GNU discussions appear to be yielding something if we are to believe what we read in the newspapers and the country could finally be moving forward after the 31st of this month. Clearly Mr Zuma’s visit was not in vain. Following the marathon meetings over 2 and half days, it was reported that a “package of measures” had been agreed that would see the GPA move forward “substantially”. Now isn’t that what we have been waiting to hear?
Barring goings on elsewhere, (the Indigenization debate and early elections talk), this is the best news yet, this side of the year and investors on the stock market seem to agree! The industrial index picked up 2.98% on Tuesday on the back of broad based gains in blue chip counters. This gain is the third in as many trading sessions. Nearly $6m worth of shares changed hands Tuesday. A further $1,2m changed hands on Wednesday, with the industrial index climbing by a further 2.70%, bring the year to date movement to -9%. As pointed a few weeks ago, interest has certainly returned to the market, which had seen prices tumble to rock bottom levels in the past fortnight.
Last week we touched on the catalysts for a broad-based gain on the market and reiterate that position this week. Improved liquidity and improved sentiment will see that market record significant gains. For now investors will do well to take advantage of wide price swings that have become the order of the day on the ZSE. The most amazing being Meikles, which had sunk to 30 cents since being re-listed but is now being bought happily at 40 cents. Looking at the value of assets in Meikles and considering that KFHL is still part of the group, it should be trading at a price not less than 75 cents. Yes, the company is still making losses, but the some of parts valuation definitely warrants a price of at least 75cents.
What does Investec see in Zimbabwe that others don’t? (I say so because they are also invested in Falgold) Value and Potential! The company is chasing value and getting it. Investec is the underwriter to a $15m Rights issue approved this week and has extended a 5-year loan at 12.5% to OK. OK is what one could call the largest and most well-known retail brands in Zimbabwe. The company is best known for its “OK Grand Challenge”, which I remember as a kid. “Back in the day” when the Zimbabwe dollar was still a dollar! I remember my parents doing groceries there and I would be so excited to find out what each coupon in store for us. We never won anything substantial but we did it anyway. Now that’s successful marketing. Today I still shop there with my family and that tells you something about OK. It’s a well run company that will be here for generations to come.
News reaching me is that we will see some more big rights issues in the second quarter. Talking to some people that know what is happening, there is a total of $170m that is wanted by 3 companies in the second quarter of this year. Now that’s a lot of “dough”. No doubt there will be a need for agile investors like Investec to come in and underwrite. I am really excited about the ZSE and the type of money it is attracting into our economy. This is real investment and for once the ZSE is doing what it is supposed to do, that is raising affordable equity capital. Yes there is massive dilution for us as local investors, but we will be the winners in the end.
I say this because, over the last decade we have not invested in any of our business in a meaningful way and clearly without new investment, we will not be able to salvage anything from our companies. Enough said! Have a great week.
Thursday, March 25, 2010
Wednesday, March 17, 2010
Rather Sad week
This week has started out on a depressing note for me. Sam Mtukudzi, a promising young man passed on after a freak car accident on Monday morning. He was a musician and son to Oliver “TUKU” Mtukudzi. I watched Sam perform on a few occasions and his performances were wonderful and stood out as his own. His father Oliver drew me out to him and the first time I watched him perform I like everyone else saw a bright and colourful future for the young man. The loss of Sam is a very painful one. In fact it is tragic. Yet life must go on. My heart goes out to Oliver’s family. Tuku’s music has special meaning to me.
Anyway, back to the markets where value traded on the ZSE picked up somewhat last week. We saw daily trades of over $1.2m from as little as $360,000 the previous week. There are a number of reasons for this, the first being that the industrial index is down 10.79% since December 2009 and mining shares are down by 14.4% over the same period. So investors may be looking at stock prices and chasing bargains again. When one drills down the detail, there are most certainly a few bargains to pick. We will look at some of these later.
The second and most important reason is that there has been some improvement in liquidity in the stock market. This sounds more credible. Following the authorities’ move to allow PPC to be traded on the JSE, unconfirmed reports say 6m shares have already been moved out and at a price of $4.31 per share that’s a cool $26m that could potentially be chasing shares on the ZSE. Trades have certainly picked up and there have been a few big trades in the last week or two mostly in Old Mutual, NMB, Interfresh, Econet, CFX, Dawn, OK, and Delta, which is evidence of some portfolio restructuring.
The third reason, albeit not so important right now is still linked to the second. The tobacco selling season has increased the number of trading days and so far over $7m worth of tobacco has been traded. The filter through effect of this could also be seen in the picking up of value traded on the stock market. An improvement in liquidity remains the key to unlocking value on the ZSE.
