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At The Market With Tetrad

Public enemy down but not out

By Brian K Mugabe

“PUBLIC enemy number one”, inflation, has continued to be slowly but surely run out of town, at least according to the official figures

, as the price increases experienced thus far this year have remained below those of the comparable period of 2003.

The latest figures for August as issued by the Central Statistical Office indicate that year-on-year inflation was down to 314,4% compared with 362,9% recorded in July. Month-on-month inflation also slowed to 5,3% having increased from 6,01% to 9,48% between May and July.

Given the high base this year’s inflation figures are working from, this overall trend is likely to continue probably until after November, given that November 2003 was the month in which month-on-month inflation reached its all time high of 33,58%, before the shocks resulting from the stratospheric rise in interest rates during the last quarter of 2003 led to a liquidity crunch that virtually collapsed demand and speculative activities. After that, it is possible that cost pressures will begin to push through, growing as they will be from a lower base.

In the short-term, that is looking to September, it is possible that we could see an upward spike in the rate of inflation, particularly month-on-month, given the recent fuel price increases as well as the fairly substantial increase in telephone charges experienced recently as all holders of landlines, I am sure, can testify to. Also, as has happened traditionally, quarterly annualised inflation has tended to increase in the months of April and September as the graph below shows, fuelled by industry and public service salary and wage adjustments.

The lack of excitement on the stock market has basically mirrored investors’ lack of excitement with the continued publication of results, of which we shall look at the year-end and interim results to June of Innscor and associate company Natfoods, respectively.

Beginning with the latter, turnover for the period was up 544% to $237 billion, a growth rate which while relatively impressive was hampered by the fact that the company’s customers were by and large in an overstocked position, such that Natfoods sacrificed price and hence margin, in an effort to stimulate sales. Despite that strategy, net volumes still took a knock.

As alluded to above, Natfood’s operating margin came off substantially from 32% to 20%, with cost pressures remaining prevalent, and thus operating profits grew by a below turnover 314% to $48,2 billion. A net interest charge of $8,5 billion, resulting from the company as well as its debtors experiencing cash-flow constraints during the high interest rate period, further compromised the bottomline, which came out at $27,5 billion for the half year, an increase of just 245%.

Innscor’s results made far better reading as the group continued to strengthen its position in the market. Turnover grew by 631% to $575 billion, driven by increased volume growth in most of its business lines, as well as increased presence and capacity in the regional markets.

Operating profit, however, did not maintain the growth in revenues, increasing by 387% to $122 billion, reflecting a drop in margin from 31% to 20%, as apart from the ubiquitous hyperinflationary impact costs, the group elected to expense the start up costs associated with of Spar Zambia and Innscor Malawi Distribution.

Unlike most other listed companies, Innscor had taken the decision to switch to cash prior to the spike in rates, and this manifested itself in a net interest receivable position of $23,9 billion. Materially improved contributions from associates Colcom and Natfoods, of a combined $29 billion, as well as a slightly lower effective tax rate boosted attributable earnings growth to an impressive 585%, giving a figure of $108 billion.

While disappointingly, the regional operations are still to reach critical mass and contribute positively to earnings, the group has continued to consolidate its local operations organically and more so by related business acquisitions. Innscor expects to continue driving growth via the latter option given its strong cash generative capacity.

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