Batanai Matsika
ART Corporation (ART) is an interesting case study of a light manufacturing company in Zimbabwe that has been growing steadily both on the local market as well as in the Southern African region. ART is a holding company of a manufacturing group of businesses with distribution operations in Zambia and Zimbabwe. It is involved in the manufacturing and retailing of lead-acid batteries, pens, stationery, tissues, hygiene products and forestry resource management. The Group’s units include Chloride Zimbabwe, Chloride Zambia, Exide Express, Eversharp, Kadoma Paper Mills, National Waste Collection, Softex Zimbabwe and Mutare Estates. ART products are also distributed in Malawi, Mozambique, South Africa, Zambia as well as other African countries. We note that the batteries division remains the mainstay of the group’s operations, contributing 68% to revenues.
Chloride Zimbabwe, a wholly owned subsidiary of ART Corporation is in the business of manufacturing lead acid batteries and distributing solar solutions. On the other hand, Chloride Zambia is the largest distributor of automotive batteries in Zambia and has a network of 12 own branches throughout Zambia. Exide Express is the retail and distribution arm. The batteries division has a network of distributors both locally as well as in the SADC region and this enables effective market penetration as illustrated hereunder;
In Zimbabwe, the demand for automotive batteries remains strong despite some competitive threats. Exide has become the prime brand for the automotive industry in Zimbabwe. There has indeed been a significant growth in the number of motor vehicles in Zimbabwe over the past years. Numbers from the Central Vehicle Registry (CVR) show that the total number of vehicles and motor cycles registered in Zimbabwe have increased from 828 395 in 2009, 1,2 million in 2014 to over 1.4 million currently. Nonetheless, these numbers do not show an accurate picture of the vehicle fleet given the deficiencies in the vehicle registration database. We however note that the numbers have been boosted by an increase in the importation of second-hand vehicles, mainly from Japan, South Africa and the UK.
In the region, ART Corporation recently secured a partnership deal with a Botswana-based firm for the distribution of its products in the Southern African country. Our view is that the partnership will increase volume growth and product penetration. The battery manufacturing division has also made headways in terms of exports with the firm exporting to Zambia, Malawi, Botswana and Mozambique. The business has a market share of c40% in Zambia and c25% in Malawi. At a recent Annual General Meeting (AGM), management gave a brief trading update for the first five months to February 2019 and the following are the highlights;
- Turnover in the five months to February 2019 grew to USD23,0m from USD18,0m in the previous period although the numbers are distorted by the current reporting of USD and RTGS;
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- Turnover in the five months to February 2019 grew to USD23,0m from USD18,0m in the previous period although the numbers are distorted by the current reporting of USD and RTGS;
- Local sales volumes were down 20% except for the tissue business (Softex) which are maintaining 2018 volumes;
- The main constraints was depressed demand and the unavailability of foreign currency for critical inputs. The business was also negatively impacted by the mass demonstrations during the month of January 2019;
- Export revenues increased by 10% in line with increased focus on export growth in the region;
- Gross margins were at 41% against prior year’s 45%;
- The group’s pre-tax line had grown marginally to USD4,0m from USD3,9m in the prior year;
- In FY 2018, ART revenues grew by 40% y-o-y from USD33,5m to USD46,9m underpinned by increased sales volumes. Operating expenses grew at a slower pace than revenues, ending the year at USD11,8m from USD9,62 recorded in the year prior;
- As a result of the improved profitability, the group’s net asset position improved to USD1,4m in 2018 against a net liability position of USD4,8m seen in FY 2017. The company had a net cash and cash equivalents of USD1,4m at the end of the financial year up from USD0,47m in the comparable period last year;
- Management is still assessing the impact of the recent Monetary Policy Statement (MPS) and is optimistic that the group will still realise improved earnings despite headwinds in the broader macroeconomic environment. The group is also targeting to generate a surplus of foreign currency through an investment in the battery container making unit; and
- Management has indicated that the business is targeting revenues of USD50m for F2019. Overall, the stock is trading at a price of 11,8 cents (market cap of RTGS$51,6m and PER of 10,8x).
Author – Batanai Matsika, Head of Research – Morgan & Co +263 78 358 4745batanai@ morganzim.com
