At The Market with Tetrad – Cottco spins a merry yarn

By Brian K Mugabe

THE darlings of the stock exchange in 2000/2001, the financial counters, have had a far more difficult time of it over the past two years as their era of super profits, courtesy of the mism

atches inherent in the economy and, admittedly, a fair amount of greed, came to a sharp stop.



Closures, curatorhips, liquidations and investigations, as well as the warranted fears on the sustainability of these earnings, resulted in the sector become an investor’s pariah, the result being that their share prices generally underperformed the market in 2002/2003.


The impact of the monetary policy statement, which at first was to further worsen sentiment towards financials, has now begun to have the opposite effect as the bigger players such as Barclays have seen their fundamentals improve thanks to the rationalisation of the industry.


The smaller players too have seen benefits by way of speculative interest, the market being awash with rumours of mergers and acquisitions.


This is reflected in the year to date performance of the ZSE up to June 16. An analysis of the top ten performers reveals four banks in that esteemed company, namely, Barclays, up 489%, CBZ 427%, Finhold 300% and First Bank 171%, the first two in fact being the number one and two for the year.


One of the major drivers of the re-emergence into favour of financials has no doubt been the staggeringly impressive interim results to March 31 from the hitherto perennial underperformer Finhold. This has forced the market to reassess the earnings potential of the sector.


Net interest income was up a massive 3 721% to $152 billion, admittedly from a relatively low base, as the interest margin shot up from 6% to 47%. This performance brought the bank more into line with margins achieved by peers such as Barclays and Standard Chartered, whom it had lagged by a long way in prior years, as it failed to efficiently “sweat” its assets.


Its large deposit base, the bulk of which is made up of “cheap” current accounts, would have also done wonders for its net interest income particularly given the stratospheric rise in interest rates experienced at the end of 2003 and early 2004.


Other income grew by 985% to $26 billion, this mainly comprising fee and commission income which went from $2,3 billion to $19,2 billion, whilst forex income went from $72 million to $6,6 billion. After accounting for a fair value adjustment of a negative $5,4 billion, total income of $173 billion was achieved.


Operating expenses growth at 1 370% was well ahead of inflation, staff and administration costs in particular having surged upwards. The impressive income performance more than offset this however, and the cost to income ratio experienced a significant improvement going from 53% to 30%, bringing it into line with the lowest in the sector.


The bad and doubtful debts provision went up forty-two fold to $31 billion reflecting the current parlous state of the economy, as well as the 436% growth in loans and advances. The quantum of the provision does, however, bring into question the overall quality of the lending book.


On the back of this notable all round performance, as well as a major reduction in the effective taxation rate from 50% to 38%, attributable earnings of $56,7 billion were attained for the first six months of the year, up 2 951%.


Another superlative performance was produced last week by Cottco as it furnished the market with its results for the year ended March 31.


Turnover was up 952% $278 billion, as the company benefited from the official devaluation of the currency, an increase in cotton seed intake from 133 000 tonnes to 145 000 tonnes as national crop output increased 28% to 250 000 tonnes and improved international lint prices courtesy of strong world demand, driven in particular by the Chinese economy.


Cost of sales growth at 953% was in line with the growth in turnover, affected by much the same factor, that is exchange rate movements, increased intake and sales, as well as the upward adjustment in the producer price from $56/kg to $405/kg during the year under review.


Operating profits of $149 billion were recorded which at 903% growth was lower than the growth in turnover. As a result, the operating margin declined from 56% to 54%. The decline in margins was attributed to a 1 048% rise in operating expenses, mostly a function of the movement in the official exchange rate from $55:US$1 to $824:US$1, as the company, being substantially a net exporter, has all along valued its costs, (and revenues), at the official exchange rate.


Finance costs ballooned to $32,9 billion from an income position of $902 million in the prior year reflecting the increased costs of financing the crop at higher input and producer prices, as well as the rise in interest rates during the year.


Income from associate Seedco, of $7,5 billion, up from just $188 million diluted the impact of the finance charges somewhat and with the estimated tax charge remaining very low at 16%, thanks to the EPZ status of two of the company’s ginneries and the fact that the company exports more than 60% of its output, bottom line earnings of $102 billion were attained for the year, up 658% on 2003.


With the company expecting an even bigger national crop, in excess of 300 000 tonnes, in the current year, as well as world lint prices remaining at current high levels in the medium term, Cottco should continue to produce sterling results going forward. Being mainly an exporter however, to what extent these results will impress the market is likely to depend on the extent to which the managed auction rate is allowed to devalue, as surely it must, over the course of 2005.

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