Pelhams one foot out of the woods

By Admire Mavolwane



THE turn of the new millennium saw a number of new buzz words gripping the investment market. The era of diversification and conglomeration had gone

and “demerger”, “unbundling” and “core business” were terms that became the order of the day.


Setting the trend was Anglo American Corporation, probably Zimbabwe’s then foremost conglomerate which started selling off its non-mining assets in the late 1990s.


TA divested from the food and manufacturing businesses but retained its insurance and hotel interests. By 2000, the fad had really caught on. Apex Corporation, Delta, TZI, Astra Corporation and Mash Holdings followed suit undertaking a number of spin offs by way of de-mergers, unbundlings and management buyouts. In all cases the justification was the board and management’s intention to unlock shareholder value and focus on core competences.


This week we focus on the six months results from two Zimbabwe Stock Exchange-listed entities borne out of a de-merger of Delta’s retailing divisions, namely, OK Zimbabwe and Pelhams. Since their weaning from the corporate parentage the two have met with mixed fortunes. Pelhams was the last to leave the stable following its de-merger in April 2002. The company had a swell time until the tide turned in December 2003.


Since then, the going has been more than tough for the big ticket furniture items purveyor and from September 2004 to March 2006 the company had been reporting losses. However, it appears the company is coming out of the woods now. For the half year to 30 September 2006, it recorded a modest profit of $102 million.


The extent to which disposable incomes have shrunk is in a way reflected in the company’s volumes performance which when compared with the same period last year have halved.


In absolute terms the group sold only 3 290 units — comparative period: 6441 — of its major product range which comprises lounge, bedroom, and dining room suites as well as fridges & freezers, televisions and bedding. However, as a result of replacement pricing total sales grew by 971% to $637 million.


With finance income inflow of $84 million and “other” of $36 million, operating profits were $486 million. The company enjoyed good gross profit margins of 57%, up six percentage points from 51%.


An off shoot of the good operating income inflow and gross margins was the growth in operating profits of 7 823% to $147 million as the corresponding margin improved significantly from 3% to 23%.


The debits, which included an interest bill of $24 million, exchange losses on the ZAR640 000 obligation to the software supplier of $8 million and deferred tax of $14 million, meant that shareholders could lay claim to attributable profits of $102 million referred to above. Last year, the same period saw losses of $4 million being recorded.


In the first four months to July the retail arm of the company recorded losses and only managed to return to profitability in August and September.


Consequently, the funding arm carried the group. Thus in the terms of segmental reporting, the retail unit provided only $4 million whilst the financing unit contributed the rest of the profits.


Notwithstanding the difficult economic conditions, management vowed not to relapse into loss making positions again and intend to fight aggressively for market share, leveraging on their strong brand and distribution network.


Proceeds from the capital raising exercise concluded in April this year which netted $7 million have placed the group in a good and debt free stead.


Forget Pelhams’ past woes, OK on the other hand has been riding on a crest wave. In the past six months to September 30 2006, sales grew by thirteen fold to $22,4 billion, which compares favourably with
average inflation for the period of 1 107%.


Perception is reality and compared with its major peer TM, OK was perceived to be the more expensive of the two. To remedy the situation, management decided to reduce aggression in the growth of margins opting to defend market share and grow volumes.


Consequently operating margins were more or less constant at 9% having lost one percentage point from the previous 10%. The corresponding profit line grew by a factor of eleven to $2 billion.


Interest income has always been a significant line item in the company’s income statement and at $1,3 billion inflow, OK easily surpasses the figures recorded by a number of smaller banking institutions. The contribution of finance income to profits before tax rose from 26% to 40%.


With more focus on volumes rather than margins, the contribution of interest income is set to rise as the company tries to maximise on the cash pile which at the balance sheet date stood at $2,8 billion.


Attributable earnings of $2,6 billion were realised, up 1 296% on the comparative period of 2005 and as usual, half of these earnings will be paid out to shareholders in the form of a dividend.


Was shareholder value unlocked by the de-merger of Pelhams? Proponents of diversification would beg and to differ and proffer that had the company remained part of Delta its funding constraints would have been taken care of by Delta’s huge cash flows.


They would further argue that when most in the furniture retail sector were struggling in 2004, Pelhams would have even strengthened its position in the market benefiting from cross subsidies within the group. Food for thought.

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