Turnaround pivotal to Aico’s fortunes

The Aico stable has topped the news headlines since the beginning of the year, more than any other listed company. At one point the market lost hope in the firm after countless cautionary statements had been published with all the underlying transactions rumoured to have collapsed midway under unclear circumstances.

By Victor Makanda

However, recently its subsidiary, Seed Co, published a circular to shareholders with regard to roping in a strategic technical-equity partner. The transaction was approved at an extraordinary general meeting (EGM) on the October 30. Olivine Industries Pvt Ltd, another subsidiary within the Aico stable, was reported at the end of October as having failed to rope in a European investor meant to raise an estimated US$20million for recapitalisation. On November 6, Seed Co kick-started the September reporting season with their interim financial results and within the next three to four weeks Aico is expected to publish its interim results and also hold an extraordinary general meeting (EGM).

It appears that executives across the Aico group are busy trying to knit the pieces together so that all units return to winning ways. Judging from the numbers that were published last week, there is no doubt that Seed co got a technical partner at the right time. The company recorded an after tax loss of US$12,8million which was 44%, worse than last years’ US$8,9million. An 18% growth in finance costs and a US$3million impairment for a deposit held with Interfin led to the ballooning of the loss position.

While the first half year for Seed Co is normally a cost accumulation phase, the magnitude of the loss was disappointing to say the least, especially in a US dollar environment. Seed Co has been facing cash flow constraints, weighed down mainly by delayed payments from its major customers. This has been a major blow to its profitability. However, the coming on board of Vilmorin & Cie will go a long way in improving its earnings’ generating capability starting in the financial year 2014/15 according to management guidance. This is because of the US$40,11million transaction, of which US$21,34million will be channelled towards debt retirement. This is expected to bring annual interest savings of between US$2million to US$3million. Furthermore, Seed Co with the increase in competition from global seed houses may also benefit from Vilmorin which is the world’s fourth largest seed player. Only time will tell whether Vilmorin & Cie will bring in the intended benefits to Seed Co but overall this is a step in the right direction for Seed Co.

It is the cotton and FMCG businesses that remain a point of concern as their respective executives appear to be focusing too much on unsustainable ways. In the cotton business, it appears management continue to grapple with ways to deal with the legacy debt issue which has been a thorn in the flesh since dollarisation. A couple of transactions have been tabled since dollarisation. Initially, the company intended to do a rights issue of US$50million beginning in 2010 but that option was shelved. Finally, Aico resolved to dispose of its 10% stake in Seed Co to raise US$20,34million. The transaction, however, awaits shareholders approval at an EGM to be held in the near term. The expected proceeds are earmarked for reducing its total debt of US$79,10million for the cotton and Olivine businesses.

Market watchers concur that this will not solve the debt challenges haunting Cottco.

Aico executives are also reported to be contemplating unbundling the conglomerate thereby paving way for the separate listing of all the units by way of introduction. This implies that Cottco and Olivine would be listed separately on the local bourse. Cottco is also expected to raise US$20million through a private capital placement. Whilst the option to separately list is a good idea, Cottco may not realise the full benefits as investors have lost faith in the company mainly due to its huge debt. In addition, Cottco has shifted from being a profitable company to a perennial loss maker. The major drag on the performance of Cottco lies not so much in the softening of lint prices as this is cyclical and has to be expected for such a business, but in having a legacy debt and passive management approach. It is against this background that soliciting for investors to raise the US$20million may prove to be an overwhelming task which ultimately could see Cottco still underperforming, assuming it is separately listed.

On the Olivine front, management remains adamant about its business model although Zimbabwe has lost its comparative advantage to its peers from a production perspective. Zimbabwe is now a high-cost producer and as such competing against imports has been extremely difficult. The case for Olivine is further worsened by the below optimum capacity utilisation that the company is operating at and the use of antiquated machinery. Olivine’s capacity utilisation is reported to be ranging between 25–30%. The failure by the company to rope in a European investor signals the low confidence that investors have in its business model especially in this time of globalisation. Aico is thus better off disposing of its stake in Olivine and focussing on the cotton and seed business. Overall, Aico’s fortunes will continue to lie not on how busy they are trying to turnaround the company but on how viable the turnaround strategies are, especially for the business units it owns.