The last week has been indeed a very important one for not only investors, but equally for policy makers in gauging the direction ofthe economy. Most listed companies and banks in general have been publishing their results which, to a large extent, have been impressive. The adage that ‘size does not matter, what matters is how you use it’ has been put to test once again, and indeed some ‘seemingly’ big institutions such as ZB Holdings and PG have failed to use their perceived size to generate positive earnings for investors with full year losses of $2.6 and $9.2 million respectively.
Among the banking stocks, CBZ Holdings, with a remarkable trading P/E of 6x, is one of the most attractive counters on the market after it bagged $22million in profits in 2010. The market capitalization levels of companies on the ZSE continue to show interesting valuation aspects, with highly geared companies getting the lowest confidence. Interfresh, after having made a profit of $3.7 million, albeit heavy reliance on revaluation gains amounting to $7.3 million, is trading at a market cap of $1.5 million! Where on earth would one find such a cheap stock whose market cap is half its annual profit? Shouldn’t Interfresh be the most attractive counters onthe ZSE? A closer look at its balance sheet reveals a worrying debt component in excess of $5 million. Indeed the market has been discounting such stocks that do not exhibit strong positive cash flows that can potentially extinguish debts that are sitting on their balance sheet. And equally important, its revaluations at $7.3 million versus a loss from operations at $2 million point to a very long road ahead of Interfresh towards return to real profitability backed by positive cash flows.
Therefore, considering the very slim possibility that Interfresh will declare a dividend in the next three or so years, investors will find it hard to see value in the stock, and indeed its market cap at $1.5 million is probably a very true reflection of the value of the company. PG Industries is one such listed company that has equally suffocated under the debt burden and inefficiencies since dollarisation and has, expectedly, lost the keys to open the doors to profitability, churning a massive $9.2 million loss in 2010. Having struggled with a debt that had ballooned to $10 million just before its right issue in December2010, PG’s subsequent proceeds from the $11.2 million right issues had very little impact in changing its falling fortunes. Unusually high losses typically put struggling companies’ going concern in serious doubt, and surely the market does not wish to see another Gulliver,Redstar or Bindura in PG. PG has failed to re-align operations tosatisfy the modesty and efficiency that is called for in a stable environment with low operating margins, and resultantly it has not managed to steer clear of trouble.
And a fragile cash-flow position and unsustainable operating costs have haunted it for long. The market will not, however, give PG the proverbial nine lives of a cat and unlike the Zim-dollar environment, the losses that PG is making are real and it has to move quickly to plug the leakages. Its shareholders, having recently capitalized it, inadequately though, may not be having the same appetite and ability to inject more money to fund an unviable business model.
And the local lenders, having burnt their fingers in PGs before (such as BancAbc), will likely want to keep their distance from such a big company whose magnitude of losses are enough to bring down a couple of small banks in town. Therefore the future of PG rests with the ability of the board to demonstrate above-usual leadership skills by learning two key aspects on managing a business in a stable environment - keeping costs down and optimizing debt.
The advent of dollarisation has brought in very low inflation (nowbelow 4%), liquidity crunch, real costs of doing business and thinoperating margins. Some of the weaknesses of business models that survived under hyper-inflation where costs were subsidized have now been exposed. Common blame has now been on the inaccessibility and high cost of capital, but the bottom line remains that no more subsidies exist in this economy for poor business models and the time has come for managers to take full responsibility for running their businesses. The tragedies of PG Industries, Redstar, Gulliver and Steelnet, among other listed companies, show that indeed some business models need to change or perish. Unlike in 2006-2008 era when borrowing was the most lucrative activityon any company’s balance sheet, the costs of borrowing in the dollarized environment are real and many companies, including listed ones, have lost the ‘blue chip’ status.
Indeed bankers and creditors who will lend goods and services without security to listed companies just on the strength of it being listed may learn the hard way that all that sounds, looks and smells blue is not blue after all. Banks therefore have to remain very vigilant in such circumstances to ensure that they do not carry the burden of economic losses via exposure to high non-performing loans of inefficient companies. Zimbabwe corporate environment is navigating through a very important phase of creative destruction, and banks, for their very important intermediation role that keeps credit flowing to facilitate trade, need to remain vigilant and safeguard their capital.
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