The hits and the misses of the last reporting season


June reporting season was not anything far from the general analysts’ forecasts. Earnings were weaker across most companies due to volume declines and/or reduction in average selling prices.
The operating environment remained challenging, with the severity of foreign currency shortages felt over the period. Consumer disposable income remained low, cash shortages worsened, and in some cases informal and unregulated markets grew to the detriment of the peer formal business.
A lot of factors were put under test – management skill, balance sheet strength, business flexibility, just to name a few. In the midst of a gloomy working environment some companies proved resilient and thrived while others wallowed in the challenges of the market.
These are the hits
1. Innscor
One thing Innscor prides itself in is an astute management team. They know why they are there and they work to deliver value to their shareholders. Likewise, the major shareholders understand why they are in business (to make money) and they are uncompromising on their purpose as business people. It may be because of this background that you find Innscor management working towards adding value to their principals.
Despite the challenges at Irvines, where the company had to cull all its birds due to the avian flu and write off $7.3 million off its income as a result, the Innscor group recorded improved profitability for the year to June 2017. For the same year, National Foods, which contributes roughly 28% to Innscor’s income, had a bad year due to the underperformance of its maize unit. Innscor group revenue was down 1%, but despite the fall, profit attributable to shareholders grew by 10.5%.
Why is that? Firstly, Innscor made the right decisions in unbundling its conglomerate structure. Since that exercise, there have been recorded improvements in efficiencies as measured by the reduction in operating costs. For this particular year, the streamlining of operating costs was more visible than before as it enabled Innscor to grow its EBITDA even after the fall in revenue, thereby improving EBITDA margin. Secondly, after the unbundling, the focus on light manufacturing resulted in meaningful acquisitions which had a stellar year and contributed positively to share of profits from associates. The business was able to record growth in profit attributable to equity holders, despite abnormal costs incurred over the year.
2. Simbisa
Being a former unit of Innscor, and having the same shareholders as well, we would have expected nothing short of a good performance. Like Innscor, Simbisa is a well-run business with an aggressive management team especially in the wake of competition. Any competition trying (or has tried) to directly compete with any of Simbisa’s brands will testify how price aggressive Simbisa can become which can push new competitors out of business before even graduating from infancy. Simbisa can afford to do so without much operational risk; they have been in the market longer, have developed scale, skill and loyalty, therefore they can do things much better compared to other market players. Furthermore, they have relatively healthy margins in Zimbabwe, and can afford to take a few percentage points off margins just to protect market share. It is a strategy that has worked well for them.
In this particular season, Zimbabwe segment posted positive results and management attributed the performance to growth in customer count. The company introduced some value offerings which must have attracted customers and increased volumes. In most cases value products come with margin declines but the Zimbabwe segment grew it EBITDA margins for the year. Benefits of scale and skill kicked in, as well as the marketing engineering which gives a value perception to consumers.
On the negative side, the region is proving difficult for Simbisa. Issues do with fierce competition as well as political instability in some regions are affecting performance. Regardless, it is a bold move by Simbisa to enter into such markets which are concentrated with international brands and trying to build brand equity (Zimbabwean brands!). The determination is commendable and there are plans to list on AIM to raise funding to grow the business as well as acquire an international franchise. It may take time for Simbisa to calibrate especially in the new markets such as Mauritus but they remain an attractive opportunity.
3. Masimba
Masimba had, since dollarisation, cried foul over the lack of major construction projects, which had caused their revenue to tumble. In the current year, there has not been much change on the construction market, but Masimba managed to get itself some lucrative projects on the market. There are a few commercial projects currently in progress as well as financial institutions that are carrying out housing development. Masimba comes as a preferred contractor because of its reputation and experience in the business. As a result, there has been a recovery in the company’s turnover.
