• Sun. May 26th, 2024

Proplastics expects to report fairly amid rise in USD transactions

ByEconomic Times

Sep 24, 2022

By ETimes

With the increased usage of the US dollar in the market in settling transactions, Proplastics says it will help to present its accounts fairly and limit its participation in the auction system as the majority of the international commitments will be fulfilled through internal resources.

Delays in settling allocated amounts by the apex bank have been the greatest challenge for most companies as it has worsened their foreign currency exposure. Some people were reportedly forced to buy dollars in alternative markets in order to avoid disruptions.

“The operating environment is showing that customers are preferring to settle their transactions in US dollars,” said group chairman Greg Sebborn in a statement accompanying the half-year results.

The money market has been dry of ZWL for quite some time, prompting parallel market rates to subside from a high of $900x to $750 per US dollar.

“This, coupled with the liquidity constraints following the introduction of gold coins and the tightening of money supply, is likely to see the group trading less in Zimbabwe dollars, thus signaling a change in functional currency to the US dollars.”

Because of historically high rates of inflation, the data in business financial statements has lost all historical significance. Previously, some analysts were of the view that the inflation adjusted statistics were difficult to read due to biases in inflation indexes.

“This will, in my view, help the group to be able to report fairly on its financial performance going forward. In the same vein, participation on the auction platform will be reduced with most of the foreign obligations being settled through internal resources,” he said.

The decision to expand in the current economic environment is arguably a brave one. It is also a necessary one, as the company aggressively targets growth.

“With the new 500mm PVC line having been successfully commissioned, demand for large bore pipes will be effectively and efficiently addressed as has already been experienced towards the end of the ­first half of the year,” he said.

“This will augment the reduction in fuel prices as well as the reduction in the price of the major component of our raw materials which we have started to experience.”

On financial performance, inflation-adjusted turnover for the first six months of 2022 rose 21% to ZWL 3.1 billion from ZWL 2.6 billion in prior year. This was attributed to price adjustments considering local and global economic fundamentals.

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Volumes, a key indicator of demand, decreased 2% from the same time last year. In the reviewed period, exports made up 8% of total income, barely shy of the 10% goal.

“It is still important to note that a signi­ficant portion of the group’s revenue was recorded at the auction interbank rate having been received in US dollars. Although there was a signi­ficant movement in the rate during