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Seedco records sharp increase in H1 turnover but write offs, finance charges widen loss

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Seedco records sharp increase in H1 turnover but write offs, finance charges widen loss 

HARARE – SeedCo turnover increased sharply in the half year to September 30 but high finance charges, inventory write-offs and exchange losses saw the group, which traditionally makes a loss during the period, widen that position to $9.3 million from $5.6 million last year. Turnover increased 32% to 24.8 million due to early maize seed sales and improved vegetable seed sales but gross margins were 4% down due to write down of some old stocks.

In the period maize sales were 26% up while winter cereals were down 25%. Finance director John Matorofa told analysts yesterday that despite the increase in sales, loss after tax increased due to inventory write offs, exchange losses of $2 million in mainly in Zambia and Malawi and finance charges which doubled to $2 million from $1 million. “Finance charges increased due to discounting of treasury bills in Zimbabwe (of between 7-10%) and delays in payments by governments of Zambia and Malawi, which led to extended borrowings.”

Matorofa said operating costs were contained at prior year levels at $15.7 million while capital expenditurefor the period was $3.24 million.

On the balance sheet, PPE increased by $2.2 million due to capex on the purchase of research farm in South Africa, construction of seed drying and processing facilities in Kenya, resourcing of the new research lab and replacement of some seed dressing lines in Zimbabwe. Chief executive Morgan Nzwere said the new lab in South Africa was now fully functional “and there are a lot of things that we are now able to do in-house and this is speeding the turnaround of operations.”

Loans and receivables had decreased due to disposal of some TBs.  Accounts receivables reduced slightly as collections were offset by current sales. “Included in the trade receivables are amounts due from Governments of Zambia, Malawi, Tanzania and Rwanda which together owe the group $7 million. However, efforts are being made to liquidate the amounts,” said Matorofa.

Bank borrowings increased by $16.6 million due to the seasonal funding of seed deliveries. Matorofa said the borrowings were higher than usual due to delayed payments by the Malawi and Zambia Governments. “The average cost of borrowing is 7% and some property, inventories and receivables were pledged as collateral.” The group also said Zimbabwe had foreign debt of $5 million but there had been challenges in servicing it as payment had been in queue for about a month.

On operations,Nzwere said Malawi and Zambia had been experiencing serious power shortages and the group has had to put in gen-sets while Zimbabwe’s power situation had been somewhat stable. In spite of the challenges, the group had adequate stocks to meet anticipated demand for the current selling season. “We think we should be able to fully service customers.” Matorofa said as a result, stock levels at $48.2 million (1H15: $39.68 million) are up due to deliveries of current year production by growers in preparation of the selling season in H2. Nzwere said the group’s Grower Transformation Initiative had started paying dividends with yields/hectare increasing by over 30% in Zimbabwe. The group is also targeting to have a good stock carry over position in order to take advantage of opportunities that may arise early next year.

In Zimbabwe, the group had made good progress in terms of seed deliveries. The SBU had also got the lion’s share of the Government’s Command Agriculture Programme. “We managed to organise favourable payment terms where we have been paid a significant amount of cash up front and have made arrangements in terms of the outstanding debt.” Nzwere said Zimbabwe is expected to do better than last year.

In Zambia, winter cereals were affected by electricity and water challenges but the SBU had been awarded 20% of the input programme. Nzwere said as a plus, districts using e-vouchers had increased to 19 from 13 and this allows customers to choose the seed variety they want “and we know that most of the customers prefer our varieties.”  He however said the forex situation in the country was worrying although the group had a price adjustment.

In the DRC, political instability and the struggling mines were a threat while the group had also seen traders taking advantage of the weak kwacha to cross to Zambia. “Its cheaper for them to buy it in Zambia than the DRC where the seed is priced in US dollars. We have also noted that the duty structure does not favour truck deliveries whereas people on bicycles do not pay any duty.” In Malawi, the government programme has been reduced by 40% and the tobacco and rural economies continue to struggle. Tanzania had seen some growth due to good Magafuli policies while in Tanzania volumes were up and prices had been adjusted by 5%. In the Common Customs Union, Botswana had an early start to its input programme.

At Prime Seed, turnover was 6% ahead of last year while the group was weighing exit options in 40% associate Quton

The group was still targeting to get R & D to 10% of turnover from the current 6%. Nzwere said in the period, the group had released “some products and some were in the pipeline in the not too distant future.” The SC 719 had been released in Ghana (it is available in other markets). Two more varieties had been released in Kenya (SC Tembo 713 and SC Tembo 711) to widen the product offering there. The group was also conducting some rice trials in West Africa. In terms of projects, Nzwere said the group was putting up research facilities in Kenya as well as enhancing infrastructure in selected markets.

Nzwere said the seed production in Nigeria was beginning to take shape while there were still chasing the Ethiopian business licence and Pakistan and India were work in progress after the production of one hybrid. Rwanda had given the group good business except the “Government there is a slow payer” while some products had been released in Uganda.

Our Thoughts on SeedCo

SeedCo made its traditional H1 loss and FY profit … no surprise there. But on a sharp increase in revenue, it was a bigger drop than a year ago, largely due to other losses (exchange rate translations from Zambia and Malawi) and higher finance charges due to write downs on TBs. All acceptable and plausible … it is what any company faces operating in post-resource boom Africa in 2016 … bar the fact that there is always something slightly worrying about the way management in this country seems slightly pedestrian to the vagaries of these economies in general. When it comes to “loss of value”, it is never the executive that loses, but the shareholder/policyholder.

Given we entered the next phase of our sad economic history, comment should therefore contain some view on Bollars and in light of what has just been said, wealth preservation in general. Zimbabweans, as we well know, are good at lying to themselves as well as each other with their statements on “being educated” and what the real impact of the bond notes will be. It’s one word – “arbitrage”. SeedCo talked about it in their briefing – the pricing and duty differential between the DRC and Zambia that favours the bicycle and informal business over building a tax base, while a similar situation prevails between Zimbabwe and Mozambique given the fall in the metical.

Arbitrage creates mispricing and mispricing allows some people to make a lot of money while the greater majority generally get poorer. Does anyone remember the early days of hyperinflation? Each year was a “record profit” and “bumper” this, when in fact balance sheets were shrinking in real terms as asset values were being eroded in hard currency terms. Assets got increasingly worn down, but what did the accountants do? Revalue them upwards. Take the tired investment properties around Harare – when they should have been knocked down in value, the auditors kept pushing them up. Only in the past year (well sort of mid-Feb) have we got to know that our bank balances do not reflect their actual value.

Of course, this will all be lost on Joe Stupid as shortly we see the next two quarters of company earnings. In the year to December, banks will show extraordinary profits due to “swipe” and outrageous, rent-seeking RTGS charges, while those two bellwethers of economic activity – Delta and OK – will “surprise” analysts … thanks to swipe and bond notes. Delta volumes, down 6% in H1, will be flat to growing, while OK’s topline will probably be up 10% vs the 2.1% at half year. This is all thanks to the new liquidity. Everyone will pay an increased dividend, except Delta’s majority shareholder will still be unable to get this one and its past two dividend payments out of the country. Where’s the value there?

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