Proplastics grows topline 14% as factory efficiencies yield competitive edge

Proplastics grows topline 14% as factory efficiencies yield competitive edge

HARARE – Proplastics says continuous investments in plant and equipment over the years is now producing desired results after the company achieved steady growth in turnover and volume during the year ended 31 December 2017.

Turnover was up 14% at $16.10 mln compared to $14.14 mln in 2016 with overall volume increasing 5% to 5 023 tonnes. Group chief executive officer Kudakwashe Chigiya told an analyst briefing that at 5 000 tonnes, factory capacity was between 62 and 64 percent. Installed factory capacity is 9 000 but Chigiya said due to shortage of raw materials, capacity was underutilised.

“The availability of foreign currency for the importation of raw materials remains the single most critical challenge we face. The erratic availability of foreign currency has resulted in increased foreign currency liabilities,” he said.

Demand for the company’s products during the period was depressed in the early months as usually heavy rains delayed many projects related to the company’s product base. Chigiya said demand was far stronger in the second half of the year which saw the group ending the year on a strong footing.

He said the company has since commenced construction of new factory which will see an increase in production efficiencies and reduced costs. Target completion date is 10 months and according to the CEO at least 25% of the works have been done.

“We expect to move into the new factory next year. The new factory will result in factory capacity increasing to 12 000 tones and we are targeting to utilize at least 80% of the capacity after commissioning,” he said.

He added that the capacity is also targeted for the export market. The company is currently exporting into the region mainly borehole casings to countries such as Zambia, Mozambique, DRC and recently Sierra Leon.

Chigiya said the company is sitting on healthy order book but the only challenge has been insufficient raw materials.

Finance Director Pascal Changunda said during the period improved factory efficiencies resulted in cost of sales being contained to a 6% increase to amount to $11.30 mln from $10.69 mln during prior year despite inflationary pressure and the resultant gross profit was a healthy 4.80 mln from $3.44 mln last year.

Overheads went up 8% to $2.75 mln but financing costs were reduced 59% as a result of stronger cash flow management resulting in reduced debt.

EBITDA improved 61% to $2.91 mln and profit before tax amounted to $1.97 mln a 126% increase. Resultantly, profit after tax was at $1.35 mln compared to $679 221 in 2016.

Changunda said the gross profit margins went up to 30% from 24% in prior year. The company’s current ratio went down to 3:1 from 3.2.1 as at December 2016. The debt/equity ratio went down to 4% from 10% during prior year.

On revenue contribution, Changunda said the segments include irrigation, merchants, civils, mining and Borehole drillers. Decline recorded in Civils were in the subsectors of exports, which went down 3%, local authorities, mining and borehole drillers.

Meanwhile, during the period there was no major capital expenditure with only $371 472 committed in that regard.

Trade receivables went down 34% to $ 1,77 mln largely owing to tight credit controls. Inventories also went down 9% to $3.72 mln. Changunda said this was a result of need to slow down raw material imports due to foreign currency shortages.

OUR THOUGHTS ON PROPLASTICS

Proplastics has shown marked improvements since its unbundling from Masimba in 2015. Where it looked like one of those backyard industries, it is slowly transforming into a mid-tier industrial company. It operates a good business model with potential to meaningfully contribute to the manufacturing renaissance and economic growth in general, given how there is strong demand for its products. And given the increased support towards the agricultural sector under programmes such as Command Agriculture and the relaxation of the indigenisation law, we are likely to see more projects from the productive and extractive sector that require the company’s products. The company continues to improve efficiency with significant changes in its GM and operating lines. However, there is still need to improve the OMs further to around 20-25% as current levels still point to a vulnerability to any negative market changes should they occur and this would make it difficult for the company to fund substantial growth going forward.

Major challenges to the business remain the availability of foreign currency and the easing up of industry protection measures, which had in the past help boost volumes. Proplastics is among the companies that require foreign currency to produce, yet selling the majority of its products locally through plastic money which is anticipated to be at par to the greenback in principle but far different in practice. Although the company is trying to partly deal with the forex challenge through prepayments, it can only avert the situation to a little extent. It’s hoped that the new plant will bring with it improved efficiencies that will enable the company to competitively export. The balance sheet remained pristine with minimal gearing as well as healthy liquidity. The closing cash improved significantly to $4.39 million from $1.44 million due to tighter credit controls and also due to delays in settling foreign liabilities.  It would have been good to note their forex backlog and when it was last serviced and how much raw material cover the business has.

