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At The Market with Tetrad

Circumnavigating back to profitability

By Brian K Mugabe

ALTHOUGH the third quarter ended as somewhat of a damp squib for the stock market, its net return still provided more than acc

eptable returns for investors, courtesy of the strong July and August performances, the former month having seen the index more than doubling.

September was in fact, the only month this year that the index has shown a decline, as it lost 12% to close the month and the quarter at 648 933 points.

Thanks to the two good months mentioned above, the overall return for the quarter was 134%, or an annualised rate of 536%.

The year to date increase equated to 527%. In terms of quarterly performance, of the 81 listed counters, 78 advanced while three counters were in the red.

The table shows the top and bottom five performers/non-performers for the quarter.

While it is surprising that two mining counters were the best performers during the quarter, given the fact that the industry, though having lots of potential is hamstrung by issues such as foreign currency shortages, power disruptions and exchange rate pricing, it came as no surprise that three banks made up the bottom five.

The financials, having staged a recovery prior to the reporting season then lost favour again very quickly, as ABC recorded a loss for the six months to June while NMB had its forex trading licence suspended for 12 months.

This put a pall over the sector as a whole and investor sentiment has remained firmly against them.

What does the fourth quarter hold in store for the market? Who knows, but with the impending budget and its likely surprises, a new RBZ governor expected and press reports suggesting the return of price controls, the short to medium term outlook does not look promising.

One of the counters in the top five, Circle Cement, recently published its interim results to June, and these proved to be well ahead of market expectations despite problems involving the sourcing of coal, which resulted in the suspension of clinker production for a one-month period.

Buoyed by the removal of price controls, turnover was up 444% during the period to $7,1 billion.

Operating profit of $1,5 billion was recorded against the loss of $461 million in the first half of 2002.

The improved operational performance saw cashflows swinging into positive territory and the company earning net finance income of $270 million against outflows of $6 million.

Attributable earnings of $2 billion were attained compared with a loss of $359 million as the cement operation returned to profitability, contributing $1,5 billion to the bottom line where last year it had made a loss of $451 million.

Another turnaround story was that of Zimpapers.

Driven by a much improved performance by the newspaper division, turnover was up 184%, though this lagged by some margin the rate of inflation during the period.

Other operating income grew at a relatively better rate, 227%, to $136 million and allied with improved cost control measures which saw operating expenses growth of 211%, and an even lower growth in finance charges of 155%, the group recorded an operating profit of $128 million. The first half of 2002 had seen an operating loss of $37 million.

With prior year losses resulting in a zero tax charge, attributable earnings were the same as operating profits, with an attributable loss of $32 million having been made last year.

The group anticipates that profits will more than double during the second half, and while the recent increase in the price of its titles points towards that possibility, it will be interesting to see if the group manages to contain its costs, particularly those relating to borrowings, to achieve that target.

Last of the turnaround stories this week is Medtech which, following the new lease of life afforded to it some two years ago, has continued to go from strength to strength.

With output having increased at the manufacturing units, the ‘bedding’ down of Baines Imaging proving successful, and the establishment of MedTech Distribution, turnover for the half year was up 525% to $1,9 billion.

Operating profit of $682 million was achieved, as margins improved from 29% to 36%, the group strategy of procuring raw materials early and building up stocks having paid dividends.

Net interest paid amounted to $45 million, a six-fold increase on June 2002, as the group made greater use of its overdraft facility to help fund the aforementioned working capital build up.

The bottom line yielded a positive $500 million, an increase of 464% on the comparative interim period. The group is continuing to seek growth opportunities, with the acquisition of Margolis Medicals currently awaiting regulatory approvals.

Exports are also expected to improve and thus the second half should see an even stronger performance.

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