Increased battery sales lift Art in F17
HARARE – Profitability across Art Corporation’s business units lifted the Group’s overall performance for the half year ended 31 March 2017 with the topline rising 7.60% above prior year to $15.20mln.
Group chairman Thomas Wushe, in a statement accompanying the interim financials, said revenue was mainly driven by increased battery sales in Zimbabwe.
“The group’s positive trajectory continued in the first half of the year as all business units performed well despite the poor liquidity and foreign currency availability challenges in the environment”
He added that during the period, proactive and prudent measures taken to reduce cost and improved efficiencies yielded positive results and cushioned the business against the adverse effects of the operating environment.
Cash generated from operations was at $1.4 mln versus $1.2 mln in the prior year. Consequently the working capital position of the business improved.
Gross profit margins increased 40% compared to 38% in 2016, resulting in an operating profit of $2mln from $1.7mln in the prior comparable period. Profit before tax came in at $1.3mln compared to $1mln in 2016.
The Batteries Division achieved an operating profit of $1.3mln while sales volumes increased 26% on the back of product availability and the exploitation of opportunities presented by policy measures in support of local production.
Government in 2016 through Statutory Instrument 64 restricted importation of several goods that are manufactured locally in a bid to promote local industry. In addition, Art commissioned a new battery factory in Harare which has increased capacity and improved efficiencies, thus contributing to the increase in volumes.
The Zambian business recovered in the second quarter and traded at a marginal loss of $66 000 but an improved second half performance is anticipated which should bring the business back to profitability.
The Paper division recorded an operating profit of $52,000 compared to a loss of $16,000 in 2016. Kadoma volumes were 11% higher than prior year while National Waste volumes were 15% down from last year due to the general wet conditions in the country which reduced waste paper collection by 17%
At Eversharp pen sales were 4% above last year resulting in an operating profit of $520,000 compared to $465,000 in March 2016. The Mutare Forests posted a marginal profit of $22,000 compared to a loss of $168,000 in 2016 on the back of increased timber demand.
Wushe said during the period under review, the group’s balance sheet grew 13% on improved profitability while borrowings at $5.3mln and creditor’s balance of $10.3mln remain an area of focus.
According to Wushe, the company will continue on debt restructuring to strengthen the balance sheet. He added that the Group will expand exports to generate the much needed foreign currency and improve profitability as well as retooling.
Our Thoughts on ART
The recently commissioned new machinery has resulted in improved efficiencies and reduced cost of production, however the biggest question is the sustainability of the growth. Art says the 8% growth in revenue was mainly due to the increase in battery sales in Zimbabwe, this begs the question, are battery sales rising because of increased competitiveness of Chloride or because of the import restriction on batteries? Statutory Instrument 20 of last year saw automotive batteries and deep cycle batteries being protected, in a move which shifted the demand for foreign batteries to local ones. That said, would Art remain competitive if SI20 was reversed today? Protection cannot stay forever and we still expect more competitiveness from the battery division of Art.
Last year, the group hinted on plans to expand regionally, particularly into Malawi and Mozambique. The group did not update the market on the status of this initiative i.e. has it shifted focus to expanding on its existing operations and abandoned this initiative?
The strong performance was mainly due to, a lower effective tax rate, increased volumes across all business units and enhanced margins as efficiencies improved following the installation of new equipment at Eversharp, Chloride and Kadoma Paper Mills. The group’s operations are showing signs of recovery although the balance sheet remains weak with a huge debt burden. The group should come up with a concrete balance sheet restructuring mechanism that will relieve it from the debt burden, making it attractive for new credit facilities to recapitalise other subsidiaries. Ratings are in line with ZSE market average at PER of 11.3x (ZSE:15.3x)and PBV of 2.0x(ZSE: 2.1x)