Procrastination: The robber of time

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THERE are two common tricks that listed companies often adopt when they are struggling.

By Kumbirai Makwembere

 

Firstly, they may delay releasing their financial results until the last day of the month.

Others even opt to go a step further, publishing them on a Saturday, a day when most market watchers do not buy daily newspapers.

Secondly, the published numbers may be just summarised. This makes them vague and difficult to make meaningful use of. This practice is particularly common in the March and September reporting season.

Three such companies, namely, Aico, CFI and Star Africa published their numbers over the past week. Besides sharing the same reporting period, these companies have a similarity in that all of them reported losses and all have been issuing cautionary notices for close to two years.

This time around CFI and Star Africa accompanied their results with circulars indicating corporate transactions that they wish to undertake to resuscitate their ailing companies.

CFI will seek shareholder approval to sell 49% of their shareholding in Victoria Foods to Grindrod trading for a consideration of US$3 250 000. Grindrod trading will also advance a shareholder loan of US$2 750 000 to the company at a cost of 8% per annum with no fixed tenure.

Furthermore, Grindrod will advance a US$12 million 90-day CMA grain procurement facility to Victoria Foods. Star Africa, on the other hand, is selling non-core assets in the form of Blue Star logistics as well as its shareholding in Tongaat Hullet Botswana.

Management justified their intentions by disclosing that they view these assets as non-core to their main business of sugar refining.

Whether these transactions will suffice to turn around operations at these two companies is a discussion that we will leave now for a later day. At least it gives shareholders comfort that management is making some efforts to rescue the company.

It is Aico that remains a worry. There is no evidence of developments taking place in the background that will result in company operations recovering. If anything, apart from the cautionary that has been published in the press over and over again, the market has no clue as to what is taking place at the company.

It is alleged the company was at one point in discussions with Olam but the negotiations collapsed under unclear circumstances. The question that is now making the rounds in the market place is whether or not Aico will survive? If yes, at what cost?

The recently published financial results indicate the company is still in the woods. Aico made a full-year loss of US$2 million compared to a profit of US$14,8 million recorded over the same period in 2012.

Performance was dragged down by a 34,9% decline in profits from the seed business, at US$ 12,6 million, due to depressed demand in the domestic market. Additionally, delays in settling arrears by the latter affected the company’s cashflows resulting in finance costs increasing to US$7,4 million from US$4,3 million.

Operations at the cotton business were affected by low lint prices of US 80 cents per pound compared to a high of US$2,40 recorded in 2012. The unit also booked in an impairment charge of US$12 million arising from below par input scheme recoveries. Overall, the business posted a loss of US$7,8 million.

Olivine on the other hand recorded a loss of US$2 million which was an improvement compared with a loss of US$4,2 million recorded in the previous year.

What remains a real concern for Aico is its debt of US$125,9 million which now considerably exceeds its market capitalisation of US$34,7 million. Included in the total debt is the legacy debt amounting to US$35 million.

Its gearing ratio of 111% is again scary. It is beyond doubt the company needs to urgently attract investors with deep pockets or risk joining the band wagon of failed companies like Cairns, Steelnet and Caps.

The huge debt has been the major impediment in resuscitating Aico as a few investors are willing to inherit a company with such a high level of debt before channeling funds to improve operations.

Debt capital is not an option for the company at the moment.

Management disclosed that 91% of their borrowings are short-term attracting interest rates in excess of 20% per annum and this explains why the interest bill remained so high at US$25,4 million.

The interest cover continues to deteriorate from 2,10x recorded in 2011; 1,61x cover was recorded in 2012 whilst the 2013 figure stood at 0.96x. Essentially, Aico is not generating sufficient revenues and profits to service their debt.

Aico a company that was once a market darling prior to the adoption of multiple currencies is now being used as an example of how bad things can get if both management and shareholders dilly-dally over making critical decisions.

The company has failed to raise any capital for the past four years. In 2010 management hinted they would come on the market to raise close to US$40 million but nothing has since materialised.

The company’s financial needs are now in excess of US$100 million. It would appear that rescuing Aico as a whole will be an uphill task and hard decisions now have to be made.

It also appears that the best way forward would be to sell out of Olivine and channel the proceeds to the seed and cotton businesses as the unit has accumulated losses of more than US$20 million since acquisition.

Manufacturing remains difficult in the current business environment characterised by stiff competition from imports and increasing operating costs.

Olivine still requires more funding for working capital in addition to the US$12,5 million that has been injected since 2009. Whilst the company’s brands are strong there is need to produce products at a competitive price which the company cannot do at the moment due to low throughput and antiquated equipment.

Company shareholders should again be prepared to be diluted as there is now a need to bring on board new shareholders ideally at subsidiary level.

Investors prefer to inject money directly into the asset they are targeting as opposed to pumping money in at group level. This way they can closely monitor their investment and ensure that funds are not misappropriated.

However, the challenge in most corporate transactions is the issue of valuations as foreign investors usually want to buy local assets for a song. Management on the other hand should come to terms with reality.

Some executives are still emotional about the potential their companies have basing their views on historical performance. But again, they forget that things have changed radically since then and that there is need to pump in more money if operations are to return to former levels.

A rights issue is the other option but the support level might be low owing to tight liquidity conditions prevailing locally. Management again will not take this route as they feel that the stock is grossly undervalued.

But is it really or is it just in line with the state of affairs at the company?

As the adage goes, procrastination is the robber of time. If Aico had recapitalised early into dollarisation the challenges troubling it might not have grown to such a level. Both management and shareholders have to act now if the company is to stand a fair chance of surviving.

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