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As the December reporting kicks in…

THE December reporting season is unlikely to bring any earnings surprises but is nonetheless important in helping to ascertain the status of the companies.

By mid-2009 machine usage in industry had risen above 30% from less than 10% when that year began. While some companies could have increased their capacity further by December, the rate is less likely to be anywhere near what was achieved in the first half for several reasons. The principal hindrance is lack of cash for working capital.
Lines of credit have not come in huge quantities as expected towards the formation of the inclusive government and local industry has been relying on loans from domestic banks. The interest rates on these funds are high while the amounts are small.
Another apparent obstacle is soaring costs particularly for water, electricity and telephone together with wages. One other factor which is usually ignored in analysing economic performance is consumer demand. Many companies experience low effective demand for their products because of little disposable incomes. Considering the high cost of capital, companies are avoiding expanding production at a faster pace than demand. Current capacity levels of 40%, although low, may well be all that this economy can sustain if demand levels are considered.  While excess output might be exported, local products have not been competitive since we started using imported raw materials in production.
Unfortunately for many companies, at 40% capacity they are barely breaking even. The overheads are high and they have proved to be difficult to curtail. Utilities and wages are the major costs but others such as maintenance and rent are also significant. Add to that the high borrowing costs and even those profitable at operating levels will still lose money on pretax. To return to profitability companies have to increase their turnover provided there is demand for their products and they have access to capital.
The challenges highlighted above call for swift action by management and boards of directors to get earnings rolling. Bold and sometimes painful decisions have to be made and be made quickly. Delta and Econet have led from the front on this issue. Delta disinvested out of Ariston to focus on its core beverages business while Econet sold out of KMAL and some other investments. The sale of KMAL shares could have been out of frustration after the shareholders fight dragged on longer.
Recent management changes at Aico, PGI and Gulliver, if they were meant to protect shareholder value, qualify as necessary painful decisions. New owners at Ariston are rumoured to have already made executive changes with a view to reviving the agro-processors.  Companies need to critically consider what they can do from within first, before calling upon shareholders to pump in new money.
As we look forward, financial results for the six months, or full year to December may not be adequate indicators of the future but proposed strategies by management could be good pointers. Whereas hyperinflation covered managerial incompetence, the obtaining economic stability will definitely sink poorly run companies. This means that over and above the financial numbers, investors have to also examine the people running those companies.
Market players should also expect to see new blue chips emerging while some Zimdollar-era star performers will sink down the pecking order.
The performance of the stock market this year will closely mirror activity in the economy unlike in 2009 when equities rallied ahead of their fundamental values. Share prices are likely to correct as financial results are announced.
This is because many companies are trading at high price multiples. For instance the price-to-earnings ratios for many ZSE entities are at best very elevated while at worst are meaningless because of losses.
For a market that depends on foreign investors such discrepancies are likely to start correcting. Either the companies start making money to justify their valuations or share prices should decrease accordingly.


Ranga Makwata

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