Improved margins, lower finance costs boost Seed co’s F16


Seed Co Limited group chief executive Morgan Nzwere

AN improvement in gross margins and lower finance costs saw Seedco report a 3% growth in the bottom-line at $15.42 million after a near flat performance on revenue in the year to March.

The group reported $95.96 million turnover, an increase of 1% from $94.67 million last year. Gross profit was 17% higher to $50.93 million. Resultantly gross margins were at 53% from 46% previously. FD John Matorofa told analysts last week that gross margins had been boosted by US$ product pricing in some depreciating regional currencies, reduced unit costs of production to improve yields and improved efficiencies in the value chain.

CE Morgan Nzwere said the operating environment continued to be tough characterised by currency depreciation in all markets, the El Nino induced weather patterns and reduced government input programmes.

He said although the group recorded a profit, the El-nino induced drought saw the group’s uptake of seeds being affected.  “It was a very tough year for everyone in the region, and we are not an exception. On all the markets we operate in we witnessed serious Currency realignment and depreciation across the region, that is, Zambia, Malawi, Kenya and the DRC.”

“While the effects of currency depreciation were partially shared with consumers after price adjustments in selected markets, input programmes were reduced. Zimbabwe was down 68%, Malawi 13% and Zambia reduced by 37%.”

Finance costs were down to $1.94 million from $3.12 million last year as the group accessed cheaper bank facilities while debt collection intensified. Finance income was 16% lower after reduced investments of excess funds in short term deposits and reduced interest rates on short term deposits.

Earnings per share were however lower at 6.58c from 6.92c. The group declared a dividend of 2.0c during the period under review.

Maize sales volumes were down to 31 745 metric tonnes from 34 220mt last year “due to tough exogenous factors” but the crop remained the largest driver of volume within the group at 79%, winter cereals at 7%, soya beans 10% while other species take up 4%. By SBU, Zimbabwe remained the largest contributor to income at 32%.  Zambia was at 25%, Malawi 14%, Kenya 11%, Prime Seeds 2%, Rwanda 1%, Tanzania 10%. Nzwere said the coming on board of the new vegetable seed business helped the group offset the effects of the reduction in maize seed volumes. Prime Seeds turnover was $5.3 million with the GP at 29%.

The Zimbabwean market was crippled by tight liquidity in the market and El Nino induced drought conditions coupled with the reduced Government Input Programme that was reduced by 68%. Market share was however maintained although turnover was down 15% to from prior year while gross margins went up 2%
Zambian turnover was 2% lower than prior year in USD as the Kwacha moved from 6 to around 11 coupled with El Nino induced drought conditions. Gross margins went up 4%.

In Malawi turnover was 17% lower while gross margins were 10% below average due to kwacha fixed selling price in the subsidy. In Kenya turnover was also 17% lower in US$, however gross margins increased 12% and the PAT was up 72%. The unit also saw an increase in market share to 15%. Tanzania turnover was 36% higher than prior year. Nzwere said emphasis in that market was on increasing market coverage and footprint. Overheads were 16% lower, gross margins were up 16% while PAT was up by $2 million.

West Africa and Ethiopia were still work in progress.

There was however an increase in costs. Operating expenses increased 16% to $36.12 million which Matorofa said was due to expenses related to Prime Seeds ($2.6 million). “We also increased investment in research and development by 29% to $6.7 million in addition to R/D capex of $2.2 million while the sales and marketing budget grew 21% in order to grow new markets.”

Nzwere said Seedco is targeting to make intensive investments in research and make its contribution to total turnover to 10% in the medium term. “We continue to invest in research we are currently sitting at around 7% and have spent about $10 million on research this year,” he said.

On the balance sheet, there had been a sharp increase (142%) in inventories to $28.99 million which Matorofa said was due to increased production and lower sales volumes.

Nzwere said as the steep decrease in commodity prices and tough economic environment are expected to continue the El-nino effects on the food resources of the region are expected to buoy seed demand in the coming season as families are expected to increase planting to restock.

“The number of families expected to go without enough food are expected to spur some humanitarian demand for seed as well as increased government input program. There is also increased demand for our recently ultra-early maize seed varieties with the changing weather patterns   and we expect to increase share in most markets,” he said.

