ZAMEFA 2017 Half Year Review
Manufacturing, ZAMEFA Plc

The ZAMEFA half year results published on 30 May 2017 (available on the LuSE website) showed that the metal fabricator had a challenging start to the first half of the financial year. According to the press release, their revenue was only 1% higher for the group compared to the previous year’s half year results. This was largely attributed to a sluggish start to the current financial year on the local front which the management team attributed to tightened liquidity in the market. Demand for copper wire was lower domestically compared to half year 2016. Conversely,demand for aluminum conductors was comparatively higher for the period in comparison.

 

The company recorded lower earnings due to the tax bill (in the previous year they enjoyed a taxcredit) saw profit reduce in comparison with the previous half year earnings.  Tightening liquidity is evident with the lower cash position. Furthermore, the company continues toenjoy a good relationship with its bankers as overdrafts were at similar levels with minimal signs of increased appetite for short term cash which would increase finance costs (short term money is more expensive than long term).

 

The company’s export sales continued to be bullish driven by demand for their quality offering of copper cables. With a stable exchange rate, it is no wonder the management team are consolidating their efforts in ensuring they have a dominant position in the export market. This is in line with our statement that “sustaining the new found East African market will be Rosetta’s team’s top priority for 2017” in our annual review of the company’s 2016 annual report.

 

The export strategy is admirable however we express caution in entering the multinational corporation game. MNCs entering into markets for example East Africa or West Africa (regions with much higher GDPs compared to Zambia) risk steering up competitive forces. For example, The Star online reported on Jul. 28, 2015 of East African Cables opened a new copper plant which would be a credible threat to ZAMEFA entering the Kenyan market. Investors would normally be weary however, geographical position on the extant player ZAMEFA ensures that it has “proximity to commodity competitive advantage”. These are the benefits of adding value to a product that is mined in your backyard. Zambia has bigger copper mines. East Africa does not. Skeptics would argue that maybe the near rivals would look to Congo which is next door for raw material.Granted. However, for this industry, the moment you add distance to your overheads (not to mention macro factors in the region you are sourcing your commodity) competitive advantage begins to diminish.

According to the African Development Bank (African Economic Outlook Report 2016), in 2015, sub-Saharan Africa (excluding South Africa) grew faster than the continental average, at 4.2%, with East Africa leading the way at 6.3%.With grow rates such as these, we anticipate that value will continue being created in the region. Therefore, we are firmly behind the metal fabricators surge for value creation from the region.

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