As anticipated, the ongoing June financial results reporting season has been dismal as the adverse effects of illiquidity blossom. This augurs well with the economic growth downgrade by the fiscal authorities from 6,1% to 3,1% for the current year.
Revenues for most companies that have reported so far have declined with some recording double digit negative growth rates. Profitability has also followed suit whilst others have turned to loss makers.
Exceptional cases have, however, been recorded. For instance, Barclays Bank and African Distillers (Afdis), just to name a few.
In such an environment, reporting lower profits is becoming more acceptable by the investment community compared to loss-making.
Whilst acknowledging the overall declining trend in turnover and earnings, the Turnall story leaves a lot to be desired.
The basis for such has been the negative trend that the company has been stuck in since sometime in 2011 when growth started to slow down in the economy.
Subsequently, Turnall slowly altered their model from credit sales towards encouraging more cash sales as a way of addressing its working capital needs. This transition, albeit being the most practicable as illiquidity worsened, has however not benefitted the company in as much as value creation is concerned.
Market capitalisation which peaked on July 15 2011 to US$74 million is currently pegged at US$14,8 million, an 80% loss of value in US dollar terms. Could it be that the model does not work or there are other external factors that senior management have not considered? Will the dividend-in-specie by its major shareholder, FBC Holdings, be of any help to the building and piping products supplier?
Turnall’s recent half year results published last week show, turnover went down 36% to US$12,9 million as the company called for a change in the business model from a predominantly credit based one to one which is cash based. Cash sales accounted for 42% whilst credit sales weighed in at 50%. The other 8% was a mixed portion of the two in a 70:30 ratio, respectively.
Low capacity utilisation which averaged 45% due to erratic raw material supply on the back of cash flow, resulted in gross margin compression from 22% in prior period to a measly 7%. Failure to spread fixed overheads over huge output led to an operating loss of US$2,6 million being recorded compared to a US$1,4 million profit in the same period prior year. Net finance costs, though 34% lower at US$0,9 million, saw the company recording a before tax loss of US$3,5 million.
It would appear that the change in the business model alone may not have been the major cause of the poor performance as Turnall has been able to service its obligations as they fall due. The company even managed to pay off US$1,9 million in debt.
Trade debtors were also reduced by US$4,9 million. Among some of its pitfalls has been failure to address its capital structure at a time when the company faced a 3-month raw material import lag for fibre.
The major drag, however, was the short term expensive debt that the company accessed from its major shareholder FBCH. General consensuses which even the Turnall team once affirmed was the view that FBCH milked Turnall through exorbitant rates when in fact they were supposedly breathing life into their operations through offering reasonably priced finance. Had FBCH played its role properly from the onset coupled with this model, Turnall would not have been choked to the extent it currently has been.
FBCH which is predominantly a financial services player also announced in the same week its intention to dispose of its investment in Turnall by way of dividend en specie.
All FBCH shareholders will receive 0,39 Turnall ordinary shares for every one ordinary share held in FBCH pending regulatory and shareholder approval. The overall stake held by FBCH was 58%.
Although the decision has been made later than initially anticipated, Turnall will only benefit from this through attaining a certain level of independence which they ordinarily did not have.
The lack of independence emanated from the fact that the union between these two was a marriage of convenience after Turnall failed to honour their debt in Zim dollar days. This resulted in a debt-equity swap in favor of the lender (FBCH).
Thus the decision by FBCH to propose such a move will facilitate Turnall’s ability to make their own decisions which may possibly see them being able to unlock relatively cheaper finance even on the local market.
Concurrently from an FBCH shareholder perspective, such a decision does not completely add value to them. This reasoning is supported by the view that there was a time when most investment advisors recommended them to sell out way before the slowdown in economic growth began. At that stage, Turnall was trading at its peak levels ranging from US$0,11 to US$0,15 and the company was minting profitability. In addition, the liquidity crunch had not soared to current levels. However, the FBCH board back then remained unyielding choosing to hold onto the investment. Currently, pursuing a dividend in specie does not add value to FBC shareholders as Turnall has lost significant value through the persistent losses it has been reporting. It appears most investors, especially the indigenous ones have not learnt the art of investing particularly when it comes to making critical decisions such as when to exit after such mergers and/or acquisitions. Overally, the outlook for Turnall may remain subdued as the health of the economy continues to be depressed. The ongoing diversification of revenue streams through the sale of tiles and focus on exports may somehow prove to be a game changer.
There may be an urgent need to address leadership following the departure of the group chief executive. Nonetheless, returning to profit will be a daunting task considering the nature and demand for its product in the obtaining environment.