A sea of troubles

The equities market is presently trending downwards, which is largely attributable to profit-taking in counters that were firm in September and October.

Opinion by Kumbirai Makwembere

Weakness was also induced by a gloomy outlook from the 2013 fiscal policy statement as well as reduced participation as market players take their annual breaks.

With all this in mind, the numbers from Aico were indeed ill-timed. At this point the market is in need of something encouraging to stimulate positive sentiment.

Aico published a depressing set of interim results for the six months ended September 2012, with losses attributable to shareholders surging 456% to US$22,8 million.

While the market has always expected a negative position from the group in the first six months, it is the extent of the loss that was alarming. Revenues shrunk 53% to US$54 million following a 30% decline in volumes, together with the slump in lint prices to US$0,70 per pound from US$2,30 the previous year.

Performance was also dragged down by the high finance bill of US$12 million, only 12,7% better than the US$13,7 million recorded last year.

Furthermore, the impasse with cotton farmers resulted in increased side-marketing, hence recoveries on input scheme advances were low. The net effect was that the company incurred an impairment charge of US$8,7 million.

The cotton business caused the bulk of the losses for the group, accounting for US$9,3 million at operating level. Olivine Industries had an operating loss of US$244 000 and Seed Co’s share was US$7,5 million.

If things don’t change, Aico, a counter that was once regarded as a blue chip, might soon be regarded as a penny stock. Aico itself came into being in 2008 when shareholders gave up three shares they held in Cottco for two shares in the enlarged group.

At inception, Aico subsidiaries comprised Cottco, that was wholly owned, Seed Co and Olivine that were 51% and 49% owned, respectively. Other units worth mentioning include Scottco, a spinning business and Exhort, a business involved in the export of frozen vegetables. Both units were wholly-owned.

However, over the years, Scottco operations were discontinued as the local textile industry has been failing to compete with imports from Asia, while Exhort was sold off.

The main objective of forming the Aico group was to separate strategic issues from operational ones so as to unlock value for shareholders. Forming a holding company was also meant to improve co-ordination of activities amongst the group subsidiaries.

What could have possibly gone wrong for a group that was once a market darling due to the attractive assets it had in form of Seed Co and Cottco?

Besides the operational issues, the company is sitting on huge debt and this is impacting negatively on the company financials through high interest costs.

There have always been legacy debt issues at the company that are attributed to the previous management prior to dollarisation. The company’s debt position currently stands at US$198,1 million, with US$185 million being short-term, the bulk of it in the Cotton business.

One fact that is difficult to come to terms with is, why did the company come out of hyperinflation with a debt of US$41 million yet it was earning revenues in foreign currency from cotton and seed exports? Was it a case of mismanagement? At one point the media was awash with reports of corruption and mismanagement at the company. Could the stories have been true?

Channeling resources towards Olivine could also have been a wrong move. Since its acquisition in 2008 for US$6,8 million, the company has been making losses, eroding shareholder capital. Companies in manufacturing are presently failing to compete with imports as they are using aged machinery and are under-capitalised.

To date Aico and IDC have pumped US$11,5 million into the business. The company’s brands used to command a large market share, but have since lost this position as consumers are now opting for imports that are cheaper, are of a better quality and always readily available.

Seed Co appears to be in a better position but management however needs to come up with a plan on how to deal with excess stocks worth US$67 million that they are currently sitting on. While the group might boast that they have adequate stocks to meet demand, there is a need to understand that working capital is tied up in the stocks and it will cost the company in the form of increased finance charges.

Shareholders and management at Aico might also be to blame for the high debt overhang as they have taken too long to recapitalise the business. Back in 2011, the company hinted that there were plans for undertaking a rights issue to raise US$50 million.

As it stands, the money required to turn around the operations has far exceeded the initial amount they sought to raise.

At one point press reports had it that Olam was close to taking up a 49% stake in Cottco but the talks reportedly collapsed under unclear circumstances.

Plans to unbundle the group are welcome as there is need to bring on board new equity partners at subsidiary level as funding needs cannot be continuously supported through debt. Demerging the group therefore appears to be the best way forward at the moment.

Olivine should be disposed of as manufacturing is no longer competitive in the current environment. Focus going forward should only be on seed and cotton.

Seed Co might still survive; however, it is Cottco that remains a huge concern. The company currently has a debt of US$125 million and, hence there is need for funding first of all to clear the huge debt and to make a further injection of working capital.

There is therefore need for an equity partner with deep pockets and a long-term investment horizon.

Cottco is operating in an industry were government still wants to intervene with price controls. Ideally, when prices fall on the international market, the government should chip in and subsidise farmers to encourage them to continue growing the crop.

However, our government is unable to do so and this implies that the structural challenges the industry is facing will remain in place.