THE slowdown in economic growth and subsequent decrease in consumer spending has led to largely lacklustre earnings in the June reporting season. This year began with the expectation that growth would increase over its course as had been the case previously. The economy was expected to grow 9,4% compared to an estimated 9,3% expansion last year.
However, macro-economic predictions that started off mixed have already grown gloomier as the liquidity crisis has grown much deeper, coupled with a rising current account deficit, hence slow growth. This has forced the Finance minister Tendai Biti to make a downward revision on the economic growth rate to 5,4%.
The June earnings season has largely mirrored the performance of the economy, with companies recording reduced earnings or downright losses, which were largely weighed on by high operating costs and the liquidity crunch, which have had an adverse impact on disposable incomes.
Analysts say the weak trend in the earnings season has been influenced by a number of factors, chief among which are lack of a coherent policy with respect to mining, transport, agriculture and energy, slow demand, especially on capital goods, late payments from debtors, plant inefficiencies and huge operating costs.
“What we are seeing are two opposite ends in the June earnings; companies which have been building up efficiencies since dollarisation have performed well, while companies which are struggling to recapitalise and are linked to consumer services and products have reported reduced earnings,” said Joanna Hwata, a market analyst. Hwata added that there were companies whose survival was intricately linked to GDP performance and would immediately suffer if there was a slow-down.
These GDP-linked companies serve as indicators of the level of capital investment in the country and will continue to suffer from sluggish demand as long as domestic incomes, savings and government capital expenditure are low.
Asbestos products manufacturer Turnall Holdings had to cut production in the second quarter of the year, resulting in a reduced profit for the half year to June. At US$874 118, profit was lower than the US$1,3 million the group reported in the year ago period.
Turnall’s performance continues to be weighed on by the huge fibre import bill caused by the closure of Shabani and Mashava Mines. With government and local authorities not doing any meaningful infrastructural development projects, the market does not expect an immediate turnaround in the short-term. Managing director John Jere recently told analysts that the poor agricultural season, especially in terms of the cotton and maize crop, had also affected performance in the rural areas where Turnall had a sizeable market share. Agriculture contributed 28% of the group’s volumes as opposed to the usual 42-50%.
Turnall is not the only company which was affected by the poor agricultural season; Zimplow reported a loss in the six months to June following the erratic rainy season and the standoff in the cotton marketing season. The group said cotton farmers usually make up 30% of plough sales.
However, analysts said overcoming such difficult conditions requires companies to cannibalise product lines, drive out costs and institutionalise rapid innovation. Turnall now only deals with credible customers. Most companies post dollarisation were concerned with growing sales that would never turn into cash.
In the banking sector, institutions continue to face challenges related to the liquidity crisis, capital requirements and credit risks. In the June earnings season, the majority of smaller banks reported weak earnings because of deteriorating asset quality and a high proportion of non-performing loans. Analysts say the uneven distribution of deposits also compound the liquidity challenges in the banking sector, with its current vulnerabilities having eroded public confidence, particularly in smaller banks, resulting in a flow of deposits to bigger banks which are perceived to be stable.
However, there are companies which have reported positive growth such as BAT Zimbabwe, Lafarge Cement and selected banking counters. These reported results that beat market expectations. BAT’s earnings for the interim period to June eclipsed its full year performance, after posting earnings per share (EPS) of 29 US cents against a full year EPS of 28 US cents. The group even paid out a dividend of 23 US cents per share. The company managed to post these results in spite of a huge percentage of its turnover going to Zimra as BAT excise duty. The company attributed the performance to plant efficiencies and improved distribution.
Lafarge reported a 57% increase in revenue to US$12,4 million, driven by a 45% increase in domestic volumes of cement. In addition to market demand, growth was attributed to sales and marketing efforts, and improved plant reliability and efficiencies. The group managed to return to profitability, with a bottom-line of US$2,8 million.
There has been a steady rise in national demand for cement owing to the increased number of residential building projects. No doubt there will be significant building projects post-elections, with the mining sector expected to be the key driver in providing projects for the construction industry. National cement demand in the six months period grew 11% and this was after a retail price increase from US$10 to US$11,50.
The country has capacity to produce one million tonnes of cement annually. The per capita consumption of cement currently stands at 60kg, which is below the regional average of 92kg, indicating scope for better growth in the cement-making business.