Is PG built for this market?

The change in year-end makes it a little tricky to compare the financial results with those of the prior period as the 2010 results are for a nine month period. However, estimates generated from annualizing the nine month results still offer a valid basis for comparison that gives a very good clue as to why BancABC and TA would want to disinvest. Despite being one of the first companies to successfully raise capital after dollarization and the sharp spike in home improvements and new home construction by individuals PG has failed to turn itself around.

On an annualized basis revenues were up by 30%, to US$39,6million, and in the commentary accompanying the results management said all units enjoyed significant volume growth.  Nevertheless, the company is still operating at a loss and finance costs jumped to US$1,6million. Like several other underperforming companies PG has high debt levels on its books. Total debt on the balance sheet is US$12,3million, 35% of which is short-term. The long-term debt is a five-year debenture with an interest rate of 10%.

 

Cashflows were strained, culminating in a net decrease in cash for the period of US$1,6million. Looking at this position together with the increasing revenues one is tempted to think credit sales are being pushed at the expense of cash generation. The company made a loss of US$5,7million for the period.

What can be done to turn around the fortunes of PG that has not already been tried? After dollarisation most companies found that they needed to rationalize operations by getting rid of non-performing units and maintaining a lean operating structure.

 

PG did this when they closed down Johnson & Fletcher in their merchandising unit and reduced the number of branches from 34 to 22. The other thing that firms were keen to do was to raise money for working capital and for retooling plants that had long been neglected in the days of hyperinflation. PG was lucky to be one of the first companies that managed to raise capital and was able to commission a new plant at Zimtile.

 

Their rights issue and debenture issue raised over US$11million meant to refinance expensive short-term debt, retool and provide working capital. It was widely anticipated that after this exercise the company would return to profitability in a short space of time. Another exercise that was carried out was a management change that saw former C.E.O.

 

Mr. Nyasha Zhou leaving the company. Yet PG continues to make losses despite raising cheaper capital, changing management and rationalizing operations! All these changes were made in a market where construction activity was picking up, particularly the construction of private homes which was boosted by the availability of mortgage finance. Could it be that PG’s business model is just not bankable?

 

Already even more money has been raised for Zimtile’s working capital and management have mentioned the need for a capital injection in merchandising.

Manica Boards and Doors (MBD) has also raised an amount of US$10,4million since year end which resulted in PG being diluted from 60% to 28%.  This amount is said to be sufficient for capital expenditure and working capital. Hopefully, this will turn around the unit’s fortunes and translate into future profitability.

 

As it stands management attribute the losses to the high cost of running antiquated machinery. But experience from the parent company suggests the availability of capital does not necessarily translate to  a change of fortunes, at least not in the short-term. Perhaps it is too early to judge PG harshly – it is only two years since they started implementing their turnaround strategy.

 

It has also to be remembered that we are in a business environment which is characterized by a lot of uncertainty. If companies fail to turn things around quickly, who knows what may lie around the next corner. There is the danger that a firm may find itself stuck with a huge debt obligation, a new but underutilized production plant and dissatisfied shareholders whose capital is stuck in an underperforming investment.

Despite this gloomy picture it is encouraging that the merchandising units seem to have finally turned the corner as they are reported to have been profitable since September 2011. In fact, we believe that inevitably concentrating on the merchandising units may be where PG’s future lies. Even after upgrading the production plant at MBD it may still prove challenging for locally made products to compete with imports.

 

Imported products from South Africa have been able to give MBD a hard time in the market because they can adjust more quickly to changes in demand. They can change their product line in response to market preferences faster than PG can change their production line. They can also adjust quantities instantaneously with minimal cost whilst PG would still be incurring fixed costs at their installed plants. 

As at the year-end PG had an unhealthy debt to equity ratio of 136% and current liabilities that exceeded current assets. In fact management admitted in their commentary on the results that they had embarked on several remedial actions to ensure the going concern status of the company. It is ironic that a company should be worried about its going concern status just two years after raising a significant amount of capital.

 

It is surprising that they were not able to maximize on the status of the brand in the market to make the new capital ‘sweat’. It is no wonder that two major shareholders have given up on PG after such a short time. What looked like a promising investment shows signs of turning out to be a debt riddled capital hungry underperformer.

Top