Signs writing on the wall

We are just a fortnight away from the last quarter of 2013 and it would appear that the performance of the ZSE for the calendar year will be in two distinct parts.

Kumbirai Makwembere

The first seven months were buoyant with the market surging 52,8% owing to strong appetite from offshore investors who were taking positions ahead of an expected upturn in the economy after the elections.

However, post the elections, the market weakened significantly. Ironically, the same foreigners who had been buying were then selling their positions in response to the election results. Panic gripped the market over the possible policies that the new government would implement, chief amongst them that of empowering the locals. Further compounding this scenario are the depressing financial results that have been coming onto the market.

The June reporting season that is now coming to a close produced a mixed bag of results. Some of these numbers were good, others indifferent, whilst some have been outright depressing.

Over the past fortnight, Innscor and its subsidiary Colcom published their financial results as did Turnall and BAT. The duo of Fidelity and First Mutual life from the insurance sector also released their numbers.

Innscor’s turnover at US$656,3 million in its full year results to June 30, 2013 registered a 5 % growth rate. This growth rate was the first single one digit for the predominantly food oriented conglomerate since the adoption of the multi-currency system.

The revenue growth attained also fell short of the 15% initial growth forecast by management. The slow growth was attributable to a slowdown in demand, mainly from their food business, ie, the confectioneries and fast foods.

Contraction in demand, rising competition and increased overheads saw operating profit declining by 2% to US$67.4million. Overall, after-tax profit was flat at US$48,59 million compared to US$48,51 million recorded in 2012.

Colcom’s performance, characterised by a 70% decline in profit after tax to US$1,4 million from US$4,6 million recorded in 2012, also weighed down on Innscor. The poor outturn was due to cost provisions of US$2.4 million together with an impairment charge of US$1.5 million.

BAT, which has become a market darling, released a good set of results, with the company recording a loss of US$1,4 million compared to a profit of US$5 million recorded over the same period in 2012. The main drag was the inclusion of a share-based payment expense of US$10,61million.

BAT also had other income of US$3,7million and management disclosed that this arose from forgiveness by the holding company for services provided during the hyperinflation period.

These two line items are non-cash and adjusting for them shows that BAT would have recorded a profit before tax of US$9,2 million, which is a growth of 36% from 2012 levels.

Volumes nonetheless registered a decline of 16% owing to the hike in excise duty and pricing constraints on the part of retailers due to the scarcity of coins for change which saw prices being rounded up upwards.

Turnall continues to underperform and the company lost US$111 875 in the first six months of 2013.

Demand for its products remained depressed and the company had to lower prices, which resulted in both gross and operating margins dropping by 7 and 9 percentage points, respectively, to 23% and 7%. Finance costs also remain high, coming in at US$1,4 million compared to US$1,2 million in 2012.

The gearing ratio now stands at 37% and it is evident that the company requires cheaper equity capital as continued reliance on bank borrowings to facilitate importation of fibre, which takes three months to arrive, will continue to strain the company’s finances.

Performance of FML and Fidelity was dragged down by a spike in claims. FML registered a 38% decline in after-tax profit to US$44,05 million.

This was despite a 16% growth registered in total income, at US$53.7 million.

A rise in the number of claims was the main drawback on FML’s profitability, particularly from the medical insurance business, which accounted for 70% of the total claims of US$22,9 million.

Likewise, Fidelity’s profits plummeted by 20% to US$2.11 million, negatively affected by the 48% spike in claims at US$0.96 million. The company also revealed that its investment income had declined by 42%, which is difficult to comprehend considering the firm’s trend on the equities market, and that its competitor FML registered a 357% growth in investment income.

What is evident and what has become a chorus from most executives is that tight liquidity in the business environment has impacted negatively on the performance of companies in virtually all sectors of the economy.

The new government has a lot of work to do if the growth path recorded after 2009 is to be resuscitated. Results from Turnall and Colcom did not come as a surprise as the market was in the picture with regard to the challenges bedevilling these two firms.

Earlier in the year management at Colcom had disclosed that they had unearthed fraud and that the market had to expect significant provisions.

Turnall ,on the other hand, is taking a long time to resolve its working capital cycle problems and this has seen finance charges chewing the company’s profits. Additionally, the construction sector remains depressed, thereby reducing product demand.

It is the slowdown in the performance of the counters that are regarded as bellweather stocks, such as Innscor, that is worrying. Management from OK admitted this on presenting their full year results while trading updates by another market giant, Delta, also point towards slowing growth.

Business models of these two firms are consumer-oriented and as such one would expect that their business models are defensive and should weather the storm.

This is because spending patterns are bound to change as consumers shift their hard-earned incomes towards basic foodstuffs when there are liquidity constraints.

To sum it all up, consumers would pursue a survival mode instead of maintaining certain lifestyles. As a result, earnings of companies whose lines of business are not in food-processing suffer the most.

Therefore, a slowdown in the earnings of these companies, reflecting the adverse effects of illiquidity, is more severe than market expectations and this raises a flag on smaller companies.

Performance of companies cements figures emanating from fiscal authorities to the effect that growth in the economy is indeed slowing down.

The new government therefore needs to quickly put in place measures that will reverse the negative trend if company fortunes are to improve.

If company earnings continue to deteriorate, then the attractiveness of our bourse to foreign money will probably drop. As it stands the ZSE is likely to remain soft for the remainder of the year.

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