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Proplastics F16 turnover flat as group seeks to boost factory efficiencies

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Proplastics F16 turnover flat as group seeks to boost factory efficiencies

HARARE – Proplastics Limited is set to construct a new factory at its Ardbennie premises with the project targeted to commence during the second half of the year as the company seek to merge its investments from the last five years into an economical and efficient factory.

Chief Executive Officer Kudakwashe Chigiya told analysts in a presentation for the company’s financials for the year ended 31 December 2016 that the old factory is now constraining capacity of new machines and equipment that were commissioned in the year.

“The factory is now the only bottleneck. However, the project is now at the bankable stage and we have set up a Special Purpose Vehicle of all stakeholders looking into the cost of the project but our target is to commence the expansion in the second half of the year,” he said.

During the year, the company commissioned a new PVC machine at a cost of $1.3 mln and new efficient moulds which have seen improvements in both production efficiencies and production volumes.

Factory volumes were 13% ahead of prior year at 4,800 tonnes, but Chigiya noted that raw material supply remained a challenge in the wake of delays on foreign payments.

He said the company which imports 80% of its raw materials currently has one month’s cover in supply and has about an $800 000 backlog on foreign payments.

“We are, however, grateful for the support we have received from both government and our bankers. Availability of foreign currency to fund importation of raw materials remains a top priority for the business,” he said.

Chigiya said in 2016 the company lost 18 days of production due to shortage of raw materials which translates to 360 tonnes and turnover of $1 mln.

On other hand he said the group benefited from the introduction of Statutory Instrument 64 of 2016 in
June and its full impact was felt in the last quarter of the year.

“We still view this instrument as a temporary measure but our focus has been to modernize our plant and improve production efficiencies in order to achieve regional competitiveness in view of the SI 64,” he said.

Turnover was flat at $14.14 mln compared to $14.15 mln while sales volumes were up 13% but selling prices dropped by an average 11% as the company ensured its products remained competitively priced.

Gross profit margins increased to 24% from 23% in prior year as on efficiencies of new plant which offset the reduction of average selling prices.

Consequently, gross profit was up 5% to $3.44 mln compared to $3.27 mln in 2015. On other hand overheads grew 4% to $2.56 mln from $2.47 mln in prior year as a result of once off costs relating to restructuring following the unbundling from Masimba Holdings.

The overheads included staff rationalization cost of $109,558 while other costs include Bad debts provision $126,388.

EBITDA increased 3% to $1,808,732 while EBT was 5% up to $872,258, resulting in profit for the period to achieve a 4% increase to $679,221.

Finance Director Pascal Changunda also said the company’s financial position remains strong with total assets amounting to $13.15 mln while gearing is currently at 10% up from 8% in prior year.

In terms of revenue contribution by segment, the said growth was experienced across all segments except Civils with mining and irrigation remaining the largest contributors. Others include Borehole Drillers and Exports. Changunda said the decline recorded in Civils was a result of declining activities in housing co-ops, Local Authorities and NGO Focus.

Capital expenditure was $1,486,831 with major capital items being: 250mm PVC 9 Extruder, $941,170, Injection Moulds, $180,368, Plant Capital Spares, $ 105,031, Delivery Truck, $ 53,739

The trade receivables increased 13% to $2.69 mln owing to improved credit control procedures as well as deposits previously made towards plant equipment which were eventually capitalized.

Inventories went up 7% as the company moves away from stock cash while trade payables went up 25% to $2.21 mln largely as a result of delays in settling foreign liabilities due to the acute shortage of foreign currency. Changunda said borrowings also went up to $916,000 as the Group finished off payment for the new PVC machine.

Meanwhile, the group has an order book of $1.2 mln, near order of $2.9 mln and prospective of $6 mln largely from mining and irrigation.
Our thoughts on ProPlastics

The economic and operating environment has continued to deteriorate exacerbated by the tight liquidity and shortages of foreign currency. Manufacturers like Proplastics are the worst affected as they rely heavily on imported raw materials. Management did allude to the fact that availability of foreign currency remains a challenge affecting raw material supply. The group lost 18 days of production equivalent to 360 tonnes and over $1 million in turnover, which could have helped the numbers look better.

We however applaud management’s efforts despite the challenges which culminated in the group reporting decent numbers. The strategy to reduce prices in order to stimulate demand and stem domestic competition somewhat worked as the group managed to increase volumes by 13% whilst managing to maintain revenues at the same level as last year. Of course we would have liked to see some growth in the top line, but maintaining revenues in this tough trading environment is welcome as most companies are reporting otherwise. The plant modernization program benefits are beginning to filter through as gross margins improved despite the drop in selling prices. Overheads and administrative expenses which we have always emphasized that the group should improve on, seems to be under control but we would like to see further improvements in these line items in the future.

We cannot fault the group’s balance sheet as it remained pristine with minimal gearing as well as healthy liquidity ratios despite the increase in payables resulting from delays in foreign payments. The cashflow is also healthy and cash generated from operations as a percentage of revenue improved to 21% from 6% last year, reflecting improved credit control and cash collections.

Going forward, availability of foreign currency to purchase raw material will remain critical. Given the developments in the financial services sector, it can only get worse. At this point despite the decent numbers from Proplastics in F16, it is difficult to tell whether the same trend will be maintained going into F17.As we have always said before at FINX, the size of the operation is small making the group vulnerable to any negative shifts in the economic and operating environment.

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