I want to add a forth reason that may indirectly be leading to a picking up of trades on the market. Though not plausible, it is my hope that investors, (especially foreign) see it that way. When the empowerment law came into effect on the 1st of March 2010, no company was taken over as most feared would happen. Ok, that is a bit dramatic, I agree! But my point is that investors are a little more comfortable about the law now that it is being discussed openly and the politicians are interfacing with the public to elicit their views. The rumour milk is suggesting that a truce has been reached and exemptions given to ZSE listed companies. I can’t confirm this but hey, there is no smoke without fire, they say and I agree. Whatever is happening, it is clear to me that the current law will not proceed and be effective in its present form, because it has too many flaws and will be amended to take into account a few important things such as:
1. Definitions (who qualifies and what levels)
2. Property rights protection
3. Funding Structures and capitalization
4. Level of ownership
5. Creation of jobs and economic value addition
6. Constitution of a body to ensure transparency and accountability
My final reason why there seems to be life in the stock market once more is the fact that Mr. J. Zuma is in the country following dinner with the Queen and British officials two week ago. Call it the “Zuma Factor” if you want. Mr Zuma, who is current chair of SADC is in the country for a two and half working visit (Fairly long, wouldn’t you say. He is not expecting things to be easy but he is showing deep commitment by staying this long). A way forward must be found but it will not be easy. The three parties to the GPA are failing to agree on how to proceed. Elections as early as next year have been mentioned.
I think I have dwelt enough on the reasons for the sudden burst of life on the ZSE. Those of us who like to buy and hold for a return on the stock market will have watched some counters drop day after day since the beginning of January 2010. The worst hit are Pelhams - 69%, Afrisun - 63% Ariston - 54%, Caps - 52%, Red star - 50%, General Beltings -50%, Art - 47% , Nicoz - 45%, CFI - 43%, Fidelity - 42%, Zimre - 40% Meikles -39%, Truworths - 38%, Radar -38% , Mash – 33%, Falgold -31%, PGI -29%, Star Africa -27%. The list is not exhaustive. But you get the picture. Most of the counters have had a fair share of problems, be they capital, markets or shareholder related. If I was asked to pick any counters out of these battered ones, I would have to say Mash and Truworths have no reason to be languishing with the rest! Their results prove it. The next batch I would take out of the worst performers’ basket would be Afrisun, Star Africa and Art because they are doing something to change their fortunes by recapitalizing.
Still some money has been made on the ZSE since the beginning of January 2010. Much of it in unlikely counters! Powerspeed +67%, ZPI +50% PPC +42%, Zimplow +20%, Astra Industries +20%, Colcom +17%, FBCH +14%, Steelnet +14%, Border +13%, CBZ+10% TSL +8%, Apex +8% DZL +7%, Chemco +6%, TN +5%. So there you have all has not been gloomy on the ZSE after all!
Anyway, back to the markets where value traded on the ZSE picked up somewhat last week. We saw daily trades of over $1.2m from as little as $360,000 the previous week. There are a number of reasons for this, the first being that the industrial index is down 10.79% since December 2009 and mining shares are down by 14.4% over the same period. So investors may be looking at stock prices and chasing bargains again. When one drills down the detail, there are most certainly a few bargains to pick. We will look at some of these later.
The second and most important reason is that there has been some improvement in liquidity in the stock market. This sounds more credible. Following the authorities’ move to allow PPC to be traded on the JSE, unconfirmed reports say 6m shares have already been moved out and at a price of $4.31 per share that’s a cool $26m that could potentially be chasing shares on the ZSE. Trades have certainly picked up and there have been a few big trades in the last week or two mostly in Old Mutual, NMB, Interfresh, Econet, CFX, Dawn, OK, and Delta, which is evidence of some portfolio restructuring.
The third reason, albeit not so important right now is still linked to the second. The tobacco selling season has increased the number of trading days and so far over $7m worth of tobacco has been traded. The filter through effect of this could also be seen in the picking up of value traded on the stock market. An improvement in liquidity remains the key to unlocking value on the ZSE.
