At The Market with Tetrad

Through half a million, still going strong

By Brian K Mugabe

WOW! That’s all I can say about the continued stratospheric rise of the stock exchange during the past week to Wednesd

ay. While it was expected that the index would continue to trek upwards, the rate at which it has done so during this past week certainly caught me by surprise.

Having trailed the official rate of inflation for much of the year, the industrial index has now overtaken it, with yesterday’s close of 528 930 points, (the 500 000 points barrier has been breached!), representing a year to date increase of 411%.

The index gained 31% during the past week alone as once again increases were recorded all round.

At least 69 of the 80 listed counters recorded firmed while only six softened. The top 10 gainers in order were Zimsun, Century, PG, Willdale, Zimpapers, Falgold, Apex, David Whitehead, Barbican, and First Bank, with gains ranging from 167% to 82%. The stragglers were Tedco, Tractive, Gulliver, Innscor, Masholdings and Dairibord, which suffered declines of between 15% and 1%.

The trend does not seem to hint at any reversal just yet, but as has been noted before, when speculators decide it’s time to get out, the market turns without warning. In such cases, “the trend definitely ceases to be your friend”. In the meantime of course, the country’s overnight millionaires will continue smiling all the way to the bank, that is, until they’re told they can’t withdraw their money of course!

Barbican became the first listed counter to publish its results for the June reporting season, catching the market by surprise with Interfresh having been expected to report first. Its performance for the six months ended June 30 2003 proved well ahead of market expectations, and set the tone for other financial counters who saw their share prices go on a run as the re-rating alluded to in last week’s commentary went into overdrive.

On a week on week analysis to first call over yesterday, all the banks had experienced gains of some sort, with the top five performers being Century up 250%; First Bank 116%; Barbican 97%; Kingdom 75% and Trust 66%.

Turning to Barbican’s financials, the group saw total income increasing by 484% to $1,2 billion, this largely made up of investment and similar income which contributed $1 billion, up from just $21 million in 2002.

Operating expenses were contained at well below the increase in revenues, up 269% to $468 million, and this saw the cost to income ratio improved from 61% to 38%. The recent opening of the commercial bank in July should see that ratio rise in the second half however, and it will be interesting to see how effective the group’s apparently low-cost model actually is. Operating profit of $755 million was achieved, an increase of 814% on interim 2002.

A relatively insignificant share of losses from associates of $4,4 million did little to dilute bottom line earnings which surged 847% higher to $548 million. This exceeded full year earnings of $505 million in absolute terms, though an increase in the shares in issue meant on an EPS basis, the 460c earned lagged the full year earnings by just 10c.

The balance sheet at $20,3 billion remains by far the smallest of the other listed financials, despite the increase in fixed deposits from $7,4 billion to $17,7 billion. The commercial bank is now on stream and it will be interesting to see how it contributes to the group in the second half. The group also mentioned in its commentary that in the next eight months, it intends to demerge its private equity investments “whose value is not fully reflected in the listed holding company”.

Interfresh also produced impressive results, as a strong export performance boosted performance. Turnover was up 507% to $23,7 billion, with volumes for most of the group’s business units recording an increase. Particularly impressive was the performance of the group’s newest venture, Citrifresh Exports, which managed to export over 200 000 cartons of citrus into Europe and the Middle East, this against a budget of 100 000 cartons for the full year!

Despite the impressive top line performance, margins remained unchanged at approximately 17% as operating profits grew by 489% to $4,1 billion. The static margins were attributed to a fairly significant proportion of export sales sitting in debtors which were valued at a conservative exchange rate and yet were matched against input costs which reflected more current parallel market exchange rates. As the debtors unwind, the margin situation is expected to improve in the second half. Net financing costs were up 411% to $157 million as the group took advantage of concessionary borrowings to finance both working capital and capex requirements.

A significant decline in the rate of taxation for the company to 5% compared with 29% at the previous half year which arose as a result of the group’s reorganisation, more than made up for the stationary operating margins and attributable earnings of $3,1 billion were attained. This represented a 613% increase on 2002.

Cash-flows were hugely negative for the half year, with a net decrease in cash and cash equivalents of $2,2 billion being recorded as both operating and financing activities saw outflows of over $1 billion each.

The balance sheet has grown significantly resulting in a huge increase in net asset value from $2,10 to $22,34, with the aforementioned capex as well as revaluation of fixed assets resulting in the non-current assets figure going from $1,3 billion at the year-end to $9 billion. Current assets also shot up from $2,5 billion to $17,4 billion. Gearing was at 21%, a figure the group is comfortable with given the concessionary rates at which the borrowings are being accessed.

Looking to the second half, the group anticipates a stronger performance as has been the tradition in the past due to the nature of its selling season.

The Smithfield Flowers operation is set to commence exports of hypericum in September this year and it is anticipated that 65 000 stems will have been exported by the year end. This will naturally see the bottom line boosted even further, as will a likely review of the exporters’ exchange rate during the course of the year, with the authorities having indicated to the sector that this will happen.

The group also feels that the restructuring exercise it undertook in January this year which saw the separation of the trading operation from Interfresh Ltd, the latter becoming a property and investment holding company should see added value being unlocked for shareholders, complemented by the continued investment in capex to increase both local and export capacity.

Interfresh and Barbican have thrown down the gauntlet for the other reporting companies whose results we shall be reviewing over the next month or so. Will they prove a tough act to follow or are they simply an appetiser to bigger and better things?