Proplastics in capital rationalisation program to unlock value as PAT grows 35 percent in F15
PROPLASTICS says it has embarked on a rationalisation program, where capital employed, which cannot generate an appropriate return will be scaled down, Group Chief Executive Officer Kuda Chigiya told an analyst briefing for the full year results to 31 December 2015.
“Management performance incentives will now be based on achieving a rate of return on capital employed which is considered appropriate for the business and its stakeholders. We want to create an attractive rate of return for the business and ultimately shareholders value”, Chigiya said.
During the year, the group spent about US$488 000 on capex, mainly into the injection moulding machine and PVC line which will be commissioned in a week and Q3 of FY16 respectively .This is expected to significantly improve efficiencies and mark a slowdown in capital investment according to Chigiya. The capital rationalisation will also see “retarded investments” being disposed of.
Revenue increased by six percent to US$14,2 million underpinned by an eight percent growth in sales volumes to 4 236 tonnes. For the seven months since it listing, revenue was at US$8,8 million. However Chigiya noted that the tough economic environment as well as the lack of infrastructural development projects in the country, has had an impact on the demand for some of the group’s products.
“We had to identify other markets to support us due to lack of significant projects in the local market”, he said.
Liquidity challenges remained an issue and in order to minimize default risk, the group had to forgo what management termed “unsafe sales”.
The groups market is broken down into five segments namely; Borehole Drillers; Civils; Irrigation; Merchants and Mining. The group realized growth in sales in all segments with the exception of mining due to lack of funding for capex in the sector. Hence exports will remain a key focus area in order to mitigate falling demand. During the year under review, exports contributed one percent to revenue and management is targeting a 10% contribution. In order to hedge against falling currencies, the group invoices in USD.
On the flip side, the depreciating currencies are eroding the group’s competitiveness according to Chigiya as imports are landing cheaper. For instance finished goods are landing duty free in the country while at the same time the company pays duty on raw material, which Chigiya said creates an uneven playing field. The group will continue to focus on plant refurbishment and retooling in order to improve factory efficiencies thereby lowering the unit cost of production.
Gross profit grew by 15 percent to US$3,3 million as the gross profit margin improved to 23 percent from 21 percent compared to 2014. Overheads, which were affected by once off transactions relating to staff rationalisation, unbundling costs and bond registration fees, grew by 16 percent to US$2,5 million. Management embarked on cost saving initiatives during the year which included supplier engagements, elimination of redundant processes, total cost to company remuneration and staff reorganisation.
The total cost to company remuneration model has seen the group abolishing the company car scheme for senior managers in favour of car loans. This is expected to free up capital for the group as well as reduce running costs.
Factory performance compared to last year was 8% ahead to 4 460 tonnes despite the over voltage that occurred in Q1. However raw material supply as well as electricity remained a challenge during the year.
“We had acute shortages of raw materials in H2 as our sole supplier in South Africa experienced challenges and management had to source alternative suppliers in other markets”, Chigiya said. He added that they have since identified other suppliers in South Africa, Zimbabwe and China which will allow the company to procure widely and cost effectively.
The group has since engaged ZESA resulting in the group joining the industrial grid with effect from November 2015 ensuring a reliable power supply.
FD Pascal Chingunda, said EBIDTA grew by 20% to $1.7 million and finance costs were 21% below prior year as a result of negotiating more favourable rates on long term borrowings. Profit after tax grew by 35% to $652 000.
Total borrowings stood at $750 000 (a loan which was inherited from Masimba Holdings) with $225 000 due in 2016 whilst other portions will be settled in 2017 and 2018. The loan has tenure of 3 years at an effective interest rate of 8.5%. Debt/ equity ratio was flat at 8% but according to Changunda, this is expected to move to 12% to finance the balance of the PVC machine. However the group strategy is to use internal resources to finance capex going forward.
Changunda noted that assets amounted to $12.2 million. The group remains in a strong liquidity position with healthy current and quick ratios of 3.8 and 1.5 respectively. However trade receivables grew by 53% to$3.1 mln, mainly as a result of the deposit for the new PVC machine. Excluding the deposit, debtors grew by 13%.Investories and trade payables were down 4% and 3% to $4.4 mln and $1.8 mln respectively .ROCE was at 7% versus 6% in 2014 and ROA was flat at 5%.A dividend of 0.15cents was declared translating to $380 000 in value terms.
Cash generation was at 3% of revenue compared with 10% in 2014 while cash and cash equivalents increased to $282 000 from $172 000 in December 2014.
Going forward, the key focus areas will be capital restructuring, improving factory efficiencies, increasing export contribution and strategic alliances among others. In terms of exports, “encouraging” orders had been picked up in Zambia in the last quarter of the year. The group also intends to improve the credit/cash ratio (currently 60:40); in order to increase cashflows and eliminate credit risk in a liquidity tight environment.PPPs will also be a key focus area due to increased donor funds coming into the country for infrastructure rehabilitation. FinX