This time, when the market appeared to have written them off, African Sun and Art managed to post profits. Attributable earnings for the hotel group amounted to US$743 259, beefed up by ‘other income’ of US$1,7 million which the company booked in as compensation they received for the termination of one of their management contracts in Ghana. Stripping out this amount, the company had a loss before tax of US$440 990 which still compares favourably to a loss before tax of US$1,1 million recorded in 2011. Management attributed the improved performance to the recovery in resort operations, particularly in Victoria Falls.
Art also managed to record a profit attributable to shareholders, of US$244 000 compared to a loss of US$946 000 over the same period in 2011. Similar to African Sun, this was the first time in the black since dollarisation. The group was carried by strong performances at the battery division as commissioning of the new lead smelter has begun to yield results.
Batteries contributed 60% to revenues of US$16,9 million and 49% to operating profit from continuing operations of US$1,3 million. The operating profit figure also includes US$383 000 coming from timber sales from the company plantations.All units,with the exception of Eversharp, which made a loss of US$49 000 were profitable. The division had challenges in commissioning the new machine it purchased from China and management has since resolved to purchase a new moulder.
Besides both companies sharing the same reporting period, they also have a similarity in the strategy they adopted to return to profitability. African Sun withdrew from its operations in South Africa, Botswana and also disposed of Hotelserve. Similarly Art closed loss making units, namely, the Mutare Paper Mills as well as Fleximail. The company also resolved to focus on retailing imported merchandise carrying the company brands.
Markets welcomed the return to profitability of these two companies with the hotelier even making headlines in both the print and electronic media. Whilst returning to the black is commendable, one cannot ignore the fact that huge value has been lost over the years. Have the companies done any good for shareholders over the years? Both companies are now a fraction of what they were when the economy dollarised.Investors buy into equities seeking long term growth which these two companies have failed to produce. If anything,the companies have destroyed shareholder value!
The share price for African Sun for instance was US10 cents when the economy dollarized, peakedat US 20 cents and the company had a rights issue at US8 cents. Currently, the share price is trading at US75 cents — imagine the loss to investors who bought into the counter at any of those points! The trend in the share price for Art also shows a similar picture. The first trade in the counter post dollarisation was at US 7 cents, the rights issue was undertaken at US 3 cents and the counter is presently trading at US 37 cents!
Simply put, the companies are worse off now than they were three years back. In addition to the attrition they have gone through, they have accumulated huge debts. Art is currently sitting on a total debt of US$9 million and has a scary debt to equity ratio of 87%. This is despite a rights offer conducted in 2010, raising US$4,67 million. Africa Sun’s debt has grown to US$17,1 million and the debt to equity ratio is an even more frightening 112%. As with Art, Afsun raised US$10 million through a rights issue in 2009 and is currently drawing down on a US$10 million facility with Afrexim Bank.
It would appear that both companies need more funding from shareholders as the debt they are currently sitting on is not sustainable. Most of the profits the companies are generating are going towards finance charges. Art had an operating profit of US$1,3 million and, of this, US$1 million went towards servicing the interest bill.
The strategy of disposing of excess assets which the company has adopted is unlikely to yield results as the local market is liquidity strapped. Approaching shareholders for more funding also seems likely to be an uphill task as questions will be raised as to what the funds previously injected into the company were used for.
Whilst shareholders have been short changed over the years, one positive for now is that the companies are at least profitable. We now wait to see if the trend is sustainable going forward. As for African Sun, we wait to see how its African dream ends considering that the only regional market they are still in is Nigeria. Could this be the end of its Pan African ambitions?