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Mid-year review statements – the aftermaths

By Addmore Chakurira

AFTER the release of the mid-year budget and monetary statements review, the markets have continued to trade largely

unchanged. Market focus for the week remained concentrated on equities with the commencement of the second quarter reporting season.


Generally, the stock market has rallied due to the negative returns on the money market. During the week the rally on the equities market lost a bit of steam (with the industrial index closing below the 800 000 mark) ahead of the Heroes’ holidays and also as investor anxiety about the possibility of a hike in savings and investment interest rates might also be picking.


Some banks have started realigning their interest rates as per governor of the Reserve Bank of Zimbabwe’s statement, with minimum lending rates (MLR) having eased from around 200% to 180% (Barclays at 180%, Zimbank at 180% and Standard at 175%). Non-taxable savings rates are still to be adjusted, though investment (the taxable money market investments) interest rates marginally picked by about five percentage points to the current region of around 45% to 75%.


That said, the excess liquidity might dampen investment rates. Some credit retailers have revised their credit terms, with the reintroduction of 30 days “interest free credit” where interest is not charged for settlements within 30 days (early settlements). All this in an effort to spur local demand, which had hit rock bottom late in the period November 2003 to early this year around March).


Indeed companies have to move stock, which had remained static bearing in mind that the stock was financed by borrowings which turned out to be costly in the course of events (some retailers are running promotions, mark downs). Formal micro lending has resurfaced (rates quoted at around 16% per annum), aided by the recent licensing of micro-lending institutions and the reduction in MLR. Enhanced by salary and wage hikes this might pick demand though speculative activities remain minimal.


However, the inflation hawks seem to be worried that the recent salary and wage rise will provoke a commodity prices response. Retail prices of some goods have gone up in recent days. Local products are facing stiff competition from imported goods, for some manufacturers it is now cheaper to sell imported goods.


With the second quarter earnings-reporting season in full swing, some earnings disappointments have many investors worried that growth in profits (if any) will fall short of inflation and expectations. Earnings recession led by punitive finance charges and high local costs are eminent for most companies. For most corporates, the huge earnings jump of last year are a thing of the past as weaker pricing power undermines earnings.


Going forward, both top line and bottom line growth will prove to be somewhat disappointing, amid evidence that the domestic economy continues to struggle. Capacity utilisation is still way below acceptable levels with a majority of the manufacturers in the 30% region.


However, it’s not all gloomy for everyone with some companies (in selected sectors mainly financials and consumer-related) anticipated to release excellent results. Studies in emerging markets have shown that banks generally grow faster than the economy though they follow a cyclical pattern as they evolve over time. Selected banks’ earnings are expected to show solid growth, tempered by potential interest income headwinds.


One defensive group that has been gaining strength recently despite the market’s decline is the consumer-related sector. The valuations of many stocks in this group have run up in anticipation of a recovery in demand fuelled by the salary and wage hikes, and the shift in the tax brackets. Investors should note that not all consumer companies will see a sustainable up-tick in demand. The defensive food business appears well positioned to somewhat quench investors’ thirst for consistent earnings growth even in the current lackluster economy.


Companies to have kicked the reporting period include Dairibord, RTG, Pioneer and Cafca. With the average inflation rate for the six months to June at 526%, bottom line growth (if any) for the companies that have reported to date falls short of this figure. The only notable growth came from Dairibord (defensive food business) with turnover increasing 587% year-on-year to $155,4 billion, to realise an attributable profit of $18,5 billion representing a growth of 482%.


That said, what stands out the most is the decline in volumes and the surge in finance charges. Pioneer, and Cafca reported negative earnings, mirroring the tough operating environment for the six months. For Pioneer, the main culprit being the punitive finance charges, although the company remains profitable at the operating level.


Cafca’s uninspiring performance reflects the uncompetiveness of companies relaying heavily on imported raw materials on the export front, the non-existent infrastructural development on the local market and the challenges of accessing prepayments on export orders. The demand outlook remains slack due to the depressed corporate profitability.


DISCLAIMER: Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries or affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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