Following our publication of “Metal Fabricators Plc. at Full Year 2018 – Delinquent Receivables” in December 2018, we felt it prudent to further analyse the value creation prospects of the company. Our analysis looked at their latest annual report following their AGM in Q4.
Profitability
In a year that saw the company record negative earnings since 2015, a closer look at the numbers revealed the following: gross profit margin was down from an average of 8.7% in the previous 3 years to 5.7% in 2018. Operating performance fell 2 percentage points from 5% in the previous year. The company’s EBITDA (earnings before interest tax depreciation and amortization) also took a 2% hit reducing to 3%. A four year overview of this parameter indicates is highly elastic ranging from lows of 3.2% in 2015 to a high of 5% in 2017. Profit before tax and Net profit margin both recorded negative scores in 2018 due to the receivables challenge discussed in our previous article.
Efficiency
There has been significant reduction in return on non-current assets (RONCA). 2018 recorded RONCA at 29% compared to 50% due to a reduction in operating profit. This is indicative of the tough business environment that the Board Chairman eluded to in his opening remarks of the letter to shareholders. Payable days saw an increase from 75 to 86 days. Similarly, receivable days also saw an increase from 89 to 119 days. However, inventory days remained stable during the period under review.
The impact of delinquent receivables had a huge impact on the working capital management of the company. The money turnaround or working capital cycle days increased from 48 to 67 days.
Risk
According to the notes of the financial statements, the Group’s activities exposed it to a variety of financial risks, including credit risk, foreign currency exchange rates and interest rates risks.
The income statement showed a net foreign exchange loss of K80.2 million in 2018, compared to K9.38 million in 2017. With the erosion of equity, the company’s gearing rose substantially from 203% in 2017 to over 1000% in 2018.
The Company has overdraft facilities with Barclays Bank Zambia Plc (Barclays) and Stanbic Bank Zambia Plc (Stanbic) of US$3.5 million (2017: US$3.5million) and US$20 million (2017: US$30 million) respectively. The Barclays overdraft facility is secured against a floating debenture covering all the Company’s assets and a mortgage over property 1400 Luanshya while the one from Stanbic is secured by a parent company guarantee from Reunert Limited. The overdraft facility for Barclays carries interest at 2.75% plus 3 months Libor per annum whereas that for Stanbic carries interest at 3 months LIBOR plus 3.2% per annum. Both facilities are coming up for review on 30th November 2018.
Overall, the company increased its long term debt by 26.6% while short term debt increased by 12.4% all in conformance with the aforementioned facilities the company holds.
Liquidity
The company remains fairly liquid with an acid test greater that one indicative of it possessing fairly more current assets (cash) to cover it short term liabilities (debt less than a year old). Final cash position showed the company closing the financial year with K21.6 million in 2018 compared to K104.7 million in the previous year.
Conclusion
ZAMEFA’s value creation prospects are closely linked with state holder management of counterparties that owe it receivables. CEO Rosseta Chabala’s 2019 assignment will be to woe the defaulting counterparties to ensure she protects the value creation prospects. Historically, the company has also been known to purse foreign markets in times of distress. This may also hold the key for unlocking further value.
The company’s cost containment strategy saw in hold cost of sales to below inflation rate (4.5% increase on a year on year basis). Gross profit reduced indicative of the difficult business environment that management will have to navigate in 2019. Again, pursuit of new markets may hold the key.