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Seedco: Good results in a bad market

AS the March reporting period draws to an end, seed producer, Seedco, announced solid financial results marked by a strong recovery in the Zimbabwean operations. Sales revenue for the year to 31 March 2010 increased by 43% to US$77million with the local unit contributing 17%. In 2009 Zimbabwe contributed only 11% to turnover. 

The previous year’s revenue from the local market was 9% of the total yet sales volume constituted 45%. This was a result of stringent price controls which at worst saw maize  seed selling for less than US50c a tonne (at the transfer rate) compared with US$2 500 in the region. The situation got so bad that many seed growers increasingly opted to sell their maize for human consumption because they would get slightly higher prices. In the end local seed production fell short of national requirements and the gap was being plugged by exports from the region.
Margins for 2010 were lower than usual because of a surge in commodity prices which pushed production costs higher. Gross margins slumped to 43% from 51% in the previous year as the company could not pass on the high costs to consumers for fear of losing competitiveness.  In hindsight, the decision to protect the market share at the expense of margins was decisive especially now that the commodity prices have fallen sharply and the company intends to increase output. This is a sharp contrast to the profiteering culture ingrained in corporate Zimbabwe.
The adoption of multiple foreign currencies in Zimbabwe is blamed for pushing the overheads up. Pre-tax margins fell by seven percentage points to 23%, as a result. Seedco has also been able to borrow from banks at not more than 15% unlike other local companies that are haemorrhaging because of high interest costs. Finance charges were 2% of sales.
Net earnings were not significantly different from what was achieved in 2009 with headline earnings per share declining by a marginal 1, 2% to US6.69c. What is vital about the 2010 financial statements is that they represent actual performance in US dollars as opposed to the previous year accounts that were translated from Zimbabwe dollars. Whereas 2009 earnings were paper money the latest financial reports represent real money backed by dollars and cents in bank accounts.
The statement of cash flows confirms the cash generating capacity of the business with operating activities raking in US$19.6million. Working capital commitments took up 42% of the cash resulting in the net cash flows from core business of US$11.4million.  This is an incredible achievement considering that many companies have failed to cover working capital from internal resources let alone having surpluses.
Some of the excess cash was spent on capital expenditure amounting to US$3.5m. With a cash pile of US$9, 5million on the statement of financial performance, it was only reasonable to pay out some as a dividend to shareholders. After all they are the owners of the company. All shareholders on the register as at 31st March 2010 will receive a five times covered dividend of US$1, 39cents. This should be good news to the major shareholder, AICO Africa Limited, which will pocket US$1, 3 million as a dividend. This will be a timely boost to the group especially as its core cotton operation is not doing that well.
While the reviewed performance is interesting, the company’s outlook could be more exciting if things turn out as expected by the management. For starters, shareholders should be relieved to note that their company will not approach them with a begging bowl to ask for more money. Recently, shareholders of a number of Zimbabwe Stock Exchange-listed companies have had to choose between injecting more capital and being diluted in the rights offers conducted since dollarisation. Unfortunately for many local investors, dilution was unavoidable because they did not have the money to follow their rights.
Secondly the company plans to ramp up maize production by 70% in 2011 to meet the growing demand in all the markets. With prices in Zimbabwe now market-related, the company is projected to experience significant growth in revenue. Margins are also expected to improve because of the fall in commodity prices which should see production costs declining substantially.
Thirdly, plans are underway to expand regional operations with a number of them being transformed from being seed distributors to fully fledged seed-producing businesses. For instance, the Tanzanian unit is expected to start selling locally produced seed to meet demand in East Africa. The company also announced that it recently acquired a new farm in Zambia which will be used to produce some of the key varieties for that market. 
While several companies have returned from their regional forays after losing capital, it seemed Seedco has scored more successes than failures outside Zimbabwe. Zambia and Malawi have been good investments for Seedco and it looks like East Africa may also be another hit while the only notable miss has been Mozambique.
To conclude, it is unfortunate that these good numbers from Seedco come when the mood on the market is downbeat because of lack of liquidity and the negative perception on the indigenisation policy. Although there could be some excitements on the counter on the short term, the current bearish sentiment is likely to prevail in the end.

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