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National Tyre Services: An enigma

Adoption of the multi-currency regime in 2009 transformed business models for most corporates. The extent to which a company would adapt to current challenges determined its success rate as reflected by profitability or loss.

By Victor Makanda
While some companies were forced to change their business models, others maintained their models, especially retailers. Some retailers, regardless of their area of specialty, were faced with a relatively simple task of fine-tuning their models to fit the current environment.
Tyre retailer National Tyre Services (NTS) is one such company which managed to maintain its business model.
Business models play a key part in determining how a company will sustain its performance over a longer period of time. NTS has since dollarisation managed to remain profitable, a rare feat for most listed companies.
In its latest full-year financials to March 31 2013, the company registered a 10% revenue growth to US$17,58 million which was well ahead of GDP growth for 2012 of 4,4%. Revenue growth was also well ahead of the annual inflation rate of 2,76% as at end of March 2013.
After-tax profits likewise rose by 4% to US$0,87 million despite stiff competition in the tyre retailing sector. Cash generation for NTS has also been positive on an annual basis save for 2011, again an uncommon achievement for most companies as they have failed to marry profitability and liquidity.
NTS is taking advantage of the current set-up  where Zimbabwe has been reduced to an import economy for virtually most commodities both basic and capital goods. The huge increase in imports has been due to existing dilapidated manufacturing sector equipment coupled with the use of antiquated technology. This has seen most locally produced goods being uncompetitive against imported goods.
Vehicle imports, especially through Beitbridge Border Post, have been on the rise with a total of 14 114 vehicles reported to have entered in the first five months to May compared to 10 851 vehicles in the prior year. The increase in vehicle imports is attributed to the price-freeze of vehicles in South Africa and also the exorbitant prices of vehicles on the local market.
Research has shown that on average the Zimbabwe Revenue Authority clears a total of 1 500 cars per month at Manica bonded warehouse with the figure expected to have increased to between 2 000 and 3 500 this year. The growth in the national fleet has led to brisk business for tyre retailers with NTS benefitting as a market leader in the tyre retail sector.
In addition, NTS has managed to ride on its wide retail distribution network in pushing its tyres compared to its competitors. The relatively strong financial muscle of the company has somehow been another game-changer relative to competition.
Barriers to entry into the tyre business are relatively lower than in other sectors, but sustaining the business model especially in a tight liquidity environment requires a company with deep pockets. Consequently, despite the stiff competition, the need for relatively deep pockets has seen NTS managing to weather the stiff competition.
Although the company has managed to continue being profitable there remains a puzzle concerning its performance and share price movement.
The equities market registered a positive run in the first half of the year with the mainstream index advancing by a solid 39%. The positive run was mainly driven by large caps stocks, but medium and small-sized companies joined the bandwagon later. The resultant effect of the rally saw the market breadth comprising 50 movers against 15 losers.
With NTS’ sustained performance, one would have been forgiven for assuming that it would be among the 50 movers. However, NTS was among the 15 losers, down 33,33% in the first six months of the year. Such a dismal share price performance poses a few questions such as: why would the share price have remained weak when the company fundamentals were so bright? Is it that the business model is not sustainable for affording shareholders a decent return? What is beyond doubt is that the company’s operations are too small to attract the attention of offshore investors.
The situation is further compounded by the fact that the share register is tightly held. An analysis of the company’s share register shows that the top 10 shareholders hold approximately 80,49% of the company’s shares. These are institutional investors who usually do not trade. Total trades in the counter since dollarisation amount to US$1,84 million. Foreign money usually targets liquid counters that are easy to buy and sell. If a foreign fund allocates US$1 million towards the counter, its price can jump significantly.  The tight share register should however support the share price as in the case of other tightly held counters like National Foods, BAT Zimbabwe and Colcom.
While Warren Buffet’s quote of a good company not making a good investment may hold true, the Zimbabwe set-up calls for a different view. Without undermining the performance of other stocks, it defies logic when loss-making companies such as Willdale, Zeco and Pioneer registered half-year returns in excess of 100%. In addition, such loss-making companies are still far from solving their woes and are thus regularly destroying shareholder value.
Furthermore, most companies on the local bourse do not have a clean balance sheet as they are highly leveraged. NTS, on the contrary, has managed to uphold a clean balance sheet. The jury is still out on whether the local bourse is now rewarding corporates for reporting losses rather than profits.

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