HomeBusiness DigestJune earnings to further depress ZSE

June earnings to further depress ZSE

WHAT a good way to start the earnings season in a depressed market. In the US railroad operator CSX Corp announced better-than-expected profits for the second quarter of 2010 on Monday before the aluminium giant Alcoa did the same on Tuesday.

The earnings figures breathed some life into Wall Street after several weeks of investor pessimism.

Things turned more exciting end of day Tuesday when the world’s largest chipmaker, Intel, posted “best-ever” quarterly sales and profits. These results were interpreted as an additional sign that the US economy is improving despite the fear and panic regarding Europe and the threat of contagion in that region. This has, however, created a crisis of expectations for other companies reporting second quarter performance in the next few days.

Back home, the June earnings are expected to start coming onto the market any time from now. Unlike on Wall Street, there is very little to expect from the local companies. The whole economy appears to be on a slowdown and it is doubtful the official target growth rate of 5, 4% will be achieved this year. Arguably the only positive news is coming from the tobacco industry where the national output target for the present selling season has been reviewed upwards to 114 million kg from the initial projection of 77 million kg. But tobacco is only a small portion, significant though, of the national economy.

There are few companies on the Zimbabwe Stock Exchange (ZSE) that are directly involved with tobacco.

 

TSL runs probably the bigger of the two auction floors in the country and provides the Hessian bags for the packaging of the golden leaf through its unit, Propak. Its other subsidiary, Chemco, is a retailer of agriculture chemicals while Hunyani, a TSL associate, manufactures packaging material, some of which is used in the tobacco industry. Another player in the tobacco industry is BAT which produces cigarettes for local consumption and export.

 

These companies should benefit to varying extents from the higher than anticipated crop size. BAT reports in June while TSL and its subsidiaries have an October fiscal year end.

The bulk of the companies reporting in June are banks, many of which have not fully grasped how to be profitable in a dollarised economy. Banks have been on the front position in right-sizing – a fancy term for job cuts – their businesses as many had become ineffectually large during the hyperinflation period. Business remains subdued in this sector despite the sustained increase in deposits. Bank deposits are said to have reached US$1, 9 billion in June, a growth of 35, 7% on December 2009. The bulk of those deposits are sitting with the big banks as was the case in 2009 when CBZ alone had 27%.

Bellwethers in this sector should be in the black while the smaller institutions are still battling to meet minimum capital requirements.  Already NMB and FBCH have undertaken rights issues while CFX merged with Interfin as a means of capitalising their businesses. Another rights offer is in progress at TNH as the group seeks to regularise the capital injected into the bank by the controlling shareholders.  What this means is that the majority of the players in this sector will not report positive earnings and at worst some could follow NDH which surrendered its merchant bank licence to the regulator in June.

Away from the banks, other companies that have June reporting periods are not likely to fare any better. The likes of Innscor and its subsidiary Colcom could post some profits but there is higher possibility that the amounts will be much less than last year. This is because the margins have declined as a result of increasing competition and falling demand due to lack of growth in disposable incomes. A member of the Innscor group, National Foods, is likely to disappoint again after it suffered a loss of US$1million in the December 2009 interims. Well, maybe we have spoken too soon.

Among the small capitalisation companies, Turnall and Zimplow posted impressive financial results in 2009 and the market could be awaiting the duo’s June figures with keen interest. In the case of Zimplow the bulk of its revenue and earnings comes in the second half.

It is however simplistic to project the earnings based on the performance in 2009 because business conditions have changed, for the worse in most cases. While last year the economy experienced disinflation, inflationary pressures resurfaced as early as the first quarter of 2010 with annual inflation in May 2010 at 6, 1%. Capacity utilisation remained stagnant at best and declined in worst cases reflecting deterioration in fundamentals compared with last year. With this background it does not necessarily follow therefore that companies that were profitable in 2009 will post impressive earnings again this year. None of the lossmakers in the prior year are expected to post any profits in the current period while the worst affected still stare closure in the eye.

It is paradoxical that the same June earnings which have pushed up the Dow Jones Industrial Average and other key global indices this week will likely depress the ZSE further once companies start publishing. But that is the setback of having an economy that is decoupled from the rest of the world.

 

Ranga Makwata

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