Management has also done work towards cutting costs and is now operating on a very lean structure. This was done during the period when business was low. At the upturn of the business, administrative labour has been kept lean and this has been one of the factors attributing to recovery in profitability. Construction projects will remain low in the short to medium term but Masimba has been flexible to penetrate into the new markets and this should sustain them in the absence of commercial construction projects.
Losers for the year
1. Turnall
Turnall is a good case of how management can make or break any company; the company is on its knees due to its past management. Two set of consecutive management teams are accused of committing fraud which has fractured the company severely. The fraud cases are very similar from the Jere led management onto the Musonza executive team. What this means is despite having identified the weak control systems in the business after the first fraud case, the business continued as usual without making control systems corrections and plugging leakages. Managers were dismissed and a new set of management is in place. What has been put in place that was not there before to improve the control environment? Not in any way trying to accuse the new management of being the same to their predecessors, but how will investors have confidence that they are not cut from the same cloth if no reforms in containing fraud have been made noise about?
It may be in the same regard that its shareholders do not show interest in rescuing the business. The company reported a negative working capital position of $12 million, and it is anyone’s guess how that gap is going to be funded. Banks are sitting on liquidity which they would considerably deploy but Turnall seems to be struggling to access any loans. It is unfortunate that Turnall does not have working capital funding in a market where demand for their products in rising. Raw materials required are local and they have little foreign currency pressures. Many companies would die to be in Turnall’s shoes, yet Turnall has failed to shine with an opportunity at hand.
2. Lafarge
Cement producers have also blamed the lack of major construction projects as a cause for low volumes. Residential projects have been on the rise and gave a boost to volumes but it was not enough to contain losses at Lafarge. Despite growth in gross profit on normalization of costs, operating and net profits were weak due to increase in operating costs. Management highlighted a growth in distribution costs. We are guessing Lafarge is trying to reach a broader market to make their product accessible, but unfortunately the volumes are not coming through and the increased costs only widen losses rather than improve the profitability position.
Other than the low construction projects in the market, we see Lafarge also facing a competition problem. PPC has established a plant in Msasa and closely entering the Harare market where Lafarge also services. The main worry for Lafarge should be the new machinery at PPC which makes the latter more efficient. Lafarge has an old plant which is only being refurbished in piecemeal when necessary. It would be hard to compete with competition that has a young and modern technology which is more efficient and that can ride on that to be more price competitive.
3. Truworths
Truworths has been having it difficult over the past years and 2017 was no different. Management went on a drive to reduce trading space as a means of containing occupational costs. A total of six Number 1 stores which were underperforming were closed over the year while some Truworths branches were consolidated. On a standardized basis, revenue was lower than previous period. Delay in bonus payments seemed to have grossly affected their first half and the second half did not recover enough to cover for first half losses.
Other than the low sales, the credit quality of the book also deteriorated after increase in net bad write off as a percentage of credit sales was up to 4.8% from 0.4% in prior year. Truworths has been termed as the more conservative one, relative to Edgars, but the deterioration of its debtors’ book casts doubt on the quality of their debtors. Will this figure not increase? If it does, then it is an increase in cost to the business, which will eat into an already weak topline.
The lukewarm
CBZ Holdings had a fairly good run at the topline with steady growth in income relative to last year. All its units achieved income growth with the exception of the insurance unit that recorded a drop in premiums written. The group was more cost efficient as its costs to income ratio dropped to 66% from 71% in the prior year. These factors supported a healthy growth in operating income.
Despite a relatively steady operating performance for the year, the group reported lower profit for the year following an almost double impairment charge for the period.
This watered down on all the positive performance indicators of the group as focus was shifted towards questions around the quality of the assets that the group is holding. Already there was market skepticism over the quality of loans held by the bank and the increase in impairments especially on a relatively flat loan book, discounts income performance.
In conclusion
On overall the market had more losers than winners because of the environment.
Earnings are generally weak across the board and it is hard for most managers to push for profitability growth in a market where the fundamentals are weak.
We applaud companies that are rising above the tide and adding value to its shareholders. – FinX


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