Barnfords Securities (Pvt) Ltd
Highlights TZI gave the market a solid performance. Turnover increased by 400% to $15,3 billion over the comparable period last year.
Strong profit growth of 1 085% was registered from $259 million for half year 2002 to $3 billion for the six months ending March 2003. If profit contribution of Art is added in, net profit is $4 billion.
After successful unlocking of shareholder value in the unbundling of Art, release of value in Strategis Africa will follow.
In line with sector trends, turnover for the company has grown by 400% to $15,3 billion over the comparable period last year.
This is reflective of the direct benefit achieved from the Export Incentive Scheme whose effective exchange rate of US$1: $824.
Concomitantly attributable earnings have grown exponentially by 1 085% to $3 billion over the $259 million earned in the same period last year.
Despite market perceptions and innuendos, TZI continues to show investors stable and sustained growth in profitability as can be seen in the graph shown and it is our opinion that they will continue to do so in the future.
Net margins have been maintained and surpassed, growing from 8,4% in half year 2002 to 19,9% for half year 2003.
Despite capacity constraints at Fresca, which was operating at 55% capacity and severe water shortages faced by Agriflora at the beginning of the year, the company managed to give the shareholder’s an attractive Return on Equity of 25%.
This was on the back of investment earnings which increased from $298 million to $2,5 billion as a result of proceeds from the sale of it’s stake in Agriflora and Caps, exchange gains and profit from its remaining interest in Art.
Review of Operations
This once bulky conglomerate has significantly streamlined operations.
With the disposal of 28,45% of their 39% stake in Art, the group is focusing more on horticulture.
Horticultural exports are contributing 68% to turnover.
In line with this focus on horticultural exports, the company would like to see the unlocking of shareholder value by separately listing Strategis and probably the logical conclusion to that would be a complete unbundling from that business as was the case with Art.
The listing of Strategis, if all goes well, is envisaged to occur within the next six months.
The company would then want to consolidate its position in the agro-industrial sector by acquiring or merging with other businesses within the sector.
Management will update stakeholders when any such opportunities arise.
Agriflora: remains the stalwart earnings driver for TZI although in this particular period it has been adversely affected by severe water shortages.
Management quickly averted disaster by completing two new dams and investing in irrigation equipment which salvaged the situation and will continue to do so going forward.
Fresca: was able to perform well and contributed $938 million to the bottom line for its year ended December 2002 despite capacity constraints. The lingering concern was that of Fresca’s reliance on outgrowers but focus has changed to receive raw material from a small number of large-scale farmers who can produce larger volumes, as opposed to small holders, hence contribution of outgrowers is only 30% of previous levels.
Strategis Africa: the regional market, specifically the East African markets, continues to grow and this entity has contributed 32% to turnover for half year 2003.
Of note are the company’s initiatives to unlock shareholder value embedded in Strategis.
Traditionally, the flagship of the company, Agriflora, exhibits stronger earnings in the second half so we can expect an even finer performance for financial year 2003.
This counter is an excellent hedge against the prevailing macroeconomic challenges faced by companies in the Zimbabwean environment as 90% of TZI’s assets are outside Zimbabwe and the Zimbabwean operation, Fresca is a net foreign currency generator.
The company is set to realise exchange gains from two factors, namely the prospects of another official devaluation under the New Economic Revival Programme as well as the relative strength of the euro (in which they receive their revenues) against the United States dollar (in which their costs are denominated).
Further streamlining of operations with listing and unbundling of Strategis will better enable the company to take advantage of existing synergies in their agro exports businesses.
The vagaries of the weather, insect infestations etc, that are largely outside the control of management.
Increased competition in international markets, the company will need to look into upgrading the quality of their products.
Inability to influence international flower, vegetable and fruit prices which although they have remained firm thus far, are also outside the control of management.
A cursory comparison of TZI with its industry peers reveals that TZI is still essentially undervalued.
Taking into consideration that a stronger performance is expected from Agriflora in the second half, and that another devaluation is anticipated under Nerp conservative forecast of headline earnings per share for financial year 2003 of 2 657c is a reasonable expectation.
Recommendation and valuation
This would place the counter on an undemanding forward P/E of 2,5x.
We thus recommend this share a buy.
This article was prepared by Barnfords Securities (Pvt) Ltd (Barnfords) on behalf of the Royal Bank of Zimbabwe Ltd (Royal).