Demand, product availability drive Art Corporation’s top-line to $34m

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Strong performance across Art Corporation’s divisions propelled the group to a solid performance during the year ended September 30, 2017, reinforced by the phased recapitalisation and re-tooling of operations.

The company’s chief executive Milton Macheka told an analysts briefing on Monday that while business was impacted by foreign currency challenges, retooling and rationalisation initiatives have paid off with performance largely anchored by the batteries business.

“(The year) 2017 was fairly difficult but the business performed well with strong performance across divisions,” he said.

During the year, revenue amounted to $33,48 million, a 13 percent increase from $29,76 million in 2016. Margins were up to 42 percent from 32 percent while capacity utilisation increased to 80 percent compared to 70 percent in prior year.

The group’s chief finance officer Abisai Chingwecha weighed in saying that the revenue increase was driven by strong demand and improved product availability.

He added that gross profit increased to $14,16 million compared to $11.10 million in prior year as a result of strong margins across the board which he said have been improving in recent years.

However, expenses at $9,62 million were 23 percent up from $7,87 million in prior year but Chingwecha said these were in line with increased activity, particularly investments towards the rebranding to Exide Express, increased outlets and promotional activities. Other costs were a result of labour rationalization to the tune of $639 000; including the hired contractors as well as a new plastic plant, and increased marketing spend.

Chingwecha said during the period, finance costs were near flat at $1.15 million from $1,17 million as the group managed to meet its obligations. Overall, profit after tax for the year amounted to $2,74 million compared to $1,92 million in 2016.

According to the CFO, the balance sheet grew 25 percent due to increased profitability. He said property, plant and equipment increased to $14,52 million from $13,96 million in 2016 as a result of the re-tooling of the batteries division.

During the period, new machinery was imported at a value of $2,1 million and commissioned in the Chloride division while efforts were made to reduce the working capital gap.

Inventories increased to $6,24 million compared to $4,32 million prior year which Chingwecha said was a deliberate strategy to align stocks particularly ahead of the back to school period.

He said the group has an exposure of $3 million to foreign obligations, but has made significant achievement towards retiring legacy debts.

Balance sheet highlights

Interest Bearing loans and borrowings $6,2m (2016: $5,9m).

Short term loans $3,5m (2016: $3,8m).

Creditors and debtors levels within 2016 levels.

Biological assets $4,955m (2016: $4,543m).

Net current liabilities ($4,764m) (2016: $6,853m).

According to Chingwecha, cash generated from operating activities at $2,05 million was lower than $4,18 million in 2016 and this was a deliberate strategy to invest towards re-tooling and other obligations.

“Cash generated from operations decreased as significant cash generated was used to pay creditor obligations and correct working capital levels in the divisions,” he said. The net gearing ratio was 42 percent from 48 percent in 2016.

In terms of divisional turnover performance, the Batteries division contributed 66 percent with Paper and Ever sharp at 15 percent both. Plantations were 4 percent.

The group CE said capacity at the Batteries division increased to 80 percent from 70 percent in prior year while revenue rose to $22.56 million compared to $19.79 million. Factory sales volumes increased 25 percent and volumes at Exide Express went up 41 percent as the units benefited from new plant commissioned in September.

“The division also benefited from the impact of Statutory Instrument 20 of 2016 and the foreign currency challenges which limited battery imports,” he said.

Macheka added that Phase 3 investments at the batteries division will see investments on an injection mould and formation and the group is now able to attack the regional market aggressively and competitively.

On Eversharp, Macheka said the business is recovering and is looking at a strong expansion drive into the region. He said the company will by Q2 2018 commission a book making machine as part of introducing complementary products.

Revenue at Eversharp was $4,88 million compared to $4.55 million in 2016 while operating profit increased from prior year position due to growth in export volumes.

At the plantations division, there were no fire losses recorded this year and the unit continues to record strong performance due to high demand of timber. The paper division recorded an improved position as a result of factory efficiencies and improved sales volumes. Macheka said the business has over the years been a problem child but has since recovered as a result of investments.

Meanwhile, for the two months of October and November (FY2018), revenue has already reached $6,07 million while profit after tax is at $1,47 million. Revenue for 2018 is targeted at $39 million and Macheka said the group is on course to achieve that.

Comment

Art Corporation boasts of a diversified business with portfolios that have strategic linkages. This not only spreads risk but also optimises returns. In a country with an average manufacturing sector capacity utilisation of 45,1 percent, Art Corporation stands out as one of the few manufacturing firms with a dynamic average capacity, at 80 percent.

The protection which was granted to the batteries division was one of the single biggest contributors of enhanced demand which helped grow the top-line, given that this particular portfolio contributes the lion’s share to total revenue.

The strategy to retool also resulted in less downturns and improved production which enhanced product availability and strengthened the supply chain. And the efficiencies realised from both recapitalisation and retrenchment helped in reducing the cost per unit which resultantly saw margins growing reasonably.

As alluded, the batteries performance was fair, with Eversharp however posting a not so impressive set of results. This portfolio really needs to work on improving its volumes, especially given the huge investment it is deploying towards marketing. A change in marketing strategy, to focus on strategies that yield higher returns should also be considered. It is however hoped that the reopening of schools in the next few weeks will help to invigorate things in this particular portfolio as demand will start to strengthen.

Plantations and paper divisions also demonstrated dynamism by moving from the red zone to post reasonable profitability, with the paper division actually growing margins from single digit to double digits. With more recapitalisation commitment, these two portfolios can actually grow to become forces to reckon with.

The group should also be commended for reducing its gearing from high levels of 78 percent in 2015 to 48 percent in 2016 and further down to percent in 2017. It is important to maintain lower gearing during this period where some inherent risk factors still remain. Otherwise the group will struggle to meet interest payments if low profits are realised as a result of these risks, which will expose it to liquidation. Going forward, we see the planned strategy of expanding exports and retooling bearing fruits as these twin complements are essential in taking the group to the next level. — FinX.

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