 2002.


Total sales for the group increased by 281% to $23,8 billion. The trading division remained the biggest contributor to turnover, having provided $14,1 billion while the other divisions; manufacturing and glass contributed $4,3 billion and $5,4 billion, respectively.


Operating income grew by 519% to $6,1 billion as margins gained 10 percentage points to 26% thanks to increased productivity, efficiencies, and focus on value addition and quality improvements. The movement in the exchange rate also benefited margins.


All three divisions recorded over 300% growth in operating profits with the glass division leading at 670%, trading 497% and manufacturing 285%.

Zimboard, the former problem child, has now turned the corner as evidenced by an improved performance, which saw enhanced cash generation and exports increasing by 285% compared with the previous year. Margins also improved from 21% to 27% as the comprehensive repair and plant maintenance programme initiated in partnership with P G Bison of South Africa began to bear fruit.


The new addition to the group, Creative Paints, which started operating early this year managed to break even and surpassed management’s expectations. Finance costs increased by 797% to $314 million and attributable earnings of $4,6 billion were achieved, an increase of 552% compared with 2002.


The group also announced the completion of a re-engineering exercise of the three principal divisions into three separate and autonomous 100% owned subsidiaries. This will enable the business to seek partnerships and linkages appropriate to each company’s operations and further unlock value for its shareholders.

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