When an annual report is presented to us, our primary focus is the audited financials. Whether they are financial statements audited by KPMG or HLB, they provide us with an ability to compare the performance of a company across years. In the case of ZamSugar’s 2018 AR, we knew we had a small matter of making a conjecture of what could have been their performance had there been no change in Financial Year. That is why, all things considered, our analysis for this year’s performance is based comparisons of earlier full year results (2016 & prior vs. 2018). Comparing Apples with Apples. To aid with the analysis, this first article focuses on our analysis of the commentary that came out of the leadership of Zambia Sugar.
Our first contact with the audited results was the SENS announcement of 8th November 2018 in which Company Secretary, Mwansa Mulumba Mutimushi, issued a statement from the board on the company’s performance in the 2018 financial year.
In their statement, they acknowledged that this year’s financial year end results were for a full 12 months as compared to the previous period which were for 5 months (Apples and Oranges).
On to the leadership position, when the board chairs opens his letter to shareholders with a statement like “though progress achieved, it was not enough to deliver improved shareholder value” you know it was a hectic year for the sweetest company in Zambia.
Fidelis Banda is open and candid as he stresses the fact that his business has undergone stress in the past 3 years. The effects of this have continued to impact the business and have affected growth and productivity. However, Fidelis is coy in his outlook by stating that his management team, ably led by Rebecca Katowa has been equal to the task and has put in place measures to mitigate the impact of the difficult times.
On the macro, Fidelis is content in his assessment of the economic environment. With stability in the exchange rate, interest rates and inflation, and economic boast was eminent according to him. He further believes the K388 million operating profit posted was as a result of these fundamentals.
Sadly though, debt continues to cause sleepless nights for Fidelis so much so that his board opted not to declare a dividend. However, he remains upbeat that a turnaround in fortunes is eminent as his management team places faith in the new strategy that it is implementing.
With focus being shareholder returns, Fidelis and his board believe that high quality and sustainable long term revenue and earnings growth, combined with a disciplined approach to capital allocation and progressive dividend policy, will drive superior returns for shareholders.
The company knows that it will not only take improved cane yields and production alone to deliver shareholder value, but ensuring their product gets to the right markets at the right mix. Timing and pricing are also essential to the success of their strategy. This is why the management team came up with the new route to customer (RtC) strategy. To put his into. Perspective, extant players in various industries such as Lafarge in Cement and Zambeef in agriculture, having a customer in direct line of sight can make the difference of whether the company can continue to create value. In Zambia Sugar’s case, they are revamping their supply chain management and embedding technology according to their Manager of supply chain Stuart Forbes. According to him, supply chain at Zambia Sugar is evolving.
On competition, it took a strong Fidelis to admit that his extant company was not the only boy in the school yard. Managing in competitive times and remaining relevant are heavy on Fidelis’ statement. Some investors at a recent investors asked the question “Shouldn’t Zambia Sugar be looking at diversifying into other products?” The response from the management team was that the company had invested in consolidating its position of having a high quality product which they believe needed to be streamlined so that the customer’s needs could be meet.
According to the annual report, the procurement of goods and services through a strategic plan of local supplier development continues to be a key focus in line with the company’s creating share value strategy. One of the key changes around this area during the year under review was the in-sourcing of logistics and procurement under Project 400 (path to building a thriving business cost optimization project).
Rebecca’s letter to shareholders strikes a balance between echoing the efforts being made in terms of production output and the impact the company is making through its shared value initiatives. The soft spoke CEO is firm in her delivery of what really matters to ensure the business continues on its trajectory of value creation.
A key takeaway was Rebecca touching on the voluntary separation program which has been one of the strategies they have been implementing to achieve cost optimization. 163 jobs were liquidated during the period under review which yielded a 10% reduction in permanent staff. Signals from the annual report indicate that the company intends to continue pursuing this strategy hence we expect more jobs to be shaved off.
From an investor perspective, as at 31 August 2018, Zambia Sugar had 3 significant shareholders in Illovo Group Holdings Limited (75%), NAPSA (9.73%), and Standard Chartered Zambia Securities Nominees Ltd (5.31%). These investors, along with us and others with the breadcrumb stock will be keen to hear the management team’s position on the financial performance at the upcoming Annual General Meeting. Sentiment thus far, following the recent investor day event, clarity of the roadmap to dividend will be key. Although corporate affairs has indicated that dividends can only be declared once the company declares a decent profit, it may help the management team to form a conjecture between the implemented strategy, the servicing of debt, and cost reduction and how all of these could lead to a dividend. Investor fatigue is usually the end result if the management team is not clear how measures they are putting in place will create value and lead to a dividend payment. It is no secret that event sweet investors look forward to that pay day.
