At The Market with Tetrad

The folly of price controls Delta’s final blow?

THE repeal earlier this month of the Control of Goods (Price Freeze) Order, 2002, together with 53 other price control orders and amendments to the removal of price con

trols on a wide range of products, came as a relief to many companies who saw their operations hard hit by the controls.

No doubt consumers, who were already having to source goods at higher, black market prices due to the controlled price induced shortages, will have welcomed the increased availability of items such as bread and milk on the market.

Two companies that published their results in the past week, CFI and Delta, were victims of the price control regime which to some extent hampered their ability to generate increased levels of profitability for shareholders.

Beginning with CFI’s interim results to March 21 2003, the company still managed to produce bottom line earnings ahead of the official rate of inflation despite the limiting factors. Group turnover was up a disappointing 195% to $31,6 billion as the milling division’s operations in particular were hampered by price controls and raw material availability. The retail division remained the largest contributor to turnover at 38%.

An increased focus on efficiencies, particularly at the poultry division which underwent restructuring, greater export volumes, strategic stock purchases and a change of the product mix to higher margin and more readily available products saw operating margins jumping 5% to 16%. This translated into an increase in operating profits of 350% to $5,1 billion. The retail and “other” divisions showed the effectiveness of the various strategies adopted with gains in operating profits of well over 400%.

The interest charge was up over fifteen times to $483 million reflecting a significant increase in short term borrowings during the period which the company used to finance the purchase of stocks and raw materials.

Attributable earnings of $3,1 billion were achieved, a growth of 304% on the $767 million recorded at half year 2002.

Delta’s year-end results to March 31 2003 also reflected above inflation growth although judging from the reaction of the market, where its price dropped 22% to $200 on the day its results were published, they were below market expectations.

Total turnover was up just 136% to $104 billion, but that of the beverage division or “continuing” operations was up 231%, last year’s figure having included a portion of the financials of Pelhams prior to its demerger from the group. Overall volumes were down 12,5%, as the high imported cost of maize and the shortage of sugar and price controls led to volumes of sorghum beer and carbonated soft drinks, respectively, declining by 12% and 14%. Lager beer volumes remained buoyed by the runaway success of the quarts on the market.

Focusing on the continuing operations, operating income went up a healthy 300% to $32,8 billion, with margins going up six percentage points to 32%, largely due to stockholding gains. The margin achieved was in line with the company’s long term goal of achieving an operating margin of between 30% and 35%. The effects of price controls and raw material shortages were most evident in the reduction of carbonated soft drinks’ contribution to operating income, which fell dramatically from 15% to 6%.

After taking into account reorganisational expenses and finance costs of $231 million and $310 million, respectively, and a tax charge which at 27% was 4% higher than the previous year due to low capex, attributable earnings of $22,4 billion were attained, an increase of 301%. Taking earnings from Pelhams into account, this reflected growth of 242%.

If there was a “results of the week award” it would no doubt have gone to Powerspeed whose interim results to March 2003 were well ahead of most market expectations.

With volumes at or below last year’s levels, turnover for the half year was largely driven by pricing which increased by 247% to $4,5 billion.

Operating profits were up 463% to $1,5 billion as margins surged 13% to 34% despite costs doubling compared with the corresponding period in 2002, courtesy of the large inventory position the company held at year-end September 2002. This will remain the strategy going forward as the company looks to hedge against inflation and the effects of further currency depreciation.

The increase in net finance costs of 127% to $77 million did little to dampen the bottom line as attributable earnings of $815 million were achieved, a massive 646% increase on 2002 and in fact exceeding the full year results by 203%!

The announcement of the new export incentives in February of this year gave a new lease of life to the operations of most mining houses in the country as the results released by Falgold for the six months ending March 31 2003 bore testimony to.

Turnover at $2 billion reflected a 492% increase from the $340 million recorded in 2001 thanks to the review of the gold support price last year and the new exchange rate of US$1:$824. Operating expenses, including interest payable, increased at a much slower rate of 280% to $1,3 billion. The net effect was the realization of profits before tax of $739 million compared to a loss of $15 million achieved in the previous year.

Profits attributable to shareholders of $502 million were recorded, these being the first profits reported since the year 2000.

Notwithstanding these good results, the board’s comments on the outlook do not make pleasurable reading. The future for the company remains tenuous as the shortages of foreign currency and the delays in accessing foreign currency from the “gold fund” have resulted in the company failing to import essential stocks. These problems, coupled with the increases in energy costs and power cuts at the mines, could result in estimated losses of 10kg of gold production per month, and this could see the suspension of mining operations in the second half of the financial year.

Fidelity Life Assurance, a subsidiary of Zimre Holdings Ltd, launched its IPO prospectus last Friday. This will be the first IPO of the year and will be the second within 12 months from the Zimre Holdings stable following that of NicozDiamond.

The life insurer’s offer opened on May 27 and closes on June 13 with the provisional listing date being June 23. The company is seeking to raise $2 billion by offering for subscription 699 million shares at $2,90 per share.

It is intended that the funds raised will be utilised in the upgrading of the company’s IT systems; expansion of the branch network, both locally and internationally, with the company hoping to open a branch in the United Kingdom to service Zimbabweans resident in the UK; for effective distribution and increased visibility; working capital requirements; and product development.

It will be interesting to see the public’s response to the offer given the weak market sentiment currently afflicting financial counters, in particular those related to the insurance sector which has never been the most “sexy” at the best of times.