Dr Pius must have been smiling when the unaudited provisional financial statements for results ended 31 March 2017 hit his desk. With top-line eroding by 52% (K198M : 2016 and K95M : 2017), his ZCCM-IH was heading into abyss. However, noting the timing of the publication, FiZ believes there was a protracted audit period for the 2017 financials hence why the SENS Announcement only came out 3 January 2018 (a full 9 months after the close of the 2017 financial year).
The protracted period for the consolidation of the financials can only be explained by the line item that will appear in the annual report once it’s published. Although revenue only came in at K95.3 million it was the operating profit that was recorded at K1.7 billion. The million to billion movement can only be explained by one thing that is always “hidden” in the notes of the financial statements. Impairments!
Impairment is an accounting principle that describes a permanent reduction in the value of a company’s asset, normally a fixed asset. In ZCCM-IH case, Impairments came to the rescue following the recovery of K1, 923 million from investee companies whose performance improved during the year. According to the SENS Announcement, the impairment recovery resulted in the company recording an improved performance that saw the company return to positive territory (K1, 703 million) from a loss of K858 million in 2016. This improved operating cash flows by over 130%. However, the impairment was not the only thing that contributed to this increase. Finance income trebled from K201m to K600m representing a 195% improvement.
As a result of restated subsidiary performance, operating cash flow increased by 132% for the period 2016 to 2017 (in comparison to the 75% reduction for 2015 to 2016). This translated to a return to positive territory for earnings (earnings per share from K-18.11 to K10.97).
Their tax bill also saw an increase due to higher profit before tax caused by the impairment restatement operating profit. Tax outlay increased by 628% (K47M : 2016 and K345M : 2017).
Equity growth has consistently been averaging 11.5% over the last 3 financial years (K7.3B : 2015, K8.3B : 2016 and K9.1B : 2017). ZCCM-IH continues with is participation in the equity market. In February 2016, ZCCM-IH undertook to subscribe for all shares not subscribed for by other Investrust Bank Plc (Investrust) shareholders in the Investrust Rights Offer. This resulted in an increase in ZCCM-IH’s shareholding in Investrust from 10.6% to 48.6%. However, as a result, ZCCM-IH was required to proceed with a Mandatory Offer to all the other shareholders in Investrust in accordance with Rule 56 of the Third Schedule of the Securities (Takeovers and Mergers) Rules, Statutory Instrument No 170 of 1993, issued pursuant to the Securities Act, Chapter 354 of the Laws of Zambia.
Needless to say, as Pius smokes his cigar, FiZ will caution that although return on investment shows an upward surge to 45%, this is attributed to the impact of the impairment. We assess that ZCCM-IH’s return in is the region of 18-20% going back the previous two financial years. However, we do note that macro factors such as stability in power supply and improvement in copper prices will aid in the improvement of return on investment, a closer eye on its portfolio of companies is important.
For example, Ndola Lime is still undergoing a hot commissioning, though the process has been met with a lot of challenges. Its investment in Invest Trust is year to yield positive earnings. There is a proposed Joint Venture with a Chinese firm for setting up of a Cement Manufacturing Company albeit entering into a highly competitive arena that will see margins further drop following the price war that was entered into by Lafarge and Dangote Cement. Investors will be keen to see how this unravels.