….Liquidity squeeze hit banks
…. Group volumes subdued
Innscor Africa Limited reduced its borrowings resulting in its gearing ratio sliding to 3.08% during the six months to December 2019 from 3.69% in June as the expansive, cash-rich manufacturing and retail conglomerate relied more on shareholders’ funds than borrowings.
Innscor Africa was, however, targeting a higher gearing ratio of between 15% and 18%.
But, Innscor Africa did not borrow during the period under review because of the non availability of liquidity from banks.
According to Innscor Africa’s Articles of Association, the group’s equity is about ZWL$6bn, meaning it could have borrowed 100% of that.
But, even when Innscor had wanted to borrow, banks were not lending because of a lack of liquidity.
A low gearing ratio represents a low proportion of debt to equity.
A gearing ratio is a measurement of companies’ financial risk, which is one of the most popular methods of evaluating a company’s financial fitness.
A gearing ratio higher than 50% is considered highly levered or geared, meaning the company would be at greater financial risk, because during times of lower profits and higher interest rates, the company would be more susceptible to loan default and bankruptcy.
They may fall into financial distress because a company is using debt to pay for their continuing operations, which is dangerous because such companies may have difficulties in meeting their repayment schedules.
Lenders are particularly concerned about the gearing ratio, since a high gearing ratio will put their loans at risk of not being repaid.
However, in this environment, gearing ratios even if they are more than 50%, are less than annual inflation which stood at 540.16% in February.
The month-on-month inflation is less than 20%.
A gearing ratio lower than 25% is considered low risk by investors and lenders.
This means with a gearing ratio of 3%, Innscor Africa is financially stable.
Analysts, however, told Business Times that under hyperinflation environment, which is ravaging the economy, borrowing is the best thing to do.
Banks, however, don’t have liquidity.
“The group’s statement of financial position remained solid with net gearing levels reducing to 3.08% on an inflation-adjusted basis,” Innscor Africa chairman, Addington Chinake said.
“The group will therefore continue to work with its financial institution partners in achieving a more appropriate level of debt to support its growth plans. The group will also, continue to approach the market with direct debt instruments to fund critical programmes such as contract farming.
“In light of the operating environment and the need to deploy resources to working capital, cash generated from operating activities was managed to minimum levels.”
Financial results for the group for six months to December 2019 released last week, show that revenue for the group went up 16% to ZWL$4.3bn during the period under review from ZWL$3.8bn recorded in the comparative period in the prior year.
Volumes performance for the group was generally mixed.
Volumes across most units declined largely due to reduced consumer spending power and the progressive removal of subsidies, notably within the floor value-chain.
Profeeds, an associate company of Innscor recorded a 27% decrease in feed volumes and a 33% decrease in dayold chick volumes against the comparative period.
National Foods’ volumes declined by 32% during the period under review to211 000mt.
The Colcom division, which comprises of Tripple C Pigs, Colcom Foods and Simon’s Pies, reported a 17% decline in overall sales volumes.
Irvine’s, however, recorded a 26% volume growth in table eggs during the period under review.
So were volumes of Natpak, which grew 18% during the reviewed period.
This was largely driven by the increased utilisation of the corrugated packaging plant and the newly commissioned rigid packaging operation which operated close to capacity.
Volumes in the sacks and flexible division, however, declined marginally, reflective of softer demand across these particular markets.
Volumes at Probottlers declined by 26% during the period under review.
Similar performances in both the cordial and carbonated soft drink categories were reported.
Chinake said the power supply was exceptionally poor at this unit and was the main reason for the volume reduction.
Additional generation capacity has since been installed within the plant.
This has resulted in volumes recovering well.
At Probrands, volumes were 14% down compared to those of the same period in the comparative period in the prior year, largely driven by depressed rice volumes.
Frozen chicken volumes were however 14% behind the comparative period.
Day-old Chicks volumes declined by 34% as small-scale farmers reduced operations in response to current economic conditions and diminished crop yields.
“This is a reflection of subdued consumer spending and evolving consumer demand in response to the current market conditions,” Chinake said.
Operating profit was up 64% to ZWL$675.4m compared to ZWL$412.1m due to sustained improvement in product mix, well priced strategic raw material investments and a well-controlled overhead structure.
Profit before interest and tax stood at ZWL$413.02m from ZWL$365.27m in the same period in 2018 Profit for the period was ZWL$608.4m compared to ZWL$477.44m recorded in the comparative period in 2018.
The group reported a ZWL$142.7m monetary gain during the period under review, reflecting an efficient deployment of resources to nonmonetary assets.
The group reported fair value losses in biological assets amounting to ZWL$116.18m, reflecting a reduction in real value of parts of the group’s livestock herds as a result of lower real selling prices utilized in the computation to fair value these assets.
Interest costs grew over the comparative period largely due to an increase in interest rates.
Real absolute borrowing levels remained similar to the F2019 closing position.
Interim headline earnings per share was ZWL$0.746 for the reviewed period, a 52% increase from ZWL$0.4897.
Total assets for the group was ZWL$8.3bn from ZWL$7.6bn.
Total liabilities went down to ZWL$2.2bn during the period under review from ZWL$2.4bn reported in the comparative period in 2018.