 

Foreign businesses in reserved sectors to continue operating under amended Indigenisation Act 

Foreign businesses in reserved sectors to continue operating under amended Indigenisation Act

HARARE – All foreign-owned businesses which were operating in the reserved sectors of the economy under the Indigenisation Act before January 1, 2018, have been allowed to operate only if they are registered with the Zimbabwe Revenue Authority and they open and maintain bank accounts in accordance with the Bank Use Promotion Act.

Some of the retail shops operated by Chinese nationals in Zimbabwe

This is contained in the amendments to the Indigenisation and Economic Empowerment Act gazetted under the Finance Act last Friday. The amendments mainly repeal the main part of the Act by ensuring that any person is free to invest in, form, operate and acquire the ownership or control of any business not in the diamond and platinum sectors and those in the reserved sectors of the economy. Government reserved 12 sectors of the economy for Zimbabweans with a view to empowering them and also to curb capital flight out of Zimbabwe. This is down from the 15 sectors, which were there initially. The three removed sectors are Agriculture, Milk Processing and Tobacco Processing. The Government also changed the definition of a Zimbabwean to citizen of Zimbabwe and not indigenous Zimbabwean as was the case previously.

The reserved sectors include; Transportation – passenger buses, taxis and car hire services; Retail and wholesale trade; Barber shops, hairdressing and beauty salons; Employment Agencies; Estate Agencies; Valet Services; Grain milling; Bakeries; Tobacco grading and packaging; Advertising Agencies; Provision of local arts and crafts and their marketing and distribution; Artisanal mining. A few of the sectors like grain milling and retail have in the past been subject to various lobbying for the application of the reserved sectors law. The Grain Millers Association of Zimbabwe lobbied against the acquisition of Blue Ribbon Industries by Tanzanian milling giant Bakhresa Group saying the firm was in a reserved sector and therefore locals should have purchased it. There have also been various objections over the Chinese, Eritrean, Nigerian and Lebanese businesses operating in the retail sector who are at times blamed for mopping up and externalizing US dollars.

However, despite past concerns and objections; under the new dispensation, foreign businesses already operating in the sectors should comply with the registration by no later than July 1, 2018. Failure to comply may result in prosecution (a fine and six months’ imprisonment) and the assigned minister may direct any licensing authority to revoke the operating licence.

According to the amendments, any person who is not a Zimbabwean citizen, who after January 1, 2018 wishes to operate a business in the reserved sector of the economy shall seek the permission of the Minister for special dispensation only if the business will provide significant and sustainable employment creation and that it will establish sustainable value chains. The business should also show that it will transfer skills and technology for the benefit of Zimbabweans.

The amendments also include transitional provisions, which include the continuation of certain tax incentives enjoyed before March 4, 2018 and an opportunity for businesses to revise indigenisation implementation plans already approved under SI 21/2010.

The President, Emmerson Mnangagwa has not yet announced the Minister who will be responsible for administering the Act further delaying its operationalisation.

The new amended Act does away with the National, Indigenisation and Economic Empowerment Board replacing it with the National Indigenisation and Economic Empowerment Unit to be headed by a director in the Civil Service. The Unit and its staff will have appropriate powers of inspection and access to information to carry out their functions under the Act. It will then submit its reports to the minister every quarter.

An Indigenous and Economic Empowerment Fund will now be administered by the minister through the director of the Unit, who must follow the minister’s instructions.

Further to the amendments to the requirements of the diamond and platinum sectors of 51% local ownership threshold, no merger or restructuring of the shareholding of two or more related or associated businesses in the sectors and acquisition by a person of a controlling interest in the business shall be approved unless the 51% is held by an appropriate designated entity. This is provided that some part of the 51% may be held by a community or employee ownership scheme or trust or both.

Under the new requirements the indigenisation and empowerment quota may be achieved through the use of credits the minister shall prescribe.

Government hopes its new view on empowerment will grow the economy and attract foreign direct investment.