Zambia Sugar Plc has recorded a 14% increase in revenue for the six-month period to its current financial year compared to the same period last year thanks to improved domestic sales and a surge in exports, according to a statement from the company.
“Total revenue for the 6-month period to 29 February 2020 was K1.394 billion, 14% above the comparative period last year, largely driven by growth in domestic sales volume and a higher realisation of export sales”, read the commentary to the half-year period to 29th February 2020 issued by the Company Secretary Mwansa Mulumba Mutimushi on SENS on 19th May 2020. “The domestic market performance has continued on a positive trajectory as a result of continued optimisation of marketing strategies”.
According to the published abridged financials, the company’s two core segments (Sugar production and Cane growing) had mixed performance at half-year. Sugar production, which was responsible for the overall surge in revenue, recorded an approximately 20.5% increase in sales compared to the 4.3% marginal decrease in Cane growing.
This resulted in “operating profit for the 6-month period at K235 million compared to the K190 million operating profit in the comparative period”. According to the company, “this was mainly driven by higher net revenue and sustained production levels”.
The company reports its half-year results on the back of a difficult macro period for manufacturing in Zambia. The metric for measuring the prevailing direction of economic trends in the manufacturing, the Purchasing Manager’s (PMI) index, shows that Zambia’s ranking has been below the targeted stable level of 50 (recessionary territory) throughout Zambia Sugar’s current reporting period. It has been a period that the company says has seen “escalation of costs remaining a major challenge in the business with increases during the period of electricity tariffs and fuel prices, compounded by higher than planned inflation”. Furthermore, “the extensive depreciation of the Kwacha against all currencies has also adversely affected direct costs specifically under factory and sugarcane operations”.
The company also cites another concern that it faced during the six-month period: power poverty. “Extensive periods of electricity load-shedding hindered the smooth operation of the production facilities and also adversely affected the ability to fully irrigate the crop as required”.
This has prompted the CEO Rebecca Katowa led management team, through the execution of the P400 Transformation Project which has re-energized and refocused the company, to ensure the security of return on investment as well as business efficiency.
“I am encouraged by the performance and outcomes of our “P400” Transformation Project, a major cost resetting exercise deployed across the business”, stated Rebecca Katowa her letter to shareholders in the 2018 annual report. “A number of the cost optimisation initiatives are now in the control phase, with constant engagements between the implementing office and line management teams aimed at embedding these benefits in our business”.
Furthermore, P400 has led to “proactive cost control measures and business improvement projects have being implemented to ensure efficient operations, increased productivity, and cost control while still focusing on customer service”.
Debt, however, remains a huge concern for the company. For the period under review, debt (long term and short term) reduced by 4.5% to K1.476 billion. The company saw “finance costs increasing in the last six months from K140 million in February 2019 to K163 million in the reported period as a result increases in interest rates on long term loans”.
Another concern albeit statutory obligation is tax. During the period under review, “Zambia Revenue Authority reclassified the business as a manufacturing and agricultural entity, the tax base consequently changed to a hybrid of 35% on the manufacturing part and 10% on the agricultural part. This has led to an increase in deferred tax cost by K26 million compared to the position in February 2019”.
Investors will be pleased that the headline earnings for the 6 month period ended February 2020 increased to K32 million from K30 million reported for the 6 months to 28 February 2019”. The Zambia Sugar security on LuSe now trades at K2.50 as of 19th May 2020 and a Price to Earnings (PE) ratio of 8.9 and an Earnings per share of 0.28.
In terms of prospects for the company, the management team will be keeping a close watch on what happens in Brazil. Zambia Sugar has stated in the past that international prices of sugar remain unpressured due to high supply. Brazil is on course to further increase production in light of the passing of “the “RenovaBio” law, signed into effect in January 2018 which aims to stimulate the production of biofuels such as ethanol, biodiesel, and biogas, and provides fiscal incentives and targets for the reduction of emissions”, according to the Financial Times in its article published in February 2018. This has led Brazil to switch from ethanol to sugar production hence impacting the supply equilibrium of Zambia Sugar’s product on the international market.
The aforementioned is the reason why “regional market sales volumes reduced due to the impact of surplus world sugar supply resulting in significant volumes of world market sugar finding its way into the region affecting demand and putting pressure on margins”.