On the 9th of November 2017, Mwansa Mutimushi (Company Secretary) released through SENS announcement, the 5 month audited financials by order of the Zambia Sugar Board. FiZ has been monitoring the performance of the company post project PAAR. Although shareholders would have been anxious to hear news of a dividend, we believe patience will have to continue being exercised as their investment will pay over the long term. The company has not declared a dividend in their latest announcement. However, the underlying performance indicates that the PAAR project is beginning to achieve what it was intended to.
Due to the 100% acquisition of the Illovo Group by Associated British Foods (ABF) in 2016, part of the integration process required that all financials are aligned to the parent company’s financial year. Therefore, what is reported in the latest SENS announcement is only for a 5 month period. In addition, although the financials made available are only a snap shot, there is enough for FiZ to provide some insight into how value is being created. Sadly, though performing difference analysis which would be indicative of the gains and loses made over the “two” financial years was not possible as it would be like comparing apples with oranges (12 months against 5 months).
From a macro perspective, the company indicates that over the 5 months it had to contend with a number of challenges. First of all, the weather delivered a mix bag of misfortunes that included drought in the prior year that affected yields and flooding in the current year that had the same impact (adversely on out growers). Secondly, climatic changes also influenced that resurgence of pests that including yellow sugar cane aphid, and black maize beetle. Thirdly, loop holes in cross border trade saw illicit and illegal imports of sugar enter the market (unfair and unsustainable low barrier of entry), putting substantial pressure on domestic sales. Conversely, the company has also notes that global sugar prices have been low hence worsening the situation. Lastly, energy concerns also contributed to the current seasons poor performance of the out grower cane yields (3% above prior period on average cane yield and 8% down on out-grower supplied cane). This is evidence that the macro factors in one year can have an impact on the subsequent financial year.
If the 5 month period is anything to go by, the audited accounts show that the performance in sales has actually had an upward improvement in terms of return on sales (10%). This is also indicative of an improvement in return on shareholder capital which has improved to 25% over the 5 months. Overall, total revenue for the 5 month period to 31 August 2017 was K912.8 million.
Operating performance for the 5 months indicates the company is on course to beat the 2016/17 period. Operating profit for the 5 month period was K262.7 million which is more than half of the prior 12 month period (2016/17: K410.5 million for 12 month period ended March 2017). Representing a 29% operating margin, the prior period’s margin only came in at 17%. Therefore, should the company maintain its momentum, we anticipate a 12 month operating margin that is north of 20% (all fundamentals being stable).
Following the syndicated debt burden the company sourced for Project PAAR, finance costs for the period were K151.7 million. However, finance costs were favorably impacted by the reducing interest rate environment (tribute to MPC’s aggressive downward movement). What is significant is that the closing borrowings decreased to K1.533 billion during the period. Shareholders will be keeping a close eye on this as this will be a good signal as to when they can expect a dividend.
With a profit before tax and net profit margin of 12.2% and 10% respectively, CEO Rebecca Katowa’s team are poised to make shareholders happy should they maintain the performance for remaining 7 months albeit in a new financial year. With the AGM coming in November, she will be in a more confident position as she is poised to deliver positive headline earnings. FiZ looks forward to the AGM.
