Zambia Sugar at PAAR with Value in 2016
Retail, Zambia Sugar Plc

There was little sweetness in the ZamSugar board chairman’s statement that after 20 years of paying consistent dividends, shareholders would not be receiving a dividend for the company’s 2016 performance. Fidelis Banda, its chairman, had forewarned investors in the company that 2016 would pose different challenges ranging from power interruptions to irrigation issues,force majeure situations that included bad weather caused by El Nino and the outbreak of yellow sugarcane aphids which inevitably led to a fall in yield.

In addition, their sweet E.U. export market lost taste for their cane as there was erosion in global sugar prices. Like a horrible episode of Final Destination, this fate followed them when the company ventured into regional markets. The end result was a marginal 5.7% increase in revenue from 2015 to 2016 and a 17.3% fall in earnings (scoring their lowest earnings per share in 5 years).

Working capital management is part of the challenge that faced the company in 2016. Recall, they had endeavored into project PAAR which put a strain on working capital. Fidelis confesses this by indicating that the company had to make use of additional short-term funding (short term often means expensive money) in order to meet the increase in working capital requirements. Therefore, its no surprise that tightened liquidity led to the non-declaration of a dividend for 2016 at group level. However, the positives of project PAAR are echoed by their Managing Director Rebecca Katowa. She indicates that the new refinery will not only align the company’s products to the higher food safety standards but it will also reaffirm the company’s position as Africa’s biggest cane sugar producer. For those with a long view, this is a positive.

Financial disclosure is clear when reviewing their 2016 AR.They provide a trend analysis that extends from 2012 to 2016. Over the last 5 years,“Own estate cane produced” peaked in 2015, however due to El Nino it is now down in 2016. Local sales have been steadily increasing in the same period with exports tapering after the high of 2015 (fall in E.U. appetite for sugar).

Financial diagnosis indicates a 2% reduction in both return on sales (ROS) and administration costs against sales. Marginal reduction in fixed asset and inventory turnover. 13 day improvement in working capital cycle albeit at the expense of increased payable days. Liquidity constraints evident from strained asset ratio (below 1 indicative of strain on settling short term facilities). However, gross and operating margins remain strong (around 50% and 18% respectively). Project PAAR has taken its toll.Shareholders will be please with a stronger return on capital (ROCE) for the year indicating prudent usage of funds. However, there was a fall in their return in equity (ROE) due to reduced earnings.

Going forward, weather permitting, with reduction on short term facilities attributed to project PAAR will see fruition of the implemented strategy. Furthermore, Rebecca’s team will need to keep a keen eye on global sugar prices as they re-position their target markets. Furthermore, they signal amplifying their product range in a hope to meet the needs of previously unsatisfied customer needs. Economies of diversity will be sweet.

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