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Financial results to reflect hostile climate

NO major surprises are expected when companies publish interim financial results for the period ending June at the beginning of next month, analysts have said.

Problems that characterised the last quarter of last year are likely to eat into the revenue of most firms, reducing profits or leading to losses.
Expensive finance, lack of lines of credit, high cost of utilities and intermittent power supplies are problems the local industry faces and the effect is that they are less efficient and could not compete with products from the region.

Analysts said most sectors are yet to return to profitability as they still have to increase their turnover provided there is demand for their products and they have access to capital.

Some economic analysts said interim financial results which are expected during the first week of August may not be adequate indicators of the future, but proposed strategies by management could be good pointers.

“Whereas hyperinflation covered for managerial incompetence, the obtaining economic stability will definitely sink poorly run companies. This means that over and above the numbers, investors have to also examine the people running those companies,” said an analyst with a local bank.
Lines of credit have not come in sufficient quantities as expected towards the formation of the inclusive government and local industry has been relying on loans from domestic banks whose operating expenses are very high.

The interest rates on the few available funds ranging between 7% and 18% are high.
According to Finance minister Tendai Biti’s Mid Term Budget, all sectors of the economy are still depressed and this was likely to manifest during the reporting season.

Biti said agricultural growth of 18, 8% in 2010 was expected to be up on last year’s 14, 9%. 
“This is mainly driven by tobacco, up 67, 3% from 55, 6 million kg in 2009 to 93 million kg; maize, up 3% from 1, 24 million tonnes to 1, 33 million tonnes; and beef up 2% from 93 000 tonnes to 95 000 tonnes,’ he said.

Some of the listed agriculture counters are AICO, Border Timbers, Ariston, Colcom, Cotton Company of Zimbabwe and African Distrillers.
Productivity at mining counters such at Bindura Nickel, RioZim, Hwange and Falgold continued to be hamstrung by erratic power supply as reflected in the results.

“This has meant that mining houses have not been able to sustain increased production even in cases where they have had limited access to lines of credit in support of recapitalisation,” said Biti.

As a result, realised output during the first half of 2010 has prompted downwards revision of mining sector growth from 40% to 31% this year.  Most of this growth is underpinned by continued bullish mineral and metal prices.

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 Zimbabwe 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 post losses after tax.

The momentum of recovery in the manufacturing sector has not been sustained during the first half of 2010 as reflected by sluggish gains in average capacity utilisation levels still hovering around 35-40%. This has been reflected by the trading of manufacturing counters since the beginning of the year.

Paul Nyakazeya

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