Home » Industry » Is CFI’s Future Hanging in the Balance? [analysis]

At the same time, a lot of hard work was necessary for companies to be profitable particularly with the use of a hard currency. Many companies, stuck in a hyperinflation mentality, found themselves accumulating short term debt at expensive rates to recapitalise their business. Unfortunately this had long term effects as interest costs predominately wiped out all profit made.

As a result, years into dollarisation the market is witness to companies like CFI that have failed to be profitable and are digging deeper into losses.

In a US dollar environment, one wonders for how long the company can limp on while making perennial losses that seem bottomless.

Recently, CFI released a worrying set of interim results for the six months ending March 2014.

Revenue dropped 13 percent to $41,8 million from 2013 levels. Sales volumes declined across the board save for Farm and City Centre which managed to increase turnover by 14 percent.

Operating loss before depreciation for the 6 months to March 2014 was $3,7 million which was greater than that recorded in the full year of 2013 and a worse position from the $553 297 profit achieved half year to March 2013.

Loss for the period was $5,5 million, an increase from the US$1,8 million loss recorded same period last year.

As a result of these losses, cash generated from operations was a negative $167 634, though an improvement from the negative $1,3 million recorded the same period last year. Overall cash position was a positive $107 031 mainly due to an increase in financial leverage.

The group received a total of $3 million in short-term loans, while simultaneously their long term loans were coming down.

Considering that the group has been making losses for years, they have developed an unhealthy dependency on borrowings that are also short term and expensive.

As at March 31, 2014, their debt to equity ratio stood at 21 percent, which is surprisingly low.

This is because their equity has remained relatively high at a book value of $74,9 million, a questionable figure given the recurring losses over the years.

Its market capitalisation, however, is currently valued at $2,4 million, which if alternatively used will translate to a debt to market capitalisation ratio of 668 percent!

These dismal results are reflective of how the companies under the CFI group are struggling.

The poultry division has been under-performing for ages, at the time when their peers in the market have made strides for the better.

Management highlighted that in November 2013, Suncrest abattoir, the division that bred and slaughtered chickens under the Suncrest brand, was put under care and maintenance due to unsustainable operational inefficiencies.

This resulted in the retrenchment of 114 employees. Chicken rearing business has proved successful even if it done in one’s backyard.

Bigger scale players such as Irvines have managed to dominate the market and fight the insurgency of cheap bird imports, just by being efficient.

It is therefore puzzling how CFI, an equally bigger player, could have failed to simply rear chickens and supply the market.

Instead Suncrest seems to be mothballing operations citing operational inefficiencies. These inefficiencies have been mentioned year after year and yet it seems nothing has been done to improve operations at Suncrest.

It is a high possibility that a year down the line the operation could follow through the same fate of the likes of Town and Country.

Likewise, the day old chicks business is not booming either. Management indicated that there was increased sales volatility and collapse of demand for day old chicks, particularly in December 2013 and January 2014.

In addition, power outages had a negative impact on the cost of production. As a result the business was streamlined to deal with the sales volatilities.

Other poultry divisions such as Agrifoods and Agrimix recorded steep declines in sales volumes of 39 percent and 43 percent respectively.

If sales volumes continue to decline at such magnitude, there is a high probability that the two might not pull through.

On the other hand, Crest Breeders is in the process of finalising a land for debt swap with financial institutions and there will be need to move the business elsewhere.

These are the consequences of expensive short-term debt and the business will lose valuable assets in settlement of loans.

Ironically, regardless of this predicament, the business acquired even more short term funding over the period.

The fear is that the debt trap will continue and more assets might be lost as the operations of the business might fail to service debt.

In addition, Victoria Foods has continually failed to secure an investor for the business. CFI issued a number of cautionary statements in what was rumoured to be pertaining to negotiations with equity partners.

Management highlighted in their March 2014 results that the equity transaction fell through and other ‘interested parties’ were currently carrying out a due diligence on the business.

In such a liquidity starved environment, chances of getting a new investor on board are slim.

There are other similar businesses that have been vying for investors for years now and nothing concrete has come through.

A business like Victoria Foods seems to be almost on the brink of collapse unless, by chance, it is rescued with the injection of new capital sooner rather than later.

It remains to be seen if the current interested parties will seal the deal and inject funds into Victoria Foods.

Overall, the whole group is under strain. From huge declines in sales volumes, perennial losses and loss of assets in debt settlements, it remains a wonder how the business can continue to survive.

The business has failed to turn to profitability and has become more reliant on debt for survival.

Yesteryear names such as Honey Dew, are now history and it might only be a matter of time before other big names under the CFI arm follow through the same path.

It seems as if Farm and City is the only division adding value to the business. However, the current volatile nature of the retail sector could mean the business could turnaround for the worst, making it an unstable component for the group.

Depending solely on Farm and City, would make the group more volatile than it already is. The other divisions already smell of doom and gloom, casting doubt on the group’s going concern.

It is unfortunate for shareholders who are losing value as the business quickly deteriorates. Bluntly put, there seems to be no value left in the group and the going concern of the business is highly doubtful.

Furthermore, it begs the question of whether or not it makes sense for the group to continue being listed on the stock exchange.

Essentially, there is not much value left in the group, and as an opinion a US$2,4 million market value business is really not worth listing.

In addition, the group has a significant debt problem that management does not seem to be bothered about judging from their never ending debt appetite.

It might be aisable to take the PG route, and suspend listing whilst the group finds concrete ways to deal with its debt and operational issues.

Under extreme cases, the business might need to go private and focus only on the ventures that are profitable and those that it can turnaround.

Only when the business has found its way again, will it then return to the exchange to re-list.

Otherwise, if management maintains a ‘business as usual approach’, then it will not come as a surprise if CFI falls into the history books of failed companies.

The author is a market and investment analyst who writes in her own personal capacity.

Source : The Herald