By Brian K Mugabe
At The Market with Tetrad THE March/April reporting season has come upon us once again but its arrival this year is unlikely to herald as much fanfare for the equities market as it has in t
he past few years.
This scenario has come about thanks to the generally lacklustre state of the economy following the precipitous decline experienced in aggregate demand over the last six months.
In that context, the year end results of defensive stock OK Zimbabwe proved pleasing reading, being roughly in line with our expectations. Turnover for the year was up 574% to $320,9 billion. This put the company’s performance above internal expectations for the year, a situation which at one time may have seemed unattainable given the fact that November 2003 to January 2004 had seen performances below budget. The absence of finance charges from the credit furniture business for part of the financial year following the business’s disposal also had a dampening effect on turnover growth. Operating profit on the other hand was up an inflation-beating 664% to $34,3 billion, as the operating margin improved to 10,7% from 9,4%. The improvement in margins was attributed to strategic purchasing and stock holdings, a timely replacement pricing programme and a better product mix as the retailer increased volumes of its in-house brands which provide a higher margin due to their lower costs. Control on overheads also contributed to the improved margins, with overheads as a percentage of turnover, at 13,25%, being slightly above the 13,22% recorded last year.
The most outstanding figure on the income statement was the 31 times growth in interest income from a relatively meagre $184 million to $5,7 billion. The company, being naturally a strong cash generative business, saw additional cash coming in from the sale of its furniture business in November 2003 to the tune of $10 billion. This proved perfect timing given the direction interest rates took during the last two months of the year, thereby substantially boosting interest income.
An increase in the tax rate from 19% to 24% due to reduced capex allowances against higher revenues diluted the impact of the higher finance income somewhat and attributable earnings of $30,4 billion reflected an increase on 2003 of 704% compared with the pre-tax earnings growth rate of 755%. Looking ahead, the company is fairly optimistic about the future, with volumes having started to see a recovery, whilst it anticipates that the economic stability measures as proposed by the budget and monetary policy statements should lead to improved business performance in 2004.
Pretoria Portland Cement, (PPC), also published its financials to March 31 this week, though these were interim and not year end results. Driven by strong growth in cement demand in South Africa, courtesy of higher levels of infrastructural spending and housing construction, group revenues were up 16% to R1,6 billion. Industry demand for cement grew by 13% while volumes coming out of PPC went up 15%. The cement business as expected remained the biggest contributor to the group, with turnover of R1,3 billion. The packaging business experienced similarly strong growth, fuelled by demand for cement sacks in particular while other product lines saw growth described as “good”. Revenues for this segment were up 17% on 2003 to R138 million. The lime operation unfortunately had a disappointing six months with sales volumes declining 7% and revenues by 1% as a result of the unfavourable pricing embedded in certain of its long-term contracts.
Operating profit for the period was up 36% to R516 million as the operating margin improved to 32% from 27%. This margin improvement, as with revenues growth, was due mainly to the cement business which saw margins improve by 7 percentage points to 35%. Those for lime and packaging dropping by 3,3 and 1,6 percentage points, respectively. The ongoing value based management initiative, which seeks to improve customer service and operating efficiencies across the group, also continued to pay dividends.
The group’s local subsidiary, Porthold, was this half de-consolidated and treated as an investment in the accounts given the constraints affecting the company in terms of access to, and remittance of, forex, and unabated cost increases, for example that of electricity, against unrealistic pricing expectations. These factors were deemed significant enough to materially impact management’s ability to exercise effective control over the business. The resultant change in accounting policy was said to have impacted on investment income and finance costs which fell by 40% and 23%, respectively. Bottom line earnings for the half year came out at R314,8 million, up 30% from R242,1 million in the first half of 2003. An interim dividend of R2,20 per share was declared which equates to $1 636,23 at this week’s Monday auction cross rate of $743,74: R1. The company expects to report increased operating profits and cash flows in the second half of the financial year, spurred by cement demand which is expected to remain buoyant.
Lastly we take a look at some corporate news, where Cairns and Century published cautionary statements for their respective shareholders. The former announced that further to announcements made in April regarding the outbreak of fire at its Paprika Division, expert assessment of the damage done is that group profits for the year to August 31 will decrease by an estimated 4%. Century, on a more positive note, advised shareholders that the requisite regulatory approvals had now been granted by the central bank and that negotiations had reached an advanced stage, the outcome of which would be divulged in due course. It is believed these negotiations involve some sort of amalgamation between Century and CFX Merchant Bank. If this proves to be the case, this will become the first high profile merger/consolidation in the troubled financial sector, one which, if the rumour mills are anything to go by, will be the first of many.