I want to add a forth reason that may indirectly be leading to a picking up of trades on the market. Though not plausible, it is my hope that investors, (especially foreign) see it that way. When the empowerment law came into effect on the 1st of March 2010, no company was taken over as most feared would happen. Ok, that is a bit dramatic, I agree! But my point is that investors are a little more comfortable about the law now that it is being discussed openly and the politicians are interfacing with the public to elicit their views. The rumour milk is suggesting that a truce has been reached and exemptions given to ZSE listed companies. I can’t confirm this but hey, there is no smoke without fire, they say and I agree. Whatever is happening, it is clear to me that the current law will not proceed and be effective in its present form, because it has too many flaws and will be amended to take into account a few important things such as:
1. Definitions (who qualifies and what levels)
2. Property rights protection
3. Funding Structures and capitalization
4. Level of ownership
5. Creation of jobs and economic value addition
6. Constitution of a body to ensure transparency and accountability
My final reason why there seems to be life in the stock market once more is the fact that Mr. J. Zuma is in the country following dinner with the Queen and British officials two week ago. Call it the “Zuma Factor” if you want. Mr Zuma, who is current chair of SADC is in the country for a two and half working visit (Fairly long, wouldn’t you say. He is not expecting things to be easy but he is showing deep commitment by staying this long). A way forward must be found but it will not be easy. The three parties to the GPA are failing to agree on how to proceed. Elections as early as next year have been mentioned.
I think I have dwelt enough on the reasons for the sudden burst of life on the ZSE. Those of us who like to buy and hold for a return on the stock market will have watched some counters drop day after day since the beginning of January 2010. The worst hit are Pelhams - 69%, Afrisun - 63% Ariston - 54%, Caps - 52%, Red star - 50%, General Beltings -50%, Art - 47% , Nicoz - 45%, CFI - 43%, Fidelity - 42%, Zimre - 40% Meikles -39%, Truworths - 38%, Radar -38% , Mash – 33%, Falgold -31%, PGI -29%, Star Africa -27%. The list is not exhaustive. But you get the picture. Most of the counters have had a fair share of problems, be they capital, markets or shareholder related. If I was asked to pick any counters out of these battered ones, I would have to say Mash and Truworths have no reason to be languishing with the rest! Their results prove it. The next batch I would take out of the worst performers’ basket would be Afrisun, Star Africa and Art because they are doing something to change their fortunes by recapitalizing.
Still some money has been made on the ZSE since the beginning of January 2010. Much of it in unlikely counters! Powerspeed +67%, ZPI +50% PPC +42%, Zimplow +20%, Astra Industries +20%, Colcom +17%, FBCH +14%, Steelnet +14%, Border +13%, CBZ+10% TSL +8%, Apex +8% DZL +7%, Chemco +6%, TN +5%. So there you have all has not been gloomy on the ZSE after all!
Wednesday, March 10, 2010
Financial results start pouring in
Financial results for the period ended 31st December have started coming in and as expected they are very mixed. Most manufacturing companies are struggling save for a few. Management is citing dollarisation as the main cause of losses. Bear in mind that these results are the first to be published in a completely dollarised environment. A key feature seen on most income statements is non-recurring items arising from retrenchments and business restructuring.
Here are some of the results:
1. Apex posted a turnover of $7.3m for the year, but had an operating loss of $207,000 and an after tax loss of $1m. The company which mainly services mines did not receive meaningful orders. Demand is expected to grow in 2010 but working capital is lacking.
2. Barclays bank which had $121m in deposits and $20m in loans posted a profit after tax of $1.4m in 2009. Always known to be conservative, Barclays earned the bulk of its income from non-interest related activities and will continue to do so. Sensible lending saw the bank charge between 12-16% interest, when some companies are reporting an all in cost of over 38%.
3. A turnover of $43.4m saw Dairibord post a profit after tax of $4,6m. Milk intake declined by 43% and probably for the first time in the companies' history, non-milk products drove sales and profits. Food and Beverages contributed 64% of volumes with the balance being liquid milk.
4. Edgars managed to record $11.1 in sales in the 66 weeks to 9 January 2010. High rents and massive finance costs of $626,226 saw the company record a loss after tax of $1.2m. Like most retail companies the challenge was restocking after hyperinflation and price controls decimated stocks. Its difficult to see how Edgars can avoid a rights issue to recapitalise the business with borrowings of over $4.3M at a cost of 38% per annum.
5. A tale of two cities is what this can be called. Truworths operating in exactly the same enviroment posted sales of nearly $6m for the six months to 3 January 2010. PAT was $422,485. Management is doing exactly what the Doctor ordered to remain profitable and relavent. They are importing fabric and finished goods from China. If clothing is your thing then Truworths is the better pick.
What can we learn from the above? To put it mildy we have a worrying increase in gearing levels. Companies that went on a borrowing spree with reckless abandon are now counting the cost, as activity in the economy has slowed down. Margins have plummeted. An explanation given by most companies is that "We had no choice but to borrow in order to stay afloat" In other words some of the borrowing done was not properly considered and now that it is unstainable debt, shareholders must come in and help repay it.
Another less harsh way to look at it is that we are now paying for the sins of yesteryear, when hyperinflation ravaged our investments and depleted our capital. We the owners of the companies must now raise new money in order to rebuild our investments. It is a very painful reality!
No wonder this is a very emotional subject! But should the management of companies be committing to borrow at between 32-38% per annum. With what justification? What business can repay such loans without calling on shareholders to inject new capital? To put this into perspective, most of the loans we are talking about amount to over 30% of the company's market capitalisations. Yes, i maybe generalising, but so what? Does that make it right? There is no reason why a company should take "life threatening" arrangements on behalf of the owners of the company all in the name of staying in business. Shareholders have a right to be told that you have no business left. We are recommending that we close down or we are selling the assets. At least we are left with some residual value!
To me, it appears most company executives have postponed some painful decisions in the hope that they dont have to make them in the near future in the hope that GNU starts working and the economy starts growing. But is that enough? I think its not. Business models must change now that we are in a dollarised environment. If we cant produce a product profitably we must import it. To me it is that simple, but what will happen to unemployment when we have to close companies because they are not competitive. What this highlights is that we still have to make some very tough decisions as a country.
Here are some of the results:
1. Apex posted a turnover of $7.3m for the year, but had an operating loss of $207,000 and an after tax loss of $1m. The company which mainly services mines did not receive meaningful orders. Demand is expected to grow in 2010 but working capital is lacking.
2. Barclays bank which had $121m in deposits and $20m in loans posted a profit after tax of $1.4m in 2009. Always known to be conservative, Barclays earned the bulk of its income from non-interest related activities and will continue to do so. Sensible lending saw the bank charge between 12-16% interest, when some companies are reporting an all in cost of over 38%.
3. A turnover of $43.4m saw Dairibord post a profit after tax of $4,6m. Milk intake declined by 43% and probably for the first time in the companies' history, non-milk products drove sales and profits. Food and Beverages contributed 64% of volumes with the balance being liquid milk.
4. Edgars managed to record $11.1 in sales in the 66 weeks to 9 January 2010. High rents and massive finance costs of $626,226 saw the company record a loss after tax of $1.2m. Like most retail companies the challenge was restocking after hyperinflation and price controls decimated stocks. Its difficult to see how Edgars can avoid a rights issue to recapitalise the business with borrowings of over $4.3M at a cost of 38% per annum.
5. A tale of two cities is what this can be called. Truworths operating in exactly the same enviroment posted sales of nearly $6m for the six months to 3 January 2010. PAT was $422,485. Management is doing exactly what the Doctor ordered to remain profitable and relavent. They are importing fabric and finished goods from China. If clothing is your thing then Truworths is the better pick.
What can we learn from the above? To put it mildy we have a worrying increase in gearing levels. Companies that went on a borrowing spree with reckless abandon are now counting the cost, as activity in the economy has slowed down. Margins have plummeted. An explanation given by most companies is that "We had no choice but to borrow in order to stay afloat" In other words some of the borrowing done was not properly considered and now that it is unstainable debt, shareholders must come in and help repay it.
Another less harsh way to look at it is that we are now paying for the sins of yesteryear, when hyperinflation ravaged our investments and depleted our capital. We the owners of the companies must now raise new money in order to rebuild our investments. It is a very painful reality!
No wonder this is a very emotional subject! But should the management of companies be committing to borrow at between 32-38% per annum. With what justification? What business can repay such loans without calling on shareholders to inject new capital? To put this into perspective, most of the loans we are talking about amount to over 30% of the company's market capitalisations. Yes, i maybe generalising, but so what? Does that make it right? There is no reason why a company should take "life threatening" arrangements on behalf of the owners of the company all in the name of staying in business. Shareholders have a right to be told that you have no business left. We are recommending that we close down or we are selling the assets. At least we are left with some residual value!
To me, it appears most company executives have postponed some painful decisions in the hope that they dont have to make them in the near future in the hope that GNU starts working and the economy starts growing. But is that enough? I think its not. Business models must change now that we are in a dollarised environment. If we cant produce a product profitably we must import it. To me it is that simple, but what will happen to unemployment when we have to close companies because they are not competitive. What this highlights is that we still have to make some very tough decisions as a country.
Subscribe to:
Comments (Atom)