TETRAD – CFI turnaround surprises market


By Admire Mavolwane

THERE is no doubt that the Governor of the Reserve Bank would be satisfied with the role that the productive sector facility (PSF) appears to have played in restoring

viability and preventing the ruin of many companies.


By contrast, we believe the other sibling of the PSF, the Troubled Bank Fund, seems to have fallen short of its targets with most of the troubled banks still swimming in murky waters. Whilst there are some reservations as to the inflationary impact of the two facilities, with the PSF limit, initially set at $650 billion by September 30, having ballooned to $2, 1 trillion as at the same date, the impact of the facility on the manufacturing sector is now beginning to be seen.


Corporate results from the likes of CFI and to a certain extent, Art bear witness to the fact that the PSF came in very handy and certainly prevented some entities from sinking. Those unfortunate enough to have been excluded, the retailers in particular, are still grappling with the interest burden and still paying the bulk of their profits to the banking fraternity.


However, in the same way that some banks have failed to overcome their troubles, some companies will without doubt have failed to make good use these facilities by the time they fall due for repayment.


This week we focus on the results from Art, Meikles and CFI. Beginning with Art turnover grew by a below inflation 197% to 243,9 billion, as performance was constrained by the volumes decline experienced in the first half and the static exchange rate scenario prevailing since January 12 which impacted negatively on the group’s import parity pricing model. As a result, the group could not recover the inflationary increases in costs through higher selling prices.


Export sales were significantly lower than last year, the group having been forced to abandon some export markets because of high negative margins and reduced off-take from the paper mills by South African paper converting customers who are facing stiff competition from cheaper Asian products.

This saw exports contributing only 31% to turnover, down from 43% in 2003.

The positive impact of the standstill exchange rate, in the form of a cheaper imported raw material costs, was out-gunned by the above inflation increases in electricity and labour-related expenses.


Furthermore, the absence of significant exchange gains, a valuable component of operating profits in the previous years, with only $2,4 billion being booked in this year compared with $10 billion in 2003, had a hand to play in the decline of operating margins from 39% to 12%. Consequently, operating profits recorded a negative growth of 13% to $28 billion.

Net finance costs trebled from $2.5 billion to $8,3 billion, thanks to the concessionary facilities accessed early this year. As if things were not bad enough, the group had to charge $4,8 billion to profits as an exceptional item, after a $3,6 billion write down of some stocks whose net realisable value had become lower than carrying cost, after the revaluation of the local currency and the writing off of raw materials worth $1,2 billion destroyed by the fire at Kadoma Paper Mill.


An impairment loss provision of $389 million on the fine paper mill was also booked. The bottom line came out at $11,5 billion, 49% lower that the $22,3 billion achieved in 2003.


Blue chip Meikles performance for the six months to September 30, was uninspiring if not disappointing. Turnover grew by 420% to $657, with TM Supermarkets contributing 79% and the balance coming from the retail and hotels divisions.


Operating profits increased by 279% to $165,1 billion as operating margins fell by eleven percentage points to 4%. This was attributed to a shift in the sales mix at the supermarkets, considerable mark downs in the retail division and the static exchange rate at the hotels.


The well documented inflation driven increase in staff costs and the horrendous increase in utility costs further impacted negatively on margins.

Net finance charges grew five fold to $18,6 billion as local debt increased $60 billion, all of which was attracting market rates. Being classified as a retailer, the group could not access funds provided under the concessionary facilities.


Exchange gains of $58,6 billion, slightly below the $59,5 billion recorded in the same period in 2003, a $9,8 billion fair value adjustment of the group’s shareholding in JSE listed Rebserve, together with $22,1 billion, being the group’s share of Kingdom Financial Holdings and Meikles Financial Services’ profits, saved the day for Meikles. Attributable earnings of $75,3 billion were realized, reflecting a 10% decline on 2003.


Lastly, we look at the turnaround story of CFI. Turnover increased by 376% to $605 billion, with the poultry division recorded the highest growth of 445%, followed by 307% in both retail and specialised divisions. The poultry division was the major driver of revenues, contributing 57%, followed by Retail and the specialised division with 24% and 19%, respectively.


Operating profit increased by an insipid 186% to $123,4 billion as margins declined from 34% to 20%, succumbing to much the same forces mentioned earlier.


With the positive effect of the PSF kicking in, interest charges of $77,6 billion were incurred, an increase of only $15,2 billion from $62,4 billion at half year. During the second six months the debt was reduced from $75,7 billion to $68,4 billion. The conversion of most of the debt from market to concessionary rates restricted the growth in the interest bill.


With a more manageable cost of funds, the group recorded an operating profit before tax of $45,7 billion as opposed to a $20,5 billion loss at half year. Attributable earnings of $29,4 billion were recorded, up only 8% on the $27,2 billion achieved in 2003.


This figure, however, shows the success of the management’s turnaround strategy and the benefits of the PSF, when viewed in the light of the $14,2 billion loss in the second half.


Cash-flows also improved significant with inflows from operations of $98,2 billion, against $19,7 billion outflows in 2003, and $5,3 billion outflows at the interim period. The group closed the year with cash at hand of $28,5 billion.

Top