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Masimba cautiously optimistic of outlook after returning to profitability in H1

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HARARE


Masimba Holdings is cautiously optimistic about its outlook which is expected to be driven by mining, infrastructure, commercial and retail buildings and housing projects.

Chief executive Canada Malunga told analysts that even though the outlook seems uncertain the group was motivated by current infrastructure considerations across the board as well as the improving commodity prices which could spur capital projects. This comes after the group returned to profitability in the six months to June.

Revenue for the period increased 106% to $8.56 million mainly driven by projects in the mining sector which made up 48% of the line. “We managed to deliver growth in the topline but this is so because we were not where we belonged in 2015. Our focus and better comparisons will be in 2017.”  Gross Profit margins declined to 15% which FD Agnes Makamure said was due to competitive pricing pressures and short duration projects.

Overheads were down to $1.16 million from $1.51 million. “The overheads/revenue ratio improved to 14% against 37% last year due to effective cost containment and value engineering processes,” she said. EBITDA improved to $633 561 compared to a loss of $119 579 and profit before tax was $150 138 from a loss of $749 632.

Makamure said Reinforcing Steel Contractors Zimbabwe (a JV company) had contributed $37 589 to the pre-tax line from $10 139 resulting in current LTD return on investment of 51%. Overall, profit for the period was at $111 477 from a loss of $353 199 resultantly earnings were 0.05c a share.

Cash balances improved to $1.11 million while borrowing levels at $640 968 were sustainable. “The bank borrowings increased from $444 535 as we took out expansionary capex,” said Makamure. The group incurred expansionary capex of $729 000 and will increase it to $1.5 million by year end funded from internal resources. She said debt to equity of 6% was manageable while the group is targeting ROE of 4% by year end from the current 1%.

Malunga said the group’s first half performance will likely be mirrored in the second half but the key pillars of the group going forward are to grow the order book, cost containment and value preservation. He said the group’s own generated property development projects will contribute significantly in 2017. “There are still significant opportunities in mining, infrastructure, commercial and retail buildings and housing. Housing will continue to be a key market in the next few years not just in Harare but from Beitbridge to Chirundu.”

Our Thoughts on Masimba Holdings

Masimba Holdings managed to perform within expectations after it forecast a return to profitability at the same time last year. The group has been able to contain costs and bring back the business to its former revenue levels. They now need to work on defending margins. By management’s own admission 2015 would not be a good comparative year as the group was coming off an unbundling and massive rationalisation. The future profitability will be influenced and dependent on big capital spend in the key sectors. Reduced infrastructure spending and the poor state of affairs of the economy makes the outlook even more challenging. Their survival is predicted on their ability and aggressiveness to establish themselves in the short duration project segment of the market.

Though the group has successfully returned to profitability, it has made several steps backwards when it comes to cash generation capacity in comparison to prior period. If it were not for additional borrowings of $196 432, its cash position would have deteriorated significantly. We also note with concern another “bloodletting” cash dividend declaration for the period under review much similar to another controversial payout in 2013 . For a group that has just returned to profitability and a receding cash position, we feel it would have been better for the funds to be retained and channelled towards growing the business.

Until government devises a formula to undertake capital projects the current situation will remain entrenched where competitive pressures (price wars) will eat into the margins due to the acute shortage of reasonable projects on the market and ultimately lowers profits in the long run. No industry can survive fighting on the price front. Their costs are more than their competitors’ so there will be casualties. Long term projects stabilise their revenue streams and the absence of these mean that their revenues will be unpredictable and risky.

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