The manufacturer and distributor of electrical cables and wires, ZAMEFA, has reported a loss after tax of K72.3 million for the year ended September 2019 due in part to weakening operating activity on account of slow settlement of VAT refunds from ZRA and slow payments for product by state-owned enterprises (SOEs), according to a statement from the company
“This level of operating activity is primarily due to the ongoing slow settlement of duty drawback claims and VAT refunds by the Zambia Revenue Authority as well as the slow payments for product by ZESCO and the Rural Electrification Authority,” read a statement published on SENS on 19th November and issued by BDO Zambia Limited, the assigned Company Secretaries for company.
The company’s 2019 financial performance has been mixed with mixed fortune that has seen gains due to macro indicators such as exchange rate and losses due to increasing finance costs and weakening commodity prices.
“Revenue for both the Group and Company are 10% higher than achieved in the prior year despite a 7% decrease in volumes and a 9,6% decrease in the average copper price.”, according to the statement from the company. “This was due to the depreciation of the annual average ZMW against the US$ of 25% in the current year compared to the prior year, which benefited Zamefa as an exporter”.
Faced with increasing debtor days (the time it takes to collect from those that owe), the company was forced to seek out short term financing to support working capital for operations which led to a rise in financing costs. “Operating income for the 2019 year is 64.3% higher compared to the prior year as a result of improved efficiencies and the benefit of the depreciation of the ZMW against the US$”, further read the statement. “However, financing costs increased by 35% compared to prior period due to increased funding requirements as a result of slow settlement of government and quasi-government debt and the impact of translating US$ interest at weaker ZMW exchange rates”.
However, with the acceleration of the exchange rate with the kwacha being on the back foot of the dollar came a reduction in exchange losses which benefited the company’s debt position in kwacha terms. “The net foreign exchange losses for the current financial year, which arise mainly from the re-measurement of the company and group’s net foreign currency-denominated liabilities, were lower than the prior-year due to a smaller downward change in the yearend closing ZMW/USD rate resulting in an overall 7% (2018: 27%) re-measurement of the foreign-denominated liabilities”.
The impact of Dr Bwalya Ngandu’s Budget
ZAMEFA indicates that following the 2020 budget announcement on zero VAT rating, it expects to see improvements in cash flow. “During the Zambian government’s budget presentation on 27 September 2019, various amendments to prevailing legislation were announced”, noted the company. However, the legislative measure that impact export will adversely affect the company. “As a result of the amendments, the company and group cash flow will be positively impacted by the zero VAT rating on copper cathode but adversely impacted by amendments to the duty drawback scheme on exports”.
The proposed amendments inevitably found their impact being captured on the company’s income statement by way of an impairment. “As a direct consequence of these amendments, Zamefa has impaired the plant and equipment of the company by ZMW 35 million”. The company admits that this has effectively raised the question of solvency. “This has resulted in the group’s net equity of ZMW1,4 million restoring the group to a technical solvent position at year-end.”
SOE Debt a historical concern
In March 2019, the company reported an optimistic forecast at half-year. However, on the receivables impact on revenue increase, the company did express some concern over performance. “This increase is off a very low base and the company continues to operate at below normal levels of operating activity”, the company said. “This level of operating activity is primarily due to the ongoing slow settlement of export duty drawback claims and VAT refunds by the Zambia Revenue Authority and slow payments for product by ZESCO”.
Prior to the aforementioned, the impact of delinquent receivables had a huge impact on the working capital management of the company in the 2018 financial. The money turnaround or working capital cycle days increased from 48 to 67 days.