Earnings surprises as reporting season nears

Chris Muronzi

THE earnings season is officially upon us with companies with December year-end reporting periods expected to start releasing into the market anytime now.

The economy is weakening and under inflationary pressures.

What can the market look forward to in this season?

Well, a number of scenarios actually. A few earnings surprises: companies performing above analysts’ expectations, underpinned by inflationary growth and others failing to keep pace with a spike in the consumer price index.

Already, some chief executives have alluded to inflationary pressures in their earnings.

In a trading update at the company’s annual general meeting two weeks ago, Nampak group general manager John Van Gend said while demand had remained firm across all the group’s sectors with Q1 turnover ahead of comparable period last year by 13%, the top line growth had an inflationary element to it.

Official inflation in December was measured at 42%, while unofficial figures point to CPI of 290%.

Delta has already hinted that its lager beer volume grew by 27% over prior year for the quarter and is up 43% for the nine months. The business has endeavoured to meet the high consumer demand in spite of the challenges in accessing some imported raw materials and services.

In a quarterly trade update to December 31 recently, Delta Corporation, an Anheuser-Busch Inbev associate company, said the sorghum beer volumes had risen by 15% above prior year for the quarter and 6% for the nine months.

The company reported of supply gaps stemming from shortages of packaging materials and extended plant breakdowns mostly occasioned by the lack of foreign currency for spares and contractual services. Chibuku Super contributed 85% of the volume.

National Breweries Plc-Zambia (Natbrew Plc) recorded a volume growth of 4% for the quarter and 9% for the nine months.

But, overall, earnings are not as good.

The group revenue increased by 5% in the quarter to December 31 and 24% (19% organic growth) for the nine months but warned the business remains profitable and continues to generate positive cash flows.

Just last month, Tobacco Sales Ltd (TSL) reported net earnings of US$13 million in the full year to October 31 (FY 2018) buoyed by a solid performance in all its business units.

Its topline jumped 19% to US$52 million from US$43 million in FY 2017.

Ordinarily, this would be commendable growth but the growth was below annualised inflation of 42% as at December.

Earnings per share rose marginally from 3,4 cents to 1,2 cents.

Retailers such as OK seem to have more leverage given their ability to pass on costs to customers and defend margins but could still suffer from from reduced disposable incomes.

CE Alex Siyavora told shareholders at an annual meeting of shareholders last year that his group had continued to experience growth.

“The growth we reported on at year-end YF18 is continuing. Performance is ahead of budget with positive growth over the prior year. Our promotions, the major one being the Grand Challenge Jackpot Promotion, were successful and contributed meaningfully to the quarter’s performance,” he said.

Siyavora admitted when he presented the retailer’s earnings to September that the growth in the top line was mostly inflationary.

By understating the numbers, the government has not made this inflation headache any better. Analyst also believe the numbers may not bring much joy for investors.

IH Securities says corporate earnings will be negatively impacted by austerity policy reforms and the 2% intermediated money transfer (IMT) tax.

“The 2% IMT tax is expected to have a significant effect on corporate earnings if they do not pass onto their consumers. Although monetary and fiscal policy reforms are expected to yield results in the near to medium-term, the new policies have sanctioned the use of parallel rates whilst the government aims to maintain parity between RTGS and US dollar. We expect a significant squeeze in margins as suppliers insist on hard currency to provide a hedge in the volatile economy,” said IH in a 2010 equities outlook strategy.

“If government maintains its commitment to restrict TB issuance, we expect reduced money supply (circa $2 billion in TBs issued in 2018) — which will have an impact on liquidity and consumer demand relative to prior year. We expect corporate earnings to experience lower run rates to FY19.”

IH sees consumption coming down in FY19 as inflation decimates disposal incomes.

“Bottom-of-the-pyramid disposable incomes have been compromised following highly inflationary policy reforms and the upward revision of fuel prices. We expected consumption to be significantly subdued as a result of a looming El Nino effect in the 2018/2019 cropping season, sky-high prices of agricultural inputs and fuel for irrigation in 2019 given that informal sector earnings, the greatest contributor to bottom-of-the-pyramid liquidity, largely comprise earnings of smallholder farmers, artisanal miners and informal traders,” IH said.

“Gold output declined severely in 4Q18 as miners failed to access their foreign currency proceeds, this trend may persist into 2019 in the absence of meaningful interventions. Mounting inflation and volatile parallel rates will continuously erode disposable incomes in 2019 as significant increases in incomes are not anticipated until the currency ambiguity is clarified.”