eBusiness Weekly
Kudzanai Sharara Taking Stock
The earnings season is upon us with three companies having released their half year results already.
The dominant theme has been that of failure to access foreign currency. Proplastic chief executive officer Kuda Chigiya put it bluntly: “The path to full recovery will be slow and painful with lack of access to foreign currency being the main challenge which will inevitably bite us going forward.”
But this is a theme that has been with us even as companies reported their December 2017 earnings, back in March 2018.
One cannot overemphasise how damaging this can be to business at a time the bulk of raw materials and products are imported.
But given that it’s a challenge that is likely to be with us for longer, it’s no use moaning about it, but instead there is need to come up with solutions on how this can be circumvented.
Hopefully companies will provide more information on their survival strategies.
Faced with a huge foreign debt obligation, Econet went through a $130 million capital raise, loathed or is it opposed by many at first, but now seen as a stroke of genius as earnings have ballooned and reputation to pay back debt still intact.
BAT Zimbabwe, which is struggling to repatriate dividends to major shareholders is also looking at ways to sweat the funds. Proplastic on the other hand have not left things to fate.
Despite failing to access foreign currency since the beginning of the year the company has resorted to toll manufacturing and twinning arrangements and the result has been double digit volumes growth.
These are the focus areas that investors and fund managers alike would be looking forward to. How do we survive till things normalise? Do we have a strategy? So far companies have not disappointed.
Another theme that is set to dominate the earnings season is that of strong revenue and volumes growth. It’s a theme that has already been set in motion by companies that have reported.
BAT Zimbabwe was the first one out of the block, followed by Proplastics and ZB Financial Holdings this week. We have also seen results from Delta and Econet, which included performance for some parts of 2018.
Delta for instance, gave a trading update for the first three months of the year. Its performance can thus be used as a precursor or yardstick for what to expect this reporting season.
For Delta, revenue increased by 45 percent, excluding Natbrew Plc, for the quarter, BAT revenue increased by 19 percent while for Proplastics revenue was up 71 percent.
For a country whose economy is said to be in bad shape, the numbers are just mind blowing. A lot of questions are bound to be raised. How real are these results and are they sustainable? Is the growth in revenue driven by inflationary pressures or its real?
Given how companies are accessing forex for raw materials, one cannot rule out the issue of inflation as costs are passed on to the consumer. For example Proplastics has been putting up prices of between 35 and 40 percent, for the past year, so the inflation element is there.
But as seen with results released so far, volume growth has also been tremendous. For Delta lager beer volume grew 51 percent above prior year for the quarter while sparkling beverages volume increased by 49 percent over prior year for the quarter.
At BAT Zimbabwe performance was buoyed by a 21 percent growth in volumes while at Proplastics sales were strong too, with volumes growing by 29 percent.
And as one local market analyst put it, volumes are not inflationary! Volumes growth shows an expanding business, he added.
Analysts are in agreement over the need to focus on increasing capacity. “As companies report, our focus would be on volumes which in our view are not distorted by price increases.
“At least that will prove whether or not demand is greater than inflation,” said another local analyst who cannot be named for professional reasons.
There are so many things to consider though among others trying to figure out whether companies are benefiting from the switch to electronic transactions, a preserve of a few formalised businesses, or a result of capacity expansion.
Are companies increasing their capacity to manufacture products and or is there growth in the volume of manufactured output.
“We can further go beyond the reason for the volumes growth? Is it because of the increased use of POS machines (OK) or it’s as a result of investment into capacity to cater for increased demand (Delta),” said another analyst with a leading asset management company.
Ok Zim is currently taking advantage of the switch and is opening up more outlets while Proplastics is putting up a $6 million plant, all this is enough proof that the growth is real, but it also gives us an idea of what to look for in the current earnings season.
Margin improvements and market share are critical as well, according to analysts. For Proplastics, gross margins improved to 32 percent up from 26 percent prior year comparative as revenue grew at a much faster rate than cost of sales and overheads. There was also margin growth at BAT Zimbabwe with gross profit margins increasing from 71,7 percent to 73,4 percent.
Other things to look out for during this earnings season include management’s outlook and guidance on future performance. Hopefully the company has a management team with a strong track record of setting reasonable targets and consistently meeting or beating expectations.
