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At The Market with Tetrad

ZSR advances in pursuit of income diversification

Brian Mugabe

SURPRISE surprise, the June inflation figure reflected an increase! Not really. The year-on-year inflation rate for June

came out at 364,5%, an increase of 64,4% on May’s rate of 300,1%. The rise in the year-on-year rate was attributed to the higher average prices of beverages up 477,5%, fruits and vegetables 593,3%, meat 529,2% and public transport 453,6%.

The month-on-month increase of 21,1% was the highest recorded since the CPI was last re-indexed to 1995, and reflects the unabated pressures that the country’s inflation rate continues to face. The month-on-month increase was attributed to much the same factors as that of the year-on-year rate, namely beverages, fruits and vegetables, and also, bread and cereals, milk, cheese and eggs.

The bread and cereals figure of course does not take into account the recent jump in the price of bread following the hike in the selling price of wheat to millers by the GMB from $30 100 per tonne to $366 584 per tonne.

The hefty salary increases awarded to most civil servants as published in the press by the PSC, and indeed the reviews that will filter through to most sectors, are likely to have an even greater impact on money supply growth in an economy that continues to see falling productivity and this can only mean one thing. Inflation, or hyperinflation as is the case in our country, will continue to rocket upwards.

This upward momentum is clearly reflected in the inflation moving average chart shown here, where the three month, six month and one year moving average indicators are almost vertical in their trend and show no signs of reversing any time soon. Interestingly enough, the chart also shows that this surge in the inflation rate began at roughly the same time as the “engineered” fall in interest rates at the beginning of 2001. Food for thought for our monetary authorities. Nevertheless, as we have said before, this state of affairs can only lead to further gains in the stock market, with interest rates falling further and further behind in real terms.

Turning to company news, ZSR recently published, in an announcement to shareholders, the details regarding its acquisition of 75% of the issued share capital of Advance Wholesalers. The deal comes as a result of ZSR’s desire to diversify the risk inherent in its core sugar business, a process that has been ongoing for the past five years.

Advance Wholesalers is a profitable wholesale business, having made after tax profits of approximately $670 million in the year ended December 2002. It is split into two components, direct wholesaling to the public through its Advance Cash and Carry outlets and the holding of the Spar franchise for the western region of Zimbabwe. The cash and carry operation is run via two outlets in Bulawayo while the Spar franchise, which is not directly run but is licensed to third parties, spans the likes of Bulawayo, Gweru, Chiredzi, Beitbridge and Victoria Falls. Advance acts as a distribution centre to these outlets.

In consideration for the 75% shareholding in Advance, ZSR allotted and issued 62,5 million ordinary shares, which represents 16,46% of the issued share capital of ZSR following the transaction, the effective date being May 2 2003. With the net asset value of Advance on the transaction date having been $1,05 billion, on a net asset basis this gives a value of $16,80 per ZSR share for the purposes of this transaction.

With recent news articles suggesting that ZSR’s dominant position in the local sugar industry may be coming to an end following submissions made to the Competition and Tariff Commission by other players in the industry, the decision to diversify continues to make more and more economic sense and reflects foresight for which the company must be commended. Given the profitability of the business acquired, this transaction will no doubt create further value for shareholders.

Bindura also announced, that pursuant to the cautionary published on April 16, whereby Anglo American Corporation sold its entire 52,9% shareholding in Bindura to Mwana Africa Holdings for US$8 million, the necessary conditions precedent to the agreement had now been met, the purchase and sale transaction having been completed on July 10. The Anglo board representatives resigned on the transaction date and a new board was then constituted to reflect the change in shareholding. The transaction went through the stock exchange on the 11th of this month, with approximately 66,6 million shares changing hands through a special bargain at a price of $98,92. This gives a value of roughly $6,6 billion, or US$8 million, at the official exchange rate of $824:US$1. Does this mean that the new shareholders can source the required forex at this same rate?

The company also published an interim dividend notice during the same period of $47,60 per share, which is payable to shareholders registered in the books of the company at the close of business on July 25. This invariably must have come as good news to the new shareholders as the dividend they shall receive covers 48% of the purchase price for the Bindura stake!

Lastly, CFI this week announced the restructuring of its divisional organisation with effect from July. The group now has three main operating divisions, namely the poultry division, made up of Agrifoods, Agrimix, Ross, Crest, Suncrest and Vetco; the retail division made up of Farm and City, Town and Country and a procurement and distribution centre, and the specialised division which is made up of Victoria Foods, Dore´ and Pitt (70% owned), the property company and Windmill (14% owned).

It is intended that the new structure, which has also seen the appointment of divisional heads to the poultry and specialised divisions will provide a solid structure for improved focus, autonomy and decision making, accountability, efficiencies and control. It is also stated that the structure as it now stands will “facilitate the future development of these divisions as separate entities in their own right”. Another demerger in the pipelines perhaps? I guess only time will tell.

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