By Admire Mavolwane
INNSCOR’s passion for expansion seems to be paying dividends as evidenced by the group’s recent interim results to December 31 2004. The numbers, described as disappointing by
many, were, some would say, rescued by the group’s share of earnings from Natfoods and Colcom.
These were accounted for as associates. With effect from February 1 the latter will be consolidated as a subsidiary following the increase in the group’s shareholding from 43,8 to 76,6%. Operational performance was uncomforting, with margins succumbing to cost pressures as well as the absence of stockholding profits of old, whilst export businesses were left scarred by the increasing misalignment between the exchange rate and local inflation.
Expansion of regional operations is still ongoing but these continue to sing the same old song. The number of fast food counters under the Exxon Mobil regional deal has increased with 8 counters coming on stream in the last six months thus, bringing the number to 169. Critical mass, however, remains elusive as these regional endeavors are yet to contribute meaningfully to the bottom line.
Turnover for the group grew by 288% to $758,2 billion whilst, as mentioned earlier, operating margins lost fourteen percentage points to 9%.
Consequently operating profits grew by a watered down 50% to $67,9 billion.
Net interest income of $17,6 billion, coming from the group cash resources, which at the time of reporting stood at a whopping $90 billion, and the equity accounted earnings lifeline of $60,4 billion saw attributable earnings recording a respectable growth rate of 175% to $91,8 billion.
Much to the chagrin of many shareholders, despite such a huge cash pile, the group could not pay a dividend as it is encumbered by the concessionary funds that it accessed for some of its businesses. The group had an interest bearing debt of $53,8 billion as at the balance sheet date, a portion of which was attracting productive sector facility rates.
Colcom’s performance was buoyed by the more stable economic conditions prevailing from the second quarter of 2004 onwards — this facilitated sales volume growth in some product lines.
Margins were, as can be expected, depressed, whilst the EPZ factory’s profitability was severely compromised for much the same reasons as other exporters. Turnover of $168,5 billion was achieved reflecting a growth rate of 280%. Local sales contributed 88% and returned a higher growth rate of 328%. On the other hand foreign currency-denominated revenues grew by 111% to $20,6 billion. Operating margins declined from 47% to 29% and the impact filtered down to the bottom line which grew a sub-inflation 143% to $37,4 billion.
Going forward, the focus will be to realise volume growth across all product lines and processing facilities at the least possible cost. Restraint on the part of National Employment Councils and utilities in terms of wage and tariff increases respectively as well as a more competitive exchange rate would augur well for the fortunes of the group. The region is reportedly thirsting for the group’s products. The closer relationship emanating from Innscor’s increased shareholding would add impetus to the group’s growth strategy.
Natfoods’ numbers made more palatable reading. Turnover growth of 317% to $727,8 billion was recorded. A ten percentage point decline in operating margins (to 24%) as cost pressures took their toll diluted the growth (199%) in operating profits to $177,1 billion. The threefold increase in interest charges to $10,4 billion, could not dent the growth in attributable earnings to $115,4 billion. This translates to 196% year-on-year return.
These results were well received by the market, with the share price going northwards at a time Innscor and Colcom prices were going the other way. For the third year running, the company continues to surprise, by overcoming local shortfalls in critical raw materials — wheat, soya beans, maize were all in short supply as well as shortages of foreign currency required for the importation of other essentials such as rice and salt. As a sweetener the board declared a dividend of $140 per share, payable out of the $24,5 billion cash mound.
For many companies the focus throughout the whole of last year was understandably cash generation, whilst at the same time maximizing on the differential between the cost of concessionary borrowing and interest rates prevailing on the money market. Why else would a company with close to $100 billion in cash be borrowed to the tune of $50 billion? The answer could be that management is seeking to maximise shareholder value by taking advantage of interest arbitrage opportunities.
What would the company’s core business be? Should a company derive the bulk of its earnings from operations or from other sources such as ‘treasury’ management? These are some of the questions that have sparked a lot of debate amongst analysts.
Some contend that companies should stick to their core business, hence the punishment meted out to Innscor’s share price for having the bulk of its earnings coming from associates. The difficulty in most instances lies in the definition of core operations. In the absence of management coming out clean and clearly articulating what the core business agenda is and actually walking the talk, one can only speculate.
Be that as it may, a non blinkered business strategy that takes advantage of every opportunity sometimes yields positive outcomes as Innscor’s latest results bear testimony. But an aggressive acquisitive growth strategy is no easy walk: reference Innscor’s close shave with the CFX Financial Services debacle.
When all is said and done, a company’s core business after all, is to create wealth for its shareholders and the wider economy through proactive, ethically acceptable and innovative means. So, why would one find fault in Innscor’s ways?