Forget the Reds, meet the bona fide capitalists

Overall, the mediocre results failed to give impetus to a stock market that was already affected by foreign investor apathy and limited local liquidity. Results for the few companies that report up to February are now beginning to filter in and last week saw Tractive Power Holdings and Astra Industries reporting their half year results.

 

As with the companies that reported earlier in the year, the results reflect the effects of a less than conducive operating environment but it is evident that some business models are coping better than others. Those that are fortunate enough to have the capacity have been able to make the necessary adjustments.

Tractive Power achieved revenue growth of 16% to US$21,9million on the back of very varied divisional performances. Under the Farmec division, tractor sales volumes were 27% lower than the comparable period last year. Demand for tractors was affected by the liquidity challenges that were prevailing at the onset of the agricultural season. Reports from participants in agriculture point to a very bad season which may affect next year’s demand for tractors as well.

Surprisingly, at Northmec, generator volumes were also down slightly, by 2%, despite continued problems with power supply from Zesa. Given the number of operators selling generators that have sprung up, perhaps the 2% decline is actually not that bad. Service volumes in the unit were also down by 9%.

Barzem, which sells heavy earthmoving equipment under the Caterpillar and Hyster brands had very good fortunes, achieving volume growth of 140%. Demand reportedly emanated mostly from the mining industry, where investors continue to rehabilitate and expand operations despite a slowdown in investment in the country in general. Particularly commendable is that this growth was achieved despite competition from other established brands such as Volvo and Bell and also from Chinese players offering cheaper alternatives.

Puzey and Payne also did well, with volume growth of 75% and 17% in the vehicle sales and parts sales divisions respectively. The newly established Toyota Mutare dealership is proving to be a good move as sales have been strong there.

Unfortunately for Tractive Power Holdings, part of the growth has had to be achieved through price competition, which has compromised operating margins. Margins fell from 8% in the first half of 2011 to 5% in the first half of the 2012 financial year. Finance costs were also significantly higher, having increased by 334% to US$244,186.

 

Notably, last year’s interest bill is a low base to compare with and even with the huge increase, the interest bill is still covered 5 times. The combined effect of lower operating margins and higher interest charges culminated in a 79% reduction in shareholder profits to US$603,479.

Astra also released interim results for the same period. Both the chemicals and paints operating units enjoyed volume growth to the tune of 20% and 15% respectively. As a result revenues were 22% higher at US$13,5million, whilst operating profit margins improved significantly to 8% from 5%. Last year’s disposal of the loss-making steel division was given as the reason for the improvement. An 89% decline in the interest charge to just US$5,911 helped boost the bottomline. Profits were up by 172% to US$720,038.

These two companies have had different fortunes overall. One has increased profits while the other has experienced a reduction in profits. A common theme may, however, be drawn from the performance of the two companies. Both have had to reconsider the make-up of their group structure in light of the changed operating environment.

 

Astra has had to sell off the loss-making steel unit whilst Tractive Power brought on board the new Toyota dealership. Both decisions seem to have worked for the respective companies as they have enjoyed almost immediate benefits. Astra was able to increase profits largely because of their disposal of the loss-making unit.

 

Tractive Power Holdings’ new Toyota dealership was the star performer in the Puzey & Payne unit, which had 75% growth. In contrast, other listed concerns have either been reluctant to dispose of loss- making subsidiaries or failed to take on new opportunities that can add value, largely due to capital constraints.

The two companies are fortunate to have been able to make the changes they did. But for the market in general it looks like most other entities have not been as flexible. It seems any firm intending to sell a significant equity stake, or a subsidiary, is only likely to be able to do so at a significant discount to market price.

M&R is an example of a deal that has been done recently at a significant discount to market valuation. A 47% stake recently changed hands, at a share  price of 1,47 US cents, a discount of 79% to the last traded price.

It would seem the tight liquidity conditions have forced companies to either hold on to subsidiaries that they would otherwise sell or to let them go at a depressed price. Effectively, a lot of companies are being forced to hold on to their units, some of which were acquired during the ‘grab all the assets you can’ days of hyperinflation.

 

This status quo may remain in place until our market is able to attract long term capital in meaningful amounts. When that time comes we will probably experience a flurry of corporate restructurings as new investors come in and long suffering shareholders either cash in or just reshuffle the make-up of their companies.