ROYAL BANK – PG Industries builds on success

Highlights -Turnover up 905% from $6,603 billion in HY1 ’02 to $66,338 billion for HY ’03.


* Profit before tax rose 1 365% from $1 487 billion in the prior pe

riod to $21 791 billion.

* Earnings per share up 1 232% from $4,28 in the previous comparable period to $57,01 for the current six months.

* Period saw acquisition of Zimtiles for a consideration of $4,21 billion.

Nature of business

PG Industries Ltd (PGI) are involved in the manufacture of world-class fibre board, particle board and safety glass.


The group is also a distributor of board, glass, timber and related building materials through their own networks and third parties for the domestic, regional, and international markets.


The group structure


PGI is structured into three autonomous subsidiaries each with their own board of directors.


Firstly there is the PG Merchandising Ltd (or the trading division) which is a major supplier of building products which it does through its branded retail outlets namely, PG Timbers, DST, PG Building Supplies, Johnson &

Fletcher and Creative Paints.


A new addition to the trading division is Zimtile, a tile manufacturer purchased earlier in the year.

The glass division consists of PG Glass Ltd which manufactures and distributes glass under PG Safety Glass, PG Glass Retail, PG Glass-Warehouse and Distribution.


Lastly the board division trading under Zimboard Products Ltd which manufactures and distributes fibre board, particleboard, and other value-added products.


Results commentary


In a period characterised by continued economic decline in Zimbabwe, the group released a superlative set of interim results as evidenced by the massive 1 260% rise in attributable profit from $1 157 billion in the prior comparable period to $15 735 billion for the six months to September.

Consequently EPS rose a hefty 1 232% to $57,01 in half year one of this year.


This was accompanied by an increase in group operating margins from 24% in the prior period to 38%.


An indication that while the group is aggressively driving business it is maintaining control of its costs a key success factor in an inflationary environment.


The group’s 905% increase in turnover from $6 603 billion to $66 338 billion for half year one of 2003 was attributed to an increase in real volumes in a period which saw solid activity in the housing and furniture sector.

Zimtile contributed $3,7 billion to turnover in just three months.


There was notable growth in exports as a percentage of turnover which increased in the period from 22% in the prior period to 36%.


The main contributor to turnover was the behemoth trading division which accounted for 62% of group turnover while the glass and board division both contributed 19%.


Long-term borrowings increased 358% from $673 million in the prior comparable period to $3 079 billion consequently the company’s gearing ratio increased to 36% an indication that the company is increasingly driving its business on debt.


This is a sensible strategy given the prevailing negative real interest rates.

Short term liquidity ratios were buoyed by the group’s stock piling strategy, indicative of the 815% growth in current assets to $57 094 billion, to ensure key raw materials, this will also have the added effect of inhibiting future costs.


Return on shareholders equity increased from an already healthy 51% in the prior comparable period to 77% for the latest interims.


This is an indication of increased wealth creation for shareholders.

Sustainability of ROE will see shareholders remain a contented lot. This was accompanied by an increase in the group’s Return on Assets from 17% in the prior period to 23% a sign of increased efficiency in the use of its assets.


Operational review


The star performer for the period was the board division whose percentage of operating income from 21% in the prior period to 39% at $9 603 billion on impressive operating margins of 79%.


This was attributed to real volume growth of exports.


The division was also able to attain higher margins for its produce due to the current shortage of product in the region. Aligned to this the division dropped its lower margin products and increased its exports of value added higher margin products.


The glass division contribution to operating income reduced from 32% in the prior period to 27% at $6 898 billion.


The division also exhibited great operating margins of 54%. PG Glass was primarily involved in regaining market share from new entrants.

Key developments during the period saw capacity at Safety Glass increase by 50%. This should enable increased volumes of exports.


The giant trading division was the comparative laggard seeing its share of operating income fall from 47% in the prior period to 34% at $8 666 billion.

Margins were comparatively inferior to the other divisions at 21%. The cash sales ratio rose to 48% compared to 45% in the prior period.


The period saw the acquisition of Zimtile which has already begun to contribute considerably to the bottom line. In just three months Zimtile’s operating income amounted to $1,9 billion on turnover of $3,7 billion implying a healthy operating margin of 51%.


The unit has the added bonus of having 100% cash sales.


Exports continued to grow in the period and now comprise 38% of turnover.

South Africa remained the group’s most important market accounting for 40% of their product, followed by the UK and then the Sadc region.


Immediate outlook


The future prospects of the group for the coming six months appear bright.

It is conceivable that Zimtiles will by the end of the group’s reporting period have paid for itself and more.


Management has indicated that PGI will continue to grow and consolidate in the Zimbabwean market which despite all its inherent problems does have a robust construction and furniture industry as consumers attempt to hedge against inflation by purchasing bricks and mortar.


The group is looking to increasingly drive its exports primarily through Zimboard and PG Safety Glass (which does export to the United States market).


However the group will continue to rationalise its export destinations so as to minimise costs in exporting to multiple destinations.


PGI will continue to attempt to drive exports of higher margin value added products.


Group’s strategic pillars


While these key pillars remain intact and there is no suggestion they will, the long term prospects for the group remain strong.


* Insatiable demand for housing remains strong.

* The resourcefulness of Zimbabweans home and abroad (diaspora) ensure demand for PGI’s products.

* PGI’s strong brand name.

* Retention of human skills.


Recommendation and valuation


There is no doubting the excellence of these results which surpassed market expectations.


The group has taken full advantage of the current economic environment aggressively driving business for the buoyant construction industry (at the moment largely residential) for both resident and non-resident Zimbabweans.


The group has not rested on this domestic success but is also becoming a serious exporter of note and it is only a question of time before 50% of their turnover is derived from exports.


Currently the share is trading on an attractive rolling PE of 5.55x. We have had to revise our full year forecasts upwards to $142.50 for the full year implying a very cheap forward PE of 2.7x.


We recommend the stock as a strong buy.


* This article was prepared by Barnfords Securities Services (Pvt) Ltd for the Royal Bank of Zimbabwe Ltd (Royal).

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