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Of generous landlords and local authorities

By Admire Mavolwane

THE latest inflation figure of 127,2% was received with a lot of sceptism, more so the month-on-month rate of 3,1%, down eleven percentage points from the January figure of 14,1% drawing

a lot of gasps from many readers.


Whilst the marginal increase could have been expected, seeing as it was coming off a higher base, the reasons for the month-on-month decline, undoubtedly left many astounded. An examination of the Consumer Price Index (CPI) figures shows that a 22% decline in “rent and rates”, resulting in an overall 15% decrease in the rent, rates and domestic power section of the basket contributed to the lower monthly increase. Upward pressure was exerted by increases in the prices of bicycles, educational books, fruit and vegetables which advanced by 17%, 11% and 15% respectively.


The decline in rent and rates which, at an overall weight of 17% offset the huge increases in the smaller weighted components obviously had a significant impact on the month-on-month inflation rate. The accuracy of this fact is somehow debatable, leading to the cynical comments that met the announcement of the inflation rate figure.


Hard on the heels of publication of the inflation figure — which incidentally now comes out in newspapers before the actual Central Statistics Office sheet is ready for distribution to the public — came the Reserve Bank of Zimbabwe’s announcement on Wednesday last week advising market participants that it will no longer be issuing 91 days Treasury Bills (TBs), but will instead open tenders for one year paper.


On the day the announcement was made, the authorities did issue the said paper at a yield of 65% per annum. The immediate impact of the policy shift was to lower market interest rates. Should the December 2005 inflation rate targets set by the RBZ governor be met, then investors could theoretically have a real return. But looking at it the other way, average inflation is expected to average around 80%, so at 65%, investors could be prejudiced by fifteen percentage points.


With more serious implications, however, is the magnitude of the exposure to interest rate risk being foisted on those banks holding two year paper at a yield of 17% per annum and one year TBs at 65% per annum, should rates move the other way.


Turning to corporate results this week, we focus on the financials from Truworths, Edgars and First Mutual Limited. Starting with the 6 months to 31 December 2004 numbers from Truworths; net turnover growth of 173% to $87,9 billion was achieved, which lagged the average clothing and footwear inflation for the six months of 186%. Massive volume declines were experienced in the chains, with Truworths showing a 20% decrease whilst for Topics and Number 1 Stores unit sales were 22% and 43% lower than the comparative period. The latter chain geared towards the low income group was adversely affected by cheaper imports from the Far East.


Operating profits grew by 94% to $27 billion, as operating margins (at 31% compared with 43% in the prior period) succumbed to the pressures from utility costs and wage increases which were above inflation. Interest income of $6,7 billion, ensured that after providing for the taxman, a respectable 145% increase in attributable earnings ($23,5 billion) was achieved.


The twelve months to January 8 results from Edgars came out as a well “groomed” set of financials. The group weathered the storm in the first quarter by invoking some unpopular measures which included the reduction of payment terms from five and nine months to three months and also hiked the interest charges on outstanding debtors’ balances. Net sales grew by 293%, comfortably ahead of the average clothing and footwear inflation rate of 254%.


Operating profits recorded a three fold increase to $118,9 billion even as margins lost eleven percentage points to 42% for much the same reasons as Truworths. Finance income of $6,7 billion showed the impact of the interest receivable on balances (which average 12,5% per month) and the positive cash generation which resulted in inflows from operations of $67 billion and cash balances of $58,1 billion at year end.


Attributable earnings of $82,1 billion were realised, up a commendable 280% on the prior year.


Volume improvements have been experienced in January for both retailers,

as a result of the relaxation of tax brackets and civil service salary increases. However, future performance could be hindered by possible food shortages due to poor rains and lack of foreign currency needed to import critical fabric stocks.


First Mutual’s numbers, after obviously counting the losses from the much vaunted strategic alliance with Trust Holdings Ltd (THL) which went horribly wrong and the exposure to Century Discount House/ENG which ultimately led to the liquidation of the First Mutual Asset Management (FMAM), look good indeed. The two write downs cost First Mutual $22 billion and $18,1 billion respectively.


The main driver of revenues was investment income which, at $227,8 billion, contributed 73% to total income of $312,7 billion. Most of this, however, was unrealised with 43% coming from property revaluations and 35% from marking-to-market the equity portfolio. The real drag to earnings took place in the expense section of the income statement with total outgo amounting to $102,8 billion largely as a result of a 521% surge in claims to $38,2 billion in the space of six months. At the same time administration expenses went up at a rate double that of premiums.


Of the $188,1 billion surplus after taxation, $126,7 billion was transferred to shareholder’s funds whilst the balance was apportioned between shareholders and minority interests. Associate Tristar Insurance weighed in with $963 million which saw attributable earnings to shareholders before write downs of $61,3 billion being recorded. As shareholders rather than policyholders were deemed to have been direct beneficiaries of the equity stakes in THL and FMAM, the profits attributable to them suffered from the $40,1 billion provisions alluded to earlier. Thus a final bottom line of $21,2 billion was achieved.

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