Various governments owe the group $14 million, Zambia $4 million, Malawi $5.5 million, Botswana $3.2 million and Tanzania $1.3 million to be settled by September.  Held to maturity investments had increased due to additional TBs received at the beginning of the year from the Zimbabwe Government.

Borrowings and trade payables were up to $28.5 million in 2016 from $11.7 million in 2015 due to increased seed production (44000 mt vs. >20000 mt last year)

Our Thoughts on Seedco

Our Comment at half year said:  Three things that come out of its results which we believe we warned against in 2012 and 2013. In fact, FinX’s script on Seed Co has never changed. Firstly was the over-reliance on governments and their unpredictability. Secondly we called for at least a 10% allocation on research in line with international standards and thirdly in 2013 long before the announcement of the move to veggies we said and this we will quote: Seedco has to leverage on Limagrain so that it develops seed for other crops and veg varieties. Seedco currently has two or three key seeds: wheat, maize, and soyabeans. In our opinion focusing growth on more seed varieties will reduce its exposure to governments who mostly buy maize seed for rural farmers. These also happen to be troublesome customers. A couple of years later, the script has come to life.  

Despite a 16% decline in sales volumes, these set of results are OK somewhat given that they were produced in an environment where all key risks that can have a negative impact on this kind of business were at play. The 2014/15 season was characterised by an El Nino Induced drought, reduced government input programmes in major markets and weakening currencies. But management still managed to produce a decent set of results when almost everyone in the market was expecting the results to mirror the downward trend that has characterised other companies listed on the ZSE. Yes volumes might have come down and like-for-like revenue is lower than prior year but the beauty of product diversification, through the vegetable business, saved the day with Prime Seed contributing $5.3 million to revenue. If the group continues to develop this business, then shareholders can expect steady revenue growth going forward.

At Finx we never liked the Group’s over-reliance on governments’ business so producing these set of results where government business was significantly  reduced (down 68% in Zimbabwe and 37% in Zambia) should be commended as it gives us comfort that the business has the capabilities of pushing its products without relying on government(s) and NGO programs. We are also happy that even the business that is still being done with governments, is done through financing structures that minimise risks.

The group was more efficient in cost management as gross margins improved to 53.07% from 46.03%. The improvement in gross margins should be lauded given that it came through an improvement in yields and US$ pricing given the weak currencies across the board. Management also negotiated for USD prices for some of their products. It would have been interesting to get a split of the operating costs, which went up by 15%, to see whether the business is efficient enough but we are not entirely worried given the reasons for the increase. Overheads costs went up due to investments into Prime Seeds ($2.6 million) as well as a 29% increase in R&D and a 21% increase in marketing costs.

 Although there was a significant growth in debt levels it is heartening to note that the group has a positive net finance income after the Group earned interest from TBs. Our hope is however that Government will continue to make interest payments and also honour its obligations when the TBs mature. In the event that Government defaults, it might still not lead to a train smash as management has managed to access cheaper facilities that saw finance costs come down by at least 39%.

The only worry is that the company’s cash position is now weak as it closed the period with a negative operating cashflow. FinX

***Seedco results for the year ended 31 March 2016

Consolidated Income Statement
Details31-Mar-1631-Mar-15% Change
Operating profit15,621,10316,659,833-6.23%
Finance Income2,394,8582,846,750-15.87%
Profit/Loss before Tax16,279,92116,198,0760.51%
Profit/Loss for the year15,417,61315,009,7412.72%
Basic Earnings per Share6.586.92-4.91%
Consolidated Statement of Financial Position
Details31-Mar-1631-Mar-15% Change
Total Equity144,551,678147,802,804-2.20%
Total Assets199,393,337186,977,1146.64%
Current Assets102,011,72297,967,3004.13%
Total Liabilities54,841,65939,174,31039.99%
Current Ratio1.862.50
Statement of Cash Flows
Details31-Mar-1631-Mar-15% Change
Cash Flow from Operating Activities-7,421,47817,236,216-143.06%
Cash Flow from Investing Activities-4,728,995-2,455,02292.63%
Cash Flow from Financing Activities-5,246,73721,489,614-124.42%
Cash and cash equivalents at the end of the period-9,031,1828,512,224-206.10%