Benefits of regional diversification

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Among some of the positives from the economic reforms implemented in 2009 was the gradual return to profitability by local firms dependant on the domestic market.

Report by Victor Makanda

Prior to 2009, the few corporates that thrived were being driven by their exports into the region.

Exports had the unique benefit of foreign currency generation which was generally essential to survival in the hyperinflationary period. Most business models were thus tilted towards catering for foreign currency generating activities.

The recovery in the economy which led to increased consumer confidence, over the two years to 2011, saw revenues and profits growth of most companies led by domestic operations.

From 2011 to the present day, there has been a fundamental change in the economy which is slowly wiping out some of the avenues that have been game-changers for most corporates.

The fundamental change, mainly due to the liquidity crisis and a slowing down in the economy, saw policymakers downgrading the initial 9,4% economic growth forecast to 5,6%. At the end of 2012 the economic growth rate was estimated at 4,4%. In 2013, policy makers even hinted the possibility of downgrading the present 5% growth target.

Hence in the past four years, company executives first witnessed above average economic growth rates from 2009 to 2011 and then a subsequent decline between 2012 and the first quarter of 2013.

The distressing bit after 2011 is that flat or even negative revenue growth has been registered by most listed corporates, which is the gauge of the corporate world’s performance.

Seed Co is one such company with their revenues for the full year to March 31, 2013 down 6% to US$110,6 million.

The Zimbabwe operations of Seed Co which is a regional player, were the major drag on revenues. Despite it being the major revenue contributor to the group, its contribution declined from 38% in 2012 to 33% in their latest results.

The decline was due to country specific factors leading to low seed demand mainly because of late rains, tight liquidity, cotton price disputes and the weak demand for winter wheat.

Regardless of negative revenue growth, Seed Co still managed to report profits albeit lower in an environment where others are reeling from losses.

The regional diversification thrust which they have been aggressively pursuing since 2009 was put to the test and, remarkably, limited the drop in revenues and earnings. Regional operations contribution to revenues increased from 62 to 67% supported by Zambia and Malawi operations.

Earnings also fell by 34% to US$12,6 million with a 70% contribution emanating from regional operations. In the prior year, regional operations weighed in with 61%. Had Seed Co executives put their blinkers on to solely focus on the domestic market, a loss position might possibly have been registered in their last set of results.

While regional diversification limited the possibility of capital erosion through losses, management may need continuous effort to raise their working capital. The group witnessed working capital challenges leading to a 72% surge in finance charges to US$7,42 million.

The growth was on the back of an 84% growth in inventories at US$43,65 million, and a scary 139% growth in debtors at US$60,90 million. Seed Co’s executives may need to focus on the performance of the debtors’ book.

The delay in payments by its major debtors, mainly governments not only in Zimbabwe but also in Malawi and Zambia, saw the group having to rely on borrowings ultimately eating into before tax profits. Borrowing costs, however, declined from around the 15-16% per annum range to 11,5% to March 2013 as their regional footprint saw them accessing lower rates of 4-5% in Botswana.

Seed Co, just like other corporates, may possibly need to put checks and balances on their credit sales as it affects the quality of their earnings, given the tight liquidity in the region.

Other listed companies are now reacting to the currently depressed local demand through focussing on exports. Last week Cafca also revealed in their half-year results that exports’ contribution to sales revenues rose from 10 to 18% of its US$12,72 million revenue as a way of countering the depressed local demand.

Zimplow’s loss for the full year to December 2012 could have been worse than the US$0,81 million were it not for exports’ contribution by the Mealie Brand division. Thus the era of diversifying across the borders has slowly returned as companies aim to at least be profitable.

The challenge for most Zimbabwean companies is that they are not competitive on the export front due to costlier products. Archaic technology and antiquated plant and equipment being used by corporates and high operating costs structures are the major reasons for high costs of production relative to regional companies.

Cafca’s operating margins declined in a bid to push sales volumes on the export market. Seed Co is however benefitting from its strong research and development investment and also the strategy it is pursuing of localising production in most of the countries it operates in.

In addition, rather than diversifying across the region, Seed Co also diversified its product lines through not only offering maize seed but venturing into other seed crops such as cotton and soya.

Overall caution may be required when firms diversify, especially across the region, as some models may not work in the region. A case in point is African Sun which was misfiring, especially when it was operating out of Zimbabwe soon after dollarisation. Their new focus of nurturing the local operations is slowly paying off.

Diversification does not mean complete conversion into conglomerates as conglomerates such as CFI, Star Africa and Meikles are some sad stories which were created with the view of diversifying revenues and earnings.

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