Tetrad – A week of interest for investors

THE topical issue this week had been what impact the $1 trillion plus in RBZ financial Bill maturities would have on both the money and stock markets. The central bank, in a bid to mop up this liquidity had made an announcement that with

effect from June 6 they would issue compulsory “special” Treasury Bills to financial institutions found with surplus funds after clearing as part of its liquidity management policy.


The yield on these bills would apparently be determined by the forecast inflation rate of the central bank, whilst the tenure would be three or six months. By the time of going to print, the central bank had issued $1,04 trillion of these bills, with varying tenures. At least 45,37% of the bills were issued for two years at a rate of 70,8%; 31,95% were issued for one year at a rate of 101,2%; 13,61% were issued for nine months at a rate of 101,6% whilst the remaining 9,07% were issued at a rate of 102,2%.


Money market activity remained subdued as a result of the issue of the special bills with most institutions not keen on taking deposits. As a result of the liquidity money market rates collapsed with rates in the short end up to 14 days being quoted between 5% pa and 20% pa while those in the long end were quoted between 50% pa and 100% pa.


The stock market on the other hand did see increased activity during the week, though not to the extent some may have been expecting, as much of the liquidity was siphoned out of the market. In the week to Wednesday June 23, the index gained 1,9% or 10 998 points to close at 589 558 points. Cautious trading in both markets clearly remains the order of the day.


Talking of interest rates, this week we look at the year-end and interim results of Pelhams and CFI, respectively, both unrecovered victims of the unprecedented interest rate spike experienced during Nov/Dec 2003.

Beginning with Pelhams’ year-end results to March 31, turnover growth at 690% to $49 billion on first reading, showed some promise for the bottom line. The growth in sales, which also reflected a 12% volume increase in major lines year on year, was largely driven by a successful promotion held in January and February of this year where sales of $22 billion were generated, the promotion being a response to the collapse in demand experienced in the last quarter of 2003.


Other operating income, comprising mainly finance charges earned and exchange gains, showed similarly impressive growth of 697% to $16,2 billion. Expenses growth at 650%was contained to below the growth in turnover, and commendably, the operating margin was maintained at 54%, this despite the discounts offered during the aforementioned promotion. Operating profit of $27 billion was realised, up 697%.


The gremlin in the income statement then made itself known by way of a massive jump in finance charges from $91 million in 2003 to $13,7 billion, thereby consuming just over 50% of operating income. To enable it to conduct business to the degree reflected at turnover level, so as “to retain market share”, the group was caught with borrowings of $17,9 billion when interest rates shot up at the end of 2003, thus resulting in the clearly unsustainable interest bill. As a result bottom line earnings were significantly diluted to just $9 billion, up just 296% on the previous year.


The need for the company to recapitalize has become more apparent and been noted by its Board which, as per a cautionary issued in the past couple of weeks, advised shareholders that various alternatives were being looked at in a bid to both recapitalise and restructure the make up of the company.


Looking at the interims to 31 March 2004 for CFI, turnover for the conglomerate was up 621% to $228 billion, with the poultry division recording the highest increase of 730% followed by the “specialized” and retail divisions, with growth of 713% and 474%, respectively. Export volumes were down for the half year, the group having been forced to cease, or in some instances scale down, following the “appreciation” of the local currency.


Operating profits grew by 716% to $42 billion as margins gained by two percentage points to 18%, courtesy of higher margins from the retail division emanating from a changed and better product mix, as well as stringent cost controls. Finance costs ballooned stratospherically from $483 million in the corresponding period to a massive $62,4 billion, as the debt which stood at $23,7 billion at year-end rapidly multiplied after the now infamous interest rate hike. Of the total interest bill, $45 billion was incurred in the period from December 2003 to early February 2004.


The result was a loss before tax of $20,5 billion which, after accounting for tax and minority interest provisions, comes out as a loss attributable to shareholders of $14,2 billion, compared with a profit of $3,1 billion in the first half of last year. The group’s debt as at the half year consisted of $62,5 billion worth of concessionary financing and $13,1 billion in overdraft, which translated to a net gearing position of 53%. Post balance sheet the overdraft has been retired and the group is engaged in negotiations with other parties that will result in the disposal of “non core” assets, with proceeds going towards reducing the debt.


The management of debt has now clearly become more important for all companies following the events of year-end 2003. One hopes companies take full advantage of the productive sector facilities to re-engineer themselves so as to withstand the post concessionary funding era which, like death and taxes, will surely come.