Taking Stock – Barbican Asset Management

Astra a counter worth considering

THE reporting season ending August 31 has witnessed another fine set of results for Astra Industries Ltd (Astra). In the year 2001 Astra Ltd group demerged into t

hree companies – Astra Industries Ltd, Cairns Holdings Ltd and Tractive Power Holdings Ltd. Each of these companies was then listed on the Zimbabwe Stock Exchange (ZSE).


Astra comprise of three divisions Astra Paints, Astra Chemicals and Henry Dunn Steel.


Astra paints is one of the largest paint manufacturing companies in Zimbabwe with plants located in Harare and Bulawayo.


PVA and enamel paints are the products at the core of its production. On the other hand Henry Dunn Steel is a major player in the supply of industrial steel products to the mining, engineering and construction sectors.


This division is fully-owned by Astra Industries.


The trading of industrial chemicals and alcohol for use in the industrial and commercial sectors cannot be discussed without mentioning the name Astra Chemical.


Its product range includes the inputs for the manufacture of soft drinks, paints, soap, and textile. Astra Industries Ltd fully owns this subsidiary as well. Worth noting is Astra Chemical’s 50:50 joint venture with NCP Distillers Zimbabwe (Pvt) Ltd, an alcohol distilling company. NCPDZ (Pvt) Ltd is involved in the production of portable and industrial alcohols.


Shareholding structure

The shareholding stru-cture of Astra Industries Ltd is mainly comprised of institutional investors.


This reflects the level of confidence that the institutional investors have in the company. Among the major shareholders of the company are the

Finance Trust of Zimbabwe (Pvt) Ltd, Cyrus Holding Corporation and Barnfords Securities Nominees (Pvt) Ltd.


Astra has about 134 million shares in circulation.


Financial performance


The group has rele-ased its year-end results against a background of a harsh economic environment. The good performance saw its turnover increasing by 318% to $31,7 billion.


Profit after tax was pegged at $8,8 billion, which represents a 466% increase compared to that for the same period in the last financial year.


The turnover rate of growth is exceeded by the growth rate in the profit after tax. The high growth rate in profit after tax compared to that in the turnover could be viewed as an indication of improved efficiency.


The growth in the profit after tax also exceeds the rate of inflation, which officially stood at 427% as at August 31. As a result of this, its EPS moved up by 466 percentage points to $65,68 from $11,60 as at the previous year-end.


It is interesting to note that the company posted a positive inflation-adjusted profit of about $7 billion which represents a 19 percentage point increase from last year’s $6 billion.


The gross profit and net profit margins have also increased by 10% and 7%, respectively. This reflects a slight strengthening of the firm as far as operating activities are concerned.


In line with the aim of the de-merger, that is to unlock shareholder value, we have seen the group experiencing an increase in the return on equity from 81% during the previous year to 94% as at this current year-end.


The debt to net worth ratio (gearing) shows the extent to which the company’s activities are financed by borrowing. This has significantly increased from 3,2% as at the previous year-end to 17,6% current.


This can be attributed to the high costs of production and operation resulting from the prevailing hyperinflation environment.


Strengths


Brand loyalty: Astra has been known for producing the best or high quality brands of paints, both enamel and PVA.


This has resulted in it commanding a high customer loyalty both from the corporate and individual clients.


Government support: The government has reiterated its support to the mining industry so as to achieve an increase in the operations of the sector.


Since the mining sector is the major customer for Henry Dunn Steel, it means the demand for steel products will increase.


Challenges


Foreign currency shortage: The continued scarcity of foreign currency in the country has continued to affect operations.


The group imports some of its raw materials. However, the group can reduce the impact of this by targeting the export market.


Inflation: This has resulted in high costs of borrowing as well as the erosion of disposable income for both individuals and companies.


Interest rates have continued to increase to triple digit figures although the central bank and government had tried to keep the rates low.


Shortages of buildingmaterial: The country has been experiencing some shortages in basic commodities. The availability of building materials has not been spared either.


The scarcity of cement among others has left the construction industry in a shrinking state. The shrink in the construction industry implies a shrink in the business of Astra’s subsidiary companies, that is Astra Paints and Henry Dunn Steel.


Valuation

Astra is trading at a historic P/E ratio of 5.48. Basing on our earnings forecast, the counter is trading at a forward P/E ratio of 1,18x which goes on to strengthen our perception that the counter is trading at a discount.


Conclusion

Basing on the above valuation we view the counter as undervalued and hence we expect its market price to firm.


We therefore, recommend a buy as soon as the market stabilises.

Top