Home » Industry » Who Is Meikles, Cottco Fooling? [opinion]

Admittedly this column has not been as regular and the reasons for this are varied. I am, however, not going to go through all of them but straight to this week’s topic. Earlier in the week, Meikles released its results for the year ended March 31.

They were slightly delayed by just two days, perhaps due to the goings-on in terms of staff restructuring at the company.

Meikles is a diversified group, involved in retail, hospitality, agriculture and more recently mining. It is a diversified group, which in simple terms is not making any money.

Meikles reported an almost 2 percent drop in revenue to $384,3 million mostly coming from Supermarkets at $333,9 million. EBITDA was also down to $7,8 million from $9,9 million.

Following on the income statement impairments, depreciation were at $8,7 million from $4,9 million last year. However, non-trading income relating to the fund held by the Reserve Bank of Zimbabwe saw the group report $37,49 million profits.

Taking out this income the group reported a pre-tax loss of $11,38 million. The earnings line was correct as it showed that the group recorded a loss per share of 1,64c.

What is questionable is why Meikles would record the RBZ money as income as it is based on the group being in receipt of Treasury Bills. Trust Holdings did that at one point accounting for Trust Towers in their results and that was a recipe for disaster.

We all know what happened to them after that. Meikles are hopeful they will access these funds by the end of July 2014. We are not as sure about the timeline as it is dependent upon a whole lot of factors and more importantly would require the protection from the Debt Assumption Bill, which has not been formalised.

Where is the money going to come from? Gold miners received bonds from RBZ and the miners have been stuck with them, why do Meikles management think that the Treasury Bills they will get from their amount due will be marketable.

Based on operations, Meikles would not have made a profit and it was understandable. This is because TM Supermarkets is currently undergoing recapitalisation and even the coming on board of Pick ‘n’ Pay would not have boosted operations as that investment has at least a five-year payback period.

TM has been generally slow to implement its recapitalisation and that’s not because they lack the money. The group has already announced that it has already received the capital. So what’s happening?

TM does not have g representation in the CBD – Harare Street, Orr Street and Kenneth Kaunda are more Budiriro type-like supermarkets.

These fair badly when compared with the pristine OK First Street, OK Kwame Nkrumah and Wynne Street. TM also has its fair of issues poorly promoted shop openings, terrible uniforms – the PnP ones are relatively okay though.

On to the other units the main hotel Meikles, was out for most of the financial year because of the renovations as was the Victoria Falls Hotel.

Tanganda Tea Company is also still at various stages of capitalisation. Maybe that’s why the group forayed into mining. But even there more questions are still raised.

Given the ban on the export of raw chrome, why would the company be buying chrome assets at this stage? Where would the business get $100 million for the construction of a smelter and anyway why doesn’t the business consider buying assets of Zim Alloys than wanting to construct their own smelter.

The $3 million that is intended for the purchase of 51 percent shareholding in a group of mines in the Matabeleland area, is this a capital injection into the business or it’s a buyout of existing shareholders? What is the envisioned capital requirement of the gold mines to be acquired?

Because of all these processes, the cash flows are negative. Everything brings into question Meikles management capabilities and perhaps the shareholder’s leadership.

We hope the wrong people (except the one who killed department stores) didn’t leave the group but then that’s a story for another day.

And then there is the tired argument from Cottco.

Last week the company released its results for March. We are all tired of hearing complaints from the company about side-marketing activities which are chewing up its revenues and ultimately its financial performance.

We have been hearing this cry since Pat Devenish was in charge, and it seems as if this is the legacy he has left for the new management.

They just dug into the archives and came up with a boring argument. Besides what measure have they taken to curtail such behaviour?

Maybe their pricing is putting farmers at a huge disaantage and possibly a host of other things which there are doing incorrectly.

What a feat, maybe they need to learn from the tobacco industry. Isn’t side marketing a breach of contractual obligations?

So how come the company is not seeking legal remedy to recover its lost investment? Both the farmer and whoever is buying is possibly liable.

What investors and analysts would be more interested in is what steps the company is taking to minimise such losses. Surprise, surprise we did not hear of such plans at the mind-numbing briefing.

With all that side marketing going on the company plans to increase its foothold in the cotton growing areas. The key question is how they plan to achieve that, and do they have the funding in place to execute such a grand plan?

Do they have a plan to mitigate against the serious side marketing? We doubt that, simply because these and other critical things were not disclosed.

It is a matter of serious concern that the company is only recovering 68 percent of the input scheme. This is a huge loss if also we take into account the total impairments of $6,9 million.

Cottco management should aim for what is known as “Continuous Improvement”, otherwise calling a $2,8 million impairment normal is morally wrong and a smack in the face of the owners of the business.

That is value just going down the drain, and just because such impairments have been historically justified as normal, they however should never be entertained and ways and efforts to minimise such a loss are required. Even if this means investing in newer technologies or changing the traditional way of doing things, something has to be done.

At the end of the day the management team sleeps at night as their salaries are guaranteed every end of month, but what about the shareholders who are saving for their pensions and future livelihoods.

The major challenge faced by Cottco is the huge debt overhang. In spite of the group raising $45,6 million from the disposal of its other businesses, it is still in a fix.

The disposal of Seed Co should have unlocked value for shareholders, and placed the company on a sound footing, pulling the group out of the financial mess, instead the transaction became more like a fire sale that has not in any way helped in alleviating the group’s financial challenges.

We rightly call it a fire sale because the disposals did not add any value to the business, were it the case the book value would not have gone down by a scary 72 percent.

As was the case before, we are seeing the company trading on a cautionary, aiming to set another record of the most cautionary. Once again Cottco is now in need of a white knight prepared to sink in over $30 million to refinance its working capital and resolve the company’s indebtedness once and for all.

There are no two ways about it anything short of that level of capital injection will not change the company’s fortunes.

So after losing out on the potential value of Seed Co, again Cottco shareholders will be diluted possibly at the lower end of the stick given its present valuation. This is typically what happens if shareholders continue giving their support to inept managers and directors to run their companies. It is inevitable and a given that they will lose shareholder value.

One question that boggles the mind is how the business reduced borrowings by 67 percent and yet the finance costs are still significantly high at 31 percent of revenues.

After losing all that value for shareholders and the fire sale the company only managed to cut its cost of finances by just 17 percent.

Only in Zimbabwe would you find such incompetency, and shareholders overwhelming support such. We believe investors and analysts should be furnished with a debt schedule for the last trailing twelve months so that we really see for ourselves what really is taking place and how all these dominos fell.

From being considered as a serious cotton company on the continent, Cottco is now a shadow of its former self and one wonders if the coming on board of a new strategic partner would see investors recover all that value that has been dislocated.

Source : The Herald