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Some food for thought for ZSE

At The Market with Tetrad

By Brian K Mugabe

THE furore raised by members of the export community over their viability following the introduction of the foreign currency auction syste

m has continued with cable manufacturer Cafca prior to the publication of its annual results issuing a negative trading update to shareholders.

The company advised shareholders that the “phenomenal” progress it had made in penetrating regional markets as a strategy to offset falling local demand would be rendered irrelevant and in fact have a negative impact on the company’s performance in the first quarter of 2004, due to the impact of the monetary policy statement on the acquittal of export proceeds.

The current rate available to exporters via the auction, the continued surrender of 25% of export proceeds at US$1:$824 as well as the charging of electricity tariffs by the Zimbabwe Electricity Supply Authority in foreign currency has meant that the blend rate received has become unviable such that Cafca expects to make exchange losses arising from export debtors as at December 31 which would be received during the quarter, as well as committed export orders which were expected to be delivered during the same period.

So severe in fact was the potential fallout for Cafca that the company’s board resolved not to accept any new export orders effective February 20 until such a time as the exchange rate issue as it relates to export proceeds was resolved.

Turning to its historical performance, turnover for the year to December 31 was up 371% to $31,5 billion when compared with 2002, driven as per the trading update, by a 12-fold increase in exports to $17,2 billion as local sales increased by just 174% to $14,2 billion. In volume terms, exports saw an increase of 112% while domestic sales shrunk by 54%. Operating margins improved by eight percentage points to 33%, as the company priced “pro-actively”, contained costs well and booked through $1,9 billion in exchange gains. The interest charge grew by 367% to $606 million and attributable earnings of $6,8 billion were attained, an increase of 537%. This was a solid if unspectacular performance from Cafca, but the concerns now obviously lie with its performance going forward.

Fellow exporter Interfresh Ltd also released its year end results to December recently, reflecting a return that in terms of earnings growth, was more pleasing than Cafca’s.

Turnover for the year grew by 652% to $87,2 billion as most of the group’s small business units traded well ahead of the official rate of inflation, spurred by further inroads into export markets from the citrus operations in particular. Operating profit at $17 billion reflected growth of 646% as margins remained steady at the 2002 levels of 20%. The group was materially borrowed at year-end as it sought to fund working capital and new ventures, with gearing having stood at 32%. This coincided with the significant upward spike in interest rates experienced in the money market during November/December. As a result, net financing costs surged 50 times to $2,2 billion. Post year end, this gearing position has been reduced, with much of the remaining borrowings having been replaced by concessionary finance facilities. A substantially lower tax rate of 14% compared with 26% in 2002 was enjoyed as the group yielded the benefits of increased throughput in its export processing zones operations, and attributable earnings of $11,9 billion were achieved, up 664%.

Continuing with this week’s focus on exporter results, we look at those of Zimplow.

Again, courtesy of a push towards exports, a turnover increase of 495% to $8,5 billion was achieved for the half year to December 31. Local sales and volumes went up by 339% and down by 39% respectively while exports saw increases of 725% and 33%. Operating profits which at $6,5 billion were up 609%, represented an increase in margins from 64% to a very impressive 76%, courtesy of the higher margins enjoyed on export sales. The company was cash positive during the period and thus benefited from the rise in interest rates with net interest received going from $4 million to $440 million.

The storming treasury performance helped boost the bottom line further with attributable earnings of $4,8 billion being recorded for the half year, an increase of 656%.

Both Interfresh and Zimplow made reference to the possible impact of the foreign currency auction system on their viability but in contrasting styles with the former suggesting a less dramatic impact on performance than the latter perhaps highlighting the different import requirements of the two companies in relation to what they export.

Nevertheless all three sets of outlooks highlight the constraints affecting the sector as a result of the auction. The sooner the issues are resolved the better.

Turning away from results, First Mutual Ltd (FML) was suspended from trading on the Zimbabwe Stock Exchange (ZSE) for the second time this year. This was reportedly for questioning the authority of the bourse in instructing it to restructure its board and top management as well as reduce the stake of senior executives in FML that the latter purchased during the demutualisation process.

It seems to me questions should be asked as to where these queries were when the ZSE approved the issuance to the public of the pre-listing document filed with it by FML. Also, given that the country is trying to foster a culture of corporate governance and transparency, the days of the ZSE simply suspending shares without informing the investing public of the reasons for these suspensions and the conditions upon which such suspensions will be lifted, should come to an end. Some food for thought for the ZSE committee perhaps?

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