Home » Industry » Aftermath of Perennial Losses

Year to-date, companies seem to be struggling with market giants such as Delta Corp and CBZ Holdings giving worrisome trading updates for the first quarter of 2014. The poor performance has been attributed to the deteriorating economic environment to the extent that some perennial under-performers are now finding cover. There are several companies on our bourse that have gradually depleted value for their shareholders over the years, when others were realising growth.

Conveniently enough for them, the financial results disaster that seems to be currently across the board, is doing a good cover up job for them as far as a longer streak of bad performance is concerned. The question is, how further they can continue to make losses, without drastic consequences.

Recently, General Beltings Holding Limited released their full year to December 2013 results. The company made an operating loss of $3,4 million which is worse compared to the $2,6 million recorded in 2012. This was on the back of a 26 percent drop in revenue to $3,8million, a level which is nearly equal to the operating loss made.

Management attributed the dismal performance to the overall liquidity shortages characterising the market as well as difficulty in raising additional funds to capitalise the business. Already, the company is a beneficiary of the Distressed Industries and Marginalised Areas Fund.

These funds are said to have assisted the company in raw material savings and market competitiveness. Meaning, should these funds have been absent, the performance of the company could actually have been worse.

Notwithstanding the current market distress, the company has not been able to make a profit since dollarisation. From December 2010, the losses have plunged further south and are now just shy of the $4 million mark. This is mainly because revenue had generally been on a down-trend, recording a sole increase in 2011 from 2010 and took a downturn from then on to date.

Naturally, with such an operational performance, shareholder value has been depleted as a result. As at 31 December 2013, the company’s equity stood at $1,3 million down from the $4,3million in 2012.

Assuming their historical losses are anything to go by, if nothing is done to turnaround the fortunes of the business in 2014, the company might find itself insolvent.

The company is caught between a rock and a hard place as on one hand its main market, the mining sector, is currently facing its own challenges as well as declining prices on the international market. Gold production, for example, went up 2,17 percent in the first quarter of 2014 but value was down 11,69 percent.

In addition, the manufacturing sector has failed to significantly revamp since dollarisation and as such, GBH’s chemical division has suffered declines in sales volumes over the years. On the other hand, the company’s lack of capital has prevented it from exploring new markets and possible alternative avenues of their business to enable it to survive.

The same fate has fallen upon ZECO Holdings. For the financial year to December 2013, the group generated revenue amounting to $604 526, a decline of 59 percent from that attained in 2012.

Operating loss was $3,6 million, which is close to six times the amount of revenue and a slight increase from the 2012 levels. These are quite scary figures, as the business is not able to generate enough income to cover its costs.

This defeats the point of why the company should be in business in the first place as operating costs for the same period were $3,9 million. Both top-line and bottom-line have been significantly deteriorating since dollarisation.

Equity, though declining, has, however, remained surprisingly high. June 2013 results reflect a breakdown of capital which shows a revaluation reserve of $26,7 million, a figure that has been carried through for years.

Revaluation reserve, by regulation, is not core capital, is also non-cash in nature, and thereby cannot absorb the losses of the company. Assuming the same figure was carried through at December 2013, then the equity portion which counts as far as absorbing losses in concerned, only stood at about US$1 million.

Like GBH, should the company make the same magnitude of losses in 2014, then essentially they might fall into insolvency, after adjusting the capital for the revaluation reserves.

Clearly, the situation for both companies is raising red flags. Failure to make a profit in a US dollar environment for over four years now will not go unpunished by the market.

Shareholders have been losing value over the years, and as indicated, if the losses continue then shareholders will technically be owing money to the company through negative equity.

It then warrants the question of whether the companies should continue to be listed on the Zimbabwe Stock Exchange. With such a performance, what are the probable chances that investors will buy into such companies?

Already value of trades over the counters are negligible and market cap of the two are way down the ladder. General Beltings is third from the bottom with market capitalisation of $321,953 while ZECO is last with market capitalization of US$46,334.

For the latter, the mismatch between the equity book values and the market value, is indication that ZECO’s capital will not be able to cover their back for long.

The year 2014 is of reckoning for the two. In fact, for most companies that have been trending in a similar manner, they will need to re-look at their business models. In all fairness the operating environment is tough and generally, the bulk of the solutions should be macro in nature.

However, most of these firms have been on a downward trajectory since dollarisation, and failed to grow at a time when others managed to do so.

Others are cramped with debt and are failing to pay their creditors. It will be necessary to look for alternative business avenues which will keep the businesses afloat. Furthermore, exploration of other markets might be necessary to increase sales volume as local demand seems to be dwindling.

Capital, is however, of the essence to drive all these initiatives, as the lack of it might confine the businesses to their current models.

The danger of maintaining their same status though is that they might fail to see another year as, according to Charles Darwin, survival is only for those that can adapt to change.

Source : The Herald