Padenga seeks to diversify from skins

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Kudzanai Sharara
For years, Padenga’s operations have been modelled around the steady supply of 46 000 or so premium quality Nile crocodile skins to high end luxury brands globally.

In recent years, alligator skins for watch-band size and medium size, have also been added to the product range that also includes crocodile meat.

The model, places absolute emphasis on producing fewer but top quality skins for premium luxury brands where Padenga’s market share is approximately above 80 percent.

In support of this strategy, the company says it does not chase volume but focus on producing a skin quality that is consistent with the brand status and image of the premium market. And this is a strategy that has worked and Padenga for years was ready to stick to it.

That was yesterday. Now the group is looking at investing in other projects away from crocodiles and alligators.

Chief executive officer Gary Sharp attributed the new thinking to the changes in the country’s leadership where focus has been placed on reviving economic fortunes.

“In line with the new political dispensation we are looking at new ventures. We have the cash resources available, we have identified some exciting ventures that are not directly in our core business,” said Sharp.

Chief financial officer Oliver Kamundimu told the Business Weekly on the sidelines of the group’s analysts’ briefing that the group has at least $10 million to spend on new projects.

“We closed the year with $11 million in cash, so I think I can use all that, because my operations are self-sustaining and I can meet my cash flow needs. So off the cuff, I have $10 million (to spend on new projects).

Management is, however, not in a position to disclose the new plans with Sharp saying the group will be in a position to disclose the new ventures by May.

“We are looking at going into additional ventures and we will bring those to your attention in due course hopefully by the annual general meeting in May.

But as much as Padenga is now looking to diversify, current operations are still posting strong results.

Operating profit went up to $13,9 million from $12,6 million with operating profit margins improving to 46 percent from 40 percent prior year comparative.

Profit after tax jumped percent to $12,8 million from $8,4 million with attributable profit margin jumping 52,38 percent to 43 percent from 29 percent prior year comparative.

Kamundimu said the increased margins were on the back of improved operation efficiencies as well as fair value adjustment on biological assets in line with IAS 41. He said the new margins will be sustainable although it will be a challenge.

Earnings per share went up to 2,4 cents, up from 1,65 cents.

Of stains and scars

Explaining the reasons for changing course, Sharp said the company will need at least two years before it can expand on its core business and will rather take advantage of the promising economic environment to diversify into new ventures.

“We have good potential in our core business to expand but we need to achieve certain operational and production benchmarks before we do that,” said Sharp adding that it will take at least two years for the group to reach those benchmarks.

Achieving the said benchmarks will, however, not be as easy as management would want.

Biological Assets are prone to disease outbreak that could compromise skin quality and in turn revenues.

As discovered this year and in some other years, crocodiles are prone to scars and stains among other ills that affect the quality of the skins.

For the year ended December 31, 2017, the company had a challenging year as operations were hit by a viral caused by low quality lake water which resulted in the decline in skin quality. The viral challenge caused stains on some of the skins.

While this was a new challenge, throughout the years, the issue of scars has also been a major threat to skin quality and up to now, efforts are still being made to reduce the number of scarred skins.

During the period under review, the company had to make further refinement of its scar prevention strategy through investment into additional grower pens.

In financial year 2018, Padenga is looking at constructing additional 80 new grower pens to advance the scar prevention strategy. This is in addition to another 80 that were produced in the period under review.

In 2012, the company recorded a reduction in average skin size after the culling crop was hit by a stomach infection which was “difficult to detect and impossible to recover given the proximity to winter.” Padenga had to resort to intensive antibiotic treatment programmes to fix the problem.

Weather changes also tend to impact on the growth patterns of the crocodiles. Cool weather conditions for example usually result in a shortfall in average skin size.

In 2017, the Kariba operations experienced the highest number of hours below the optimal temperatures of approximately 26 °C. Crocodiles tend to eat less in cold conditions and this has a negative impact on size, a key requirement in the premium market.

Then there is the issue of animal rights which, in 2014, saw Padenga’s US based operations being disrupted over animal cruelty claims. The operations were seriously disrupted by unexpected and intense inspections by the statutory authorities resulting in an $2,5 million operating loss.

Given such vulnerabilities, Padenga’s diversification could provide a good hedge. Or maybe complicate things for the group. Only time will tell.

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