PG built on debt, riddled with debt

THE drab set of results released by PG must have left investors asking themselves yet again why they keep on believing the company will recover.

Report by Collins Rudzuna

 

All the signs of a troubled company are present — high borrowings, sell-off of subsidiaries and properties, strained working capital and elaborate plans for recovery.

 

 

Going by the negative trend shown in the latest results, executives are right to be taking drastic measures to save the company from collapse. Whether they will be successful is of course the point to ponder for stakeholders.

 
Like most other companies PG came out of hyperinflation in bad shape.

 

Dollarisation brought with it a recovery of the construction sector, particularly small-scale private home developments. Demand for PG’s products which range from tiles, timber, glass, doors and general building supplies soared. With growing demand, management sought to take full advantage by retooling and boosting working capital through borrowings.

 

While this may have been a necessary evil, it has come back to haunt PG as the company is now riddled with debt.

 
PG’s short-term debt currently stands at US$5,2 million and they also have a US$5,5 million debenture which matures this year. Additionally, they have trade creditors to the tune of US$13,8 million, making the company’s short-term obligations a cause for concern. Working capital has been problematic for a while at the flagship merchandising division.

 
In the most recent results released earlier in the week, it was revealed that sales in the unit declined by 12% to US$10,5 million, mainly as a result of inadequate stocks at PG Building Supplies. The unit contributed 69% of group sales. Although the merchandising unit has had some growth since dollarisation, the general sentiment among market watchers is that the unit could have done better.

 
The bustling business enjoyed by informal building supplies retailers at Siya-so in Mbare is one example usually cited that the line of business itself is not so bad. Maybe it is PG that is failing to take full advantage. Put into context is that Siya-so is not necessarily a like-for-like comparison as it is a fragmented market with several individuals who do not have the working capital constraints of one large retailer. Yet PG should surely be able to take advantage of its brand name and economies of scale to outcompete the informal sector and other small independent players.

 
It was revealed that a deal had been struck which would enable PG to access imported products worth US$2,1 million without having to pay upfront. Settlement will be done once PG has on-sold the products. This move should be positive for the company as it will free up much-needed working capital.

 
Zimtile seems to be performing well following the commissioning of a new plant in December 2011. Sales in the unit rose by 2% to US$3,53 million. Growth stagnated due to a delay in getting working capital. Efficiencies emanating from the new plant resulted in improved margins and the company started generating profits in May 2012.

 
Based on management’s comments accompanying the results, the Mozambique operation seems to be doing reasonably well. In fact, it was mentioned that the Tete branch is now the second biggest in the group in terms of sales.

 
It would seem that the most immediate concern for PG is how to meet its near-term debt obligations. The plan they already have underway involves selling off their remaining stake in Manica Boards and Doors (MBD). As it stands their shareholding has already been reduced from 60% to 27,9%. Additionally, plans are also underway to recover a loan of US$1,375 million to MBD.

 
Other assets for sale include properties with a book value of US$5,2 million. In addition, other cost-cutting measures include moving from the rented head office to a less costly property. A retrenchment exercise saw the staff head count dropping from 1 271 to 641.

 
Hopefully, all these initiatives will eventually result in the finalisation of PG’s recovery. Should they continue to make further losses, they may end up having to tighten belts even further. In the half-year to June 2012, the company incurred an interest bill of US$1,1 million and made a loss of US$2,7 million.

 
PG is not alone in the fight to solve debt and working capital challenges. Art Corporation also tried to sell properties to raise cash, but failed to get a buyer willing to pay their prices. Given the tight liquidity in the market it would not be surprising if PG hit the same snag.

 
Starafrica was able to sell properties, but the amount raised was not enough to fully resolve their debt situation. In fact, despite raising over US$8 million from property sales the company is still in a precarious debt position and in dire need of working capital.

 
In retrospect, the strategy taken by many companies soon after dollarisation, of funding working capital with borrowed money, seemed ill-advised or at least should have been limited to manageable amounts. Companies like PG are now stuck with expensive debt and yet the economic growth enjoyed from 2009 to 2011 is now slowing down.

 
At the moment, asset sales are a necessary evil. But for shareholders who want to assess the performance of their companies, having to sell off assets to meet obligations is one sure sign that value has been lost. It may even have been better to sell before borrowing in the first place. That way money would have been raised without having to incur interest expense.

 
The market is still waiting for a full turnaround at PG. Patient investors will maintain their investment hoping the latest initiatives will finally take the company out of desperate survival mode. Already, those who supported the 2010 rights issue and followed their rights at 2,4 US cents have lost 58%, and there is not much to show for the money that was raised.

 
Proceeds from the rights issue were meant to retire short-term debt, but that problem still remains. Even major shareholders ABC Holdings and TA Holdings, who own a total of 32% of the company, have given up and indicated they are willing to sell out.

 
The exit of former CEO Nyasha Zhou seems not to have yielded any obvious positive result either. At the current share price of one US cent, some shareholders may be wishing they had just invested in Siya-so instead.