Metal Fabricators of Zambia plc (Zamefa) was incorporated in the Republic of Zambia under the Zambia Companies Act as a public limited liability company and is domiciled in Zambia. Zamefa was incorporated in 1968 and privatized in 1996. The company was listed on the Lusaka Securities Exchange in September 2004. The principal shareholder of ZAMEFA is Reunert International Investments (Mauritius) Limited, incorporated in Mauritius, a wholly owned subsidiary of Reunert Limited incorporated in South Africa and listed on the Johannesburg Stock Exchange (JSE). Reunert Limited has been at the forefront of the cable industry in the region for more than 60 years, supplying large volumes of cable to power and telecommunications utilities as well as the mining, agricultural and industrial sectors.
Late 2018 through to early 2019 have been a bit difficult for the company, with the main challenge centered on the ever increasing outstanding debt from the Zambia Revenue Authority (“ZRA”) to ZAMEFA. The ZRA debt to ZAMEFA, consisting of Duty Drawback claims and unpaid VAT which increased by 25% from an already unacceptable high amount in September 2017. This increased debt position remained at this level through to the financial year-end at September 2018, and resulted in the Company’s liquidity reaching an unsustainable level. It is important to note that the board of ZAMEFA has continuously had discussions with various government institutions in an effort to bring a speedy and effective resolution to the current debt problem. However, the manner in which the outstanding government debt has occurred in the year currently under review has materially impaired the Company, cost some employees their jobs and placed the long term sustainability of ZAMEFA at risk.
Economic activity in ZAMEFA’s non-utility markets showed good growth in 2018 with the volumes in both the wholesale and mining markets experiencing double digit growth. However, the severe slowdown in the utility market which is burdened by continued liquidity constraints resulted in the overall local market volumes being down by 23%. The 2019 half year commentary review indicates that ZAMEFA’s revenue for both Group and Company is 20.7% higher than achieved in the first half of 2018 financial year as a result of the 9% increase in sales volumes coupled with the 21% depreciation of kwacha against the US Dollar for the first half of the year compared to the corresponding period in 2018. The financing costs increased by 25% compared to prior period mainly due to increased funding requirements as a result of slow settlement of government and quasi government debt. Moreover, the 2019 Profit before tax (“PBT”) for the Group is higher by 2901% compared to the first half of 2018. This was mainly due to the foreign exchange gains of K4.7m which resulted from the re-measurement of the Company and Group net foreign currency denominated liabilities and the higher sales volumes.
According to the half year consolidated results report the increase in PBT is off a very low base and the company continues to operate at below normal levels of operating activity. This level of operating activity is primarily due to the ongoing slow settlement of duty draw back claims and VAT refunds by the Zambia Revenue Authority as well as the slow payments for product by ZESCO and the Rural Electrification Authority (Consolidated Results Report, 2019). These slow settlements have resulted in the group substantially increasing its borrowings to near its credit limits forcing the group to curtail its operations to remain within its available levels of credit. On 15 May 2019, when the Zambian Kwacha was 13.47 against the US dollar, the extent of this unrealized exchange loss expunged the shareholders equity, resulting in a shareholder deficit of ZMW 25million. “This has necessitated the major shareholders to subordinate in favor of other creditors of the company such as the portioning of its US$20 million loan to the company as is required to restore the technical solvency of the company and to allow the group to continue as a going concern” (Consolidated Results Report, 2019).
Currently, the ZAMEFA Group earnings per share for half year 2019 stand at (K0.03) which is 200% higher than those of the prior 2018 period which stood at (K0.01). Moving forward for the remaining half year ZAMEFA remains optimistic on government’s timely replacement of the VAT system by a GST system. This will significantly bring some relief on the working capital burden brought about by the ineffective management of the VAT system hence allowing ZAMEFA to normalize its export volumes in the latter part of 2019.