OK Zim: Regional expansion not a stroll in the park

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OK Zimbabwe is a classic example of how proactive management decisions can impact positively on company performance and in enhancing shareholder value.

Report by Victor Makanda

Prior to the adoption of the multi-currency regime, the operations of OK Zimbabwe and other large retailers were reduced to naught following the price blitz in June 2007.

Small operators and the informal market thrived during the peak of the hyperinflation period and in the early months of dollarisation. Examples that come to mind include Food King, Afro Foods and Food World.

After the dollarisation of the economy, management of OK Zim turned the company’s fortunes for the better following a US$20million capital raising exercise in April 2010.

Of the US$20million, US$5million was through a convertible loan from Investec Asset Management while the balance was pooled through a rights issue.

The rights issue had a 70,4% uptake while the remainder was taken up by Investec, the underwriter. Since then, the company has been reporting an improved set of financials on an annual basis despite solid competition in the sector.

Revenues have more than doubled by 156% from the March 2010 figure of US$187,6million to US$479,6million in their latest financials to March 2013. After-tax profits also soared by 911% from US$1,2million in 2010 to US$12,4million spiced up by a consistent, generous 50% dividend pay-out to shareholders.

Share price performance was finally aligned to company performance and this saw OK Zim graduating from being an ordinary mid-cap stock to becoming the fourth largest company on the bourse currently capitalised at US$282.71million.

The positive performance has been due to a blend of the right ingredients. These include strong shareholder support, rich management expertise, continuous innovation and store refurbishments.

As a result the company has been recovering its market share that had previously been stolen. While the performance is , focus has now turned to the future sustainability of earnings by the company.

The one question in the minds of most investors is whether earnings will be sustainable as the growth in the economy slows down.

OK Zim management, during an analyst briefing on June 12, 2013, presented their diversification strategy as being meant to sustain the momentum built up over the past 3 years.

The first route is under a new division termed OK Money Wave. OK Money Wave houses the financial services business of the company.

Progress has been such that the company is now a licensed money transfer agent and facilitates transactions for EcoCash; Mukuru; Textacash; Standard Bank South Africa; and First National Bank. OK Zim on this front will be riding on the wide distribution network it commands encompassing 54 stores nationwide.

The OK Money Wave business is a commission-based business which is practical considering the huge demand for the product and the link with the products it provides. OK Zimbabwe also intends to introduce electricity vouchers mainly for payment of Zesa utility bills via the prepaid meters.

OK Zimbabwe, however, announced the second route which most market participants and observers took with a pinch of salt. The company intends to pursue a regional expansion strategy. Considering the low business activity in the economy it could make sense for companies to expand into the region to reduce the concentration of risk.

Listed company Seed Co’s recent financials reflects how regional expansion can be a saving grace when the domestic market is depressed. In addition, Cafca’s revenues were lifted by growth in exports in its latest financials.

Nonetheless the degree to which diversification reaps benefits depends on so many factors and should be dealt with on a case-by-case basis.

Although shrinkage levels are within international standards, OK does not have the critical mass to compete effectively on the regional front. The degree to which OK will benefit from economies of scale will be much lower compared with other existing players which may see margin pressure. Regulatory issues need to be factored into account as venturing into other countries brings with it certain costs.

Competition is also rife with large players such as Shoprite, Pick n Pay and Spar just to name a few in the region, despite the latter having not really done well locally as they are perceived to be expensive compared with to OK Zim.

This competition may even see the current recovery in OK‘s net margins come under pressure. Generally, the retail business is a low margin business and this explains the reason why OK reported profits of only US$12,4million from revenues just shy of the half a billion revenue mark of US$479,6million.

Thus experiencing more competition, especially from the region, may see the 2.6% net profit margin facing pressure. In addition, OK Zim does not have the deep pockets compared to its competitors which may be required for setting up shop and to competing successfully in the region.

Spar Zambia struggled to make profits while Dairibord pulled out of Uganda due to working capital challenges. Whilst we acknowledge the failure by Redstar in its attempt to operate in the region due to a relatively weaker balance sheet and poor controls, OK’s future on the regional expansion route may not be a stroll in the park. Brand loyalty is one key issue and normally consumers follow market leaders in the retail space.

Thus irrespective of which country OK ventures into, it is widely expected to have to play second fiddle to market leaders which will inevitably limit revenue and earnings performance.

Consumer spending is also not growing significantly in most economies in the region and this may adversely impact on dollar spending.

Whereas the jury is not yet out on the proposed expansion, the going is likely to get tougher as one would have thought management will focus on areas where they have comparative advantage which is the Zimbabwe market. OK management may thus need to consider engaging in activities that do not reverse the gains reaped so far as they strive for excellence in the retail space. OK may also need to reinforce its position as large players from the region may eventually raid the domestic market.

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