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At The Market with Tetrad

Cricis management continues to dog economic recovery

Brian K Mugabe

THE tourism sector, hampered by the negative country image and its effects on international to

urist arrivals, must have banged its head in frustration at the recent decision by the authorities to ban the carrying of fuel in containers by motorists.

With the industry having gone on a drive to encourage local tourism, the mainstay of the industry in most other countries, this announcement no doubt came as a major blow as it means locals who would have driven to the various resorts countrywide would now think twice as their ability to return home would in no way be assured!

Also, the bureaucratic hassle of having to apply for a permit before travelling would no doubt be something which Zimbabweans, as used to queuing as they have become, would surely rather do without. One hopes these knee-jerk responses, not only to the country’s fuel problems but to other economic distortions, will be tackled with more meaningful, long term strategies going forward.

Turning to results, Chemco, Hunyani and TSL, a group of companies from the same “family”, all seemed to strive to outdo each other and in so doing managed to produce interim performances that exceeded market expectations.

Starting with Chemco, the decline in sales volumes for the company’s main operating unit Agricura, a function of the reduction in agricultural activity, and price controls, saw turnover only increasing by 148% to $4,5 billion compared with half year 2002. Agpy, the dwarf hybrid maize seed producer, saw overall volumes increasing despite reduced yields from contract growers.

Operating profit growth on the other hand was up well in excess of the rate of inflation at 477% to $2,3 billion. This growth arose from a significant increase in margins which more than doubled from 22% to 50%, as windfall profits courtesy of corporate finance schemes and stringent cost containment which saw costs rise only 61%, an exceptional performance in a hyperinflationary environment, paid dividends. Along with a 188% gain in interest receivable, the company managed to return attributable earnings of $1,1 billion for the six months, up 489% on last year. Hunyani’s performance from an earnings growth perspective was even more impressive.

Turnover for the period was up 331% to $16,1 billion, as the group recorded increased sales volumes of 13%, driven by the existence of significant carry over stocks from last year’s tobacco crop which boosted demand at the Corrugated Products division. Commercial volumes on the other hand were lower as the economic malaise saw national production fall even further, encouraged by the implementation of price controls and the subsequent withdrawal of a wide variety of goods from the production process by manufacturers. Export volumes grew an impressive 56% during the half year.

Again, operating margin growth was a feature, up 9% to 21%, a function of increased exports and both the official and unofficial movement in the exchange rate. Operating profits thus experienced an outstanding escalation of 653% to $3,4 billion.

Attributable earnings of $2,3 billion were attained, an increase of 609%, substantially ahead of the rate of inflation. Buoyed up by these performances from its subsidiaries, mother company TSL could not help but shine.

Turnover at $14,5 billion represented a 229% premium on last year’s figure, as all the group businesses that are significantly exposed to the agricultural sector experienced volume declines. The aforementioned price controls also played a hand in restricting sales growth. Sales at Cut Rag Processors conversely were “exceptional” as its Remington Gold brand continued to increase its appeal in its export markets.

Operating profits surged 587% to $5,4 billion with margins going from 18% to 37%. The share of profits from associates provided further impetus to earnings growth moving as it did from $44 million to $1 billion. The group’s share in associate company Tetrad, now viewed as a non-core activity, was disposed of during the period.

The group was largely in a highly geared position during the six months, a strategy that in a negative interest rate environment has proved beneficial for many as the effects of inflation and devaluation on asset prices more than compensates for the interest rates being charged. Net interest paid for the period was $48 million, down from the previous year despite a significant increase in net borrowings. Attributable earnings of $4,1 billion were made, a fourteen-fold gain on the $292 million recorded during the first half of 2002 and in fact just falling shy of the $4,6 billion attained for the full year.

The second half is traditionally the stronger for all three companies, given that, for example, the bulk of the tobacco selling season is during that latter period which benefits Tobacco Sales Floors and Hunyani. The removal of price controls should also see greater demand from the commercial packaging side as well as better margins whilst any further devaluation will naturally boost earnings given the higher export component of some of the group’s businesses. History is thus very likely to repeat itself, meaning another strong performance can be expected come the financial year end in October.

Phoenix, recently voted top company for 2002/3 in the Zimbabwe Independent/Trust Bank Quoted Companies Survey, maintained the strong earnings pattern that has been a feature of its performances in recent years.

With the exception of tarpaulin and protective clothing manufacturer William Smith and Gourock, volume increases were experienced by the other four business units, namely Phoenix Brushware, Premier Products, Scandia Wire and J W Searcy. Sales for the half year to April 2003 hence saw growth of 254% to $3 billion. The movement in the exchange rate and volumes saw exports contributing 22% to turnover compared with 18% in 2002.

The stockholding strategy, which has proved beneficial not only from a pricing perspective, but also in terms of ensuring product availability for local and export clients in particular who worry about the capability of Zimbabwean companies to sustain deliveries, saw operating margins jump from 18% to 33%. Operating profit growth of 555% was achieved.

Increased borrowings for working capital and capex led to net finance costs of $37 million against income of $2,4 million in 2002. A reduced tax rate from 30% o 22% amplified the bottom line which grew 591% to $748 million.

The high inventory levels held at the end of the first half and increased regional demand should see Phoenix generate similarly impressive results for the rest of the year.

The stock market continued to rally this week, as interest rates showed signs of coming off, whilst inflation showed no signs of slowing. No doubt the end of month and end of quarter reporting periods for fund managers to their various clients will have boosted the market as they attempt to “massage” the numbers, and the index has surged to what on Wednesday was a record high of 259 991 points.

Whilst profit taking is inevitable in the next week or so, who would bet against the index breaking through the 300 000 point mark sooner rather than later? Any takers?

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