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At The Market with Tetrad

Zimsun move heralds a new dawn

By Brian K Mugabe

RESULTS being published by listed corporates continued to exceed expectations, thereby belying the strained economic

environment in which we find ourselves, an environment characterised by shortages of power, fuel, raw materials, forex and, who would have imagined it, our own currency!

Nevertheless, commerce has moved forward, as companies have realigned their way of thinking, moving from traditional models to leaner, more adaptive ways of doing business.

New markets have had to be sought, while cost structures have been re-engineered to try and maintain margins in the hyperinflationary environment.

Where new markets have been found outside the country, movements in the currency have more than compensated for the impact of inflation on costs, while those enterprises exposed solely to the domestic market have managed successfully to pass on the costs to consumers by pricing products at replacement value.

Although volumes for some in the latter grouping have declined, the consumptive nature of our economy, a direct response to the hugely negative real interest rate scenario, has ensured that corporate earnings have at the very least kept pace with the official rate of inflation.

Recently released results like those of Natfoods, which published its interim results to June last week, have in fact seen earnings growth by far outstripping official inflation which currently stands at 364,5% for the month of June.

Turnover for the six months was up 247% to $36,8 billion compared with half year 2002, a sub-inflationary movement reflecting the impact of price controls for much of the period under review, as well as lower throughput due to the reduction in wheat and maize volumes courtesy of poor weather and land reform-induced shortages.

These negative factors were however, offset by the awarding of toll milling contracts from the World Food Programme and a steady performance from the group’s packaging division.

Cost containment came to the fore, with selling, distribution and transport and administration costs being restricted to growth of 64%, 105% and 159% respectively, as new software allowing greater focus on margins and the reduction of stock and raw material shrinkage paid dividends.

Along with an increase in other income from $18,6 million to $880 million, this saw operating margins surge from 11% to 32%. Operating profits of $11,7 billion were recorded, up 893%.

As a result of the sterling operational performance, attributable earnings of $8 billion were attained, up a massive 992%.

The company foresees a similar second half performance, though the cost of imported raw materials is expected to rise significantly which may impact negatively on margins. Efforts to restore historical volumes to core product lines will continue, while it is felt that the shareholder changes that have resulted in an indigenous consortium coming on board should better enable the company to deal with the changes that the milling, food and agricultural sectors have undergone.

Following the superlative results from Trust that we reported upon last week, Kingdom produced results which while good, confirmed that those of the former will indeed be a tough act for the other banks to follow.

Net interest income was up 505% to $7,2 billion as with Trust, the group benefited from the increased margins arising from an increase in retail deposits, the impact of which was an increase in the net interest margin from 26% to 37%.

The most notable revenue item was the twenty-one-fold increase in dealing profits from $416 million to $8,6 billion. Dealing profits have traditionally been made up of profits from dealing in derivatives, equity securities and foreign currencies. Other income at $3,9 billion was up 189%, and total operating income gained 565% to $19,8 billion.

The cost to income ratio experienced a significant improvement, going from 51% to 33%, and after accounting for 470% increase in the provision charge to $578 million, operating profit of $12,8 billion was achieved.

Contributions from the regional operations by way of equity accounted for earnings of $258 million which remained disappointing, hampered further by the fact that the Botswana banking licence was awarded later than expected.

Nevertheless, impressive bottom line earnings of $8,4 billion were generated, up 822% on 2002’s interim figure of $913 million.

The balance sheet grew at a far more subdued rate, with total assets increasing by 92% to $159 billion from the year-end position of $83 billion, with management stating that they had made a concerted effort to restrict and “cherry pick” loans and advances in line with their outlook for the economy, while switching emphasis to trading.

It is anticipated that the second half of the year will reflect a stronger performance for the group, particularly with the coming on stream of the Botswana operation.

The private banking initiative is also expected to drive the bottom line, while the group will look to increase its stake in the Malawi and Zambian operations from associate to controlling shareholder levels.

In corporate news, Zimsun this week published the details of the intended demerger of its property investments.

If approved by shareholders, it is intended that the proposed demerger will be facilitated by way of a distribution in specie of 80,01% of the group’s immovable hotel property owning interests held through a wholly – owned subsidiary, Dawn Properties.

The terms of the distribution will be one Dawn Properties Linked Unit for every one Zimsun share already held. 19,99% of Dawn Properties Linked Units will be retained by the group for collateral security purposes. The provisional listing date of the Linked Units on the ZSE is September 9.

In a new development for the Zimbabwean market, Dawn Properties will operate as a Variable Rate Loan Stock investment vehicle, whose Linked Units will be listed on the stock exchange. Each Linked Unit will be made up of a 99c debenture, with a variable debenture interest rate and, a 1c ordinary share.

Income for unit holders will be in the form of interest from the debenture portion and dividend income and capital appreciation from the equity portion. Dawn Properties will own 10 of the immovable properties currently owned by Zimsun.

It is envisaged that the restru-cturing and subsequent demerger will allow the group to focus on its core businesses of hotel and related leisure and entertainment management, while at the same time allowing shareholders to enjoy the commercial worth of the properties, which in the directors’ opinion has not been fully reflected in Zimsun’s share price.

Century also this week announced its intention to hold an EGM where it will seek shareholder approval to undertake a renouncable rights offer for the purposes of raising capital to finance its branch rollout programme, further IT investments and group working capital.

The terms of the offer will see 299 829 950 ordinary shares being offered to existing shareholders at a subscription price of $7 each, in the ratio of one new share for every four held as at the record date. It will be interesting to see what levels of support the offer garners given the disappointing financial performance of the company in recent years.

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