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.
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