At The Market with Tetrad – TSL comes out not so smoking


By Admire Mavolwane

THE new Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono appears to have the Midas touch.



f”>The announcement of his Monetary Policy Statement and vision has seen the decline of a number of economic ills, in particular, the speculative investment tendency that had gripped the country. The just announced inflation figure for the month of December, which saw the CPI shedding 20,8 percentage points from 619,5% in November to 598,7%, seems to suggest that rampant inflation could be the latest victim.


The decrease in the overall year-on-year inflation rate was however due to the fact that, change in the average price of the basket from November to December 2003 at 11,2%, as measured by the change in the price index, was lower than the change in the average price of the same basket from November 2002 to December 2002 of 14,5%.


The money market has since the beginning of the year been characterised by extreme volatility in liquidity and consequently interest rates. Liquidity levels rose to peak at $695 billion this week, attributed in the main to net foreign currency purchases by the central bank, and funds released under the Troubled Banks Fund.


The fund was set up to confine the liquidity problems being faced by particular institutions from spreading to other market participants.


Wholesale market interest rates fell from the peak levels experienced of over 700% per annum to below 100% per annum. Short-term interest rates fell to as low as 0% at the peak of the market liquidity.


An interesting development over the last week has been the resumption of Treasury Bill tender activity with issues of 91-day and 182-day bills.


A drop in the average interest rates was seen with 90-day paper being issued at average yields of 60,5% per annum and 63,5% per annum, for 182-day paper.


The RBZ this week initiated moves to mop up the excess liquidity.

More than $500 billion worth of Reserve Bank bills have been issued for tenors of 38 days and 91days. The bills were issued to clearing banks carrying surplus positions, at a fixed interest rate of 10% per annum.


This, coupled with the Treasury Bill tenders, has reduced market liquidity to a net surplus of $150 billion. A recovery in interest rates is thus expected with the fall in liquidity.


The recovery in the stock market, which began last Wednesday, on the back of falling interest rates continued, with the industrial index gaining 205 046,9 points or 64% for the week to Wednesday to close on 525 496,86, just a few points shy of its level prior to the black Thursday, December 18 2003.


Corporate results have begun to flow into the market.

Today we look at the 12 months to October 31 2003 performances from TSL Ltd and its subsidiaries Hunyani and Chemco.


Beginning with Hunyani, turnover was up 485% to $77,9 billion, as group volumes increased 7% driven by an impressive 45% growth in export volumes.


Inflation and the devaluation of the local currency also played a part in this turnover growth. Zambia and Kenya emerged as the key export markets, thanks in no small part to the strength of the South African rand.


A tight rein on costs and improvements in operational efficiencies saw operating profits growing by 602% to $18,7 billion, as margins increased by four percentage points to 24%.


Unlike in 2002, when inflows of $38 million, in the form of interest income were recorded, a net interest charge of $140 million was incurred, on short-term borrowings utilised to fund capital expenditure.


Based on this operational performance, attributable earnings of $13,1 billion were attained, a 563% rise.


Prospects for the current financial year are not encouraging as the bulk of the group’s customers have seen their large stock holdings not moving. In addition the industrial action which was experienced in December seriously affected financial performance for that month and may inhibit performance this year.


Chemco was hampered by declining commercial farming activity, which resulted in a 40% decline in volumes for Agricura. Sales in tobacco chemical were also disappointing as the group did not participate in the Tobacco Growers Trust scheme, citing low margins from the scheme. As a result, a below inflation growth in turnover of 416% was recorded.


Like most companies faced with declining demand, cost controls become the key to maintaining profitability. Adoption of this strategy saw Chemco increasing its operating margins by 24% to 60%. Consequently operating profits grew at a much better rate of 748% to $12,1 billion. Interest expenses at $1,5 billion were considerably higher than the $12 million incurred in 2002, probably reflecting the increase in interest rates, during the course of last year. This, together with a more than seven-fold increase in minority interest, diluted the growth in attributable earnings, which came out at $5,2 billion, up 648% on 2002.


Lastly TSL’s heavy reliance on the tobacco farming sector, whose production fell by 50% is reflected in the mere 331% growth in turnover to $69,6 billion. The change in the exchange rate to $800 per US dollar somewhat helped offset the decline in tobacco production.


Cost controls and an improvement in margins from 46,1% to 79,5%, led to operating profits increasing by 550% to $48,5 billion.


After accounting for share of associated companies’ profits of $2,5 billion and $3,2 billion in finance charges, and a taxation charge of $12,6 billion, bottom line earnings of $31,1 billion were achieved, up 576% on 2002.


Going forward, it remains to be seen what impact the payment to tobacco growers of an exchange rate based on the 75:25 retention ratio, will have on the success of the TSL tobacco contract growing scheme and tobacco farmers in general, on which future performance of the group is heavily dependant.

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