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Dollarisation Exposes Poor Performers

IN his 2004 chairman’s letter to shareholders Warren Buffet noted that it is not possible to see who has been swimming naked until the tide goes out. The flood covers the nakedness and for a while everything looks normal.

Parallels can be drawn between the flood and the hyperinflation which wreaked havoc on Zimbabwe until the suspension of the local currency early this year. Hyperinflation covered many companies’ weaknesses. Every company was profitable even as capacity utilisation collapsed to below 10%. Of course we all know that the profits were coming from non-core business. This included activities such as trading foreign currency on the parallel market. Many companies aggressively revalued their properties and biological assets to record financial results “beyond expectations.”
The inflation tide has gone out and the nudity of many companies is now visible. The list of villains includes even some firms which for long had been on many analysts’ buy list. They thrived in the hyperinflationary environment and many thought that they would do even better in a stable economy.
That has not been the case for many companies. Capacity has improved and sales revenues have also picked up. But there is no profit. The money generated as revenue is all being used to pay operating costs. During the Zim dollar era costs were sub-inflationary but right now they are real and in most cases way above those obtaining in other countries.
Instead of focusing on cost management some companies believe that they simply need more money to become profitable. Many have failed to convince foreign financiers to give them loans and are now asking shareholders to chip in. While for properly run companies a capital injection could boost operations, for the majority of companies on the Zimbabwe Stock Exchange this is tantamount to throwing good money after bad. There is no amount of money that can revive an inefficient company. For a company to post an operating loss after achieving a turnover above US$20 million, for instance, cost efficiency must be bad.
Companies need to restructure their operations to become cost effective. They should dispose of non-essential investments.
The proceeds could then be used to recapitalise core operations. The argument that they may not be getting good prices is ineffectual because most of these investments were acquired cheaply during hyperinflation. So far only Delta and Econet have sold their investments in non-core areas to fund critical operations. Delta sold its stake in Ariston for US$4 million while Econet disposed of a shareholding in KMAL and has been selling out of various other investments.
Restructuring also ought to cover the so called regional operations. Few Zimbabwean companies, if any, have been made money consistently outside our borders. For instance, Innscor has been losing money in Zambia; Redstar has also not been successful in Zambia; FICO in Uganda is yet to make meaningful contribution for NicozDiamond while Dairibord’s venture in Uganda was a flop.
Their failure is partly because companies rush into markets they do not understand without due care but also because the Zimbabwean brand in its present form is not exportable. Management has to be decisive in dealing with those loss making regional operations if they are serious about creating value for shareholders. Rational investors are unlikely to heed calls for additional capital before the money leaks are plugged.
So far most of the companies which reported September financial results have revealed that their respective boards are finalising recapitalisation plans, most of which include rights issues. One of them, CFI, posted an operating loss of US$241 000 from revenue of US$30,5 million for the fiscal year to September 30.
The group attributed this to cost accumulation as it invested in breeding stock. Considering that the company identifies itself as a poultry business it would be prudent to dispose of investments under the specialised division to fund the chicken business. The company holds listed investments valued at US$2,6 million which could also be liquidated before approaching shareholders for further funds.
Another set of below par accounts came from Star Africa which after recording turnover of US$54 million went on to reveal a loss of US$1 million at operating level for the six months to September. The company has transformed itself from being a predominantly sugar refinery business to being a collection of several businesses with little synergies. While it will be good to grow the top-line going forward it would be better if operating costs were rationalised to enhance profits.
Equally disappointing were the interim figures from PG. With the exception of Zimtile and PG Glass all the other divisions were unprofitable. The comfort for PG is that operating income for the six months was positive at US$171 000. Revenue for the period was US$12 million. The group is contemplating raising additional capital from shareholders. Again, management is overlooking using some of its investments to provide part of the needed capital.
Zimplow provided the only positive news of the week after becoming the third listed company after Econet and PPC to declare a dividend. The company is paying out 0,12 cents per share from profits for the period to December 31. This was possible because the “group has recently experienced improved trading conditions.”
This is what shareholders expect when investing not to be asked continuously to inject capital to keep management in employment.
Thanks to dollarisation, the market now knows who has been swimming naked.


Ranga Makwata

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