December is traditionally quiet as companies wind up their operations in preparation for annual maintenance of plants and machinery which usually stretches for a month starting mid December running to Mid January. Similarly other market players will be taking their holiday breaks.
Usually the markets tend to trend sideways in a directionless fashion. Since the beginning of this December the industrials have shed 3,88% whilst the resource index has plummeted by 4,34%. The value lost by the mainstream index since the beginning of the year currently stands at 2,12%. Mining counters however remain on the upside with a gain of 18,92% anchored by the strong performance in Hwange that has put on 114,29% since the beginning of the year. Besides the deceleration linked to the festive season, sentiment also appears to have been upset by downbeat financial results for most of the companies reporting in September.
With the exception of a few, most companies that have published their financials over the past month remain in the doldrums and their chances of recovering look very distant. The loss positions for some of the companies are worse than last year yet expectations were high that things had to improve in 2010 and beyond. What is more worrying is that the management of some of these companies are clueless on the possible strategy of turning around the fortunes of their respective businesses.
Arguably the more respectable financial results published recently were by property counters Mashonaland Holdings and Dawn. The duo had operating profits of US$2,3 million and US$326 583 respectively. Property companies are benefiting from the stable environment where there are charging market rentals and tenants are paying up their dues reasonably well. Monthly rental collections are now more than sufficient to cover operating expenses as average rentals per square metre (sqm) have improved from levels of less than US$1 per square metre obtaining when the economy dollarised. Effective average rent per sqm for Mashonaland in the period to 30 September stood at US$3,20. Rental yields have also improved to 8,4% from 5% in the previous year. Furthermore tenants are now able to pay their rent on time as evidenced by the decline in rental arrears. For Mashonaland, rental arrears improved to 9% from 15% obtaining in 2009.
Below par financial results came from Cairns, CFI and Bindura. The former recorded the highest pretax loss of US$9,9 million weighed down by high finance charges of US$3,5 million. Capacity utilisation stood at 23% at the time of reporting compared to 5% prior to the adoption of multiple currencies. It is difficult for a company to operate profitably with production taking place at such low levels. Basic economics states that unit costs of production go down as the level of production increases. Hence operating at such a low level implies that the costs of production per unit will be high.
Likewise, CFI continues to disappoint closing off another year with a pre-tax loss of US$3,5 million which was more than double the US$1,3 million recorded over the same period last year. All operating units namely the Poultry, Retail and Specialised division closed in loss positions of US$1,6 million, US$869 000 and US$ 1 million respectively. CFI franchised its Town & Country supermarkets to Afrofoods for a period of three years due to the cut throat competition in retail. Reasons advanced for the dismal performance included the tough competition from imported meat products together with tight liquidity in the operating environment. The US$3,8 million secured from the PTA Bank post year end is insufficient for the company’s capital requirements. Management hinted that the company is planning to raise capital using a combination of equity and debt instruments.
Bindura’s interim financial results to 30 September 2010 also painted a gloomy picture for the troubled nickel mining group. The company remains under care and maintenance implying that there is no production taking place while costs are being incurred to take care of the equipment. Gross turnover for the period was just US$754 255 and the company went on to make a loss after tax of US$6,5 million. It is now more than two years since the company went into care and maintenance and up to now it is still struggling to secure funding to resume operations with at least US$20 million required to kick start operations at Trojan Nickel Mine.
The solution to most of the struggling company is the injection of new funding into the businesses. Losses are emanating from using expensive funding that is wiping off the little profits through high finance costs. Companies should therefore put plans in place to secure funding at reasonable prices.
The most feasible way is through offering some equity in exchange for new capital. Unfortunately this option is not very popular among the business owners in this country as they do not want to lose control of their businesses. However, soon rather than later many will be forced to bring in new equity partners or endure the pain of seeing their companies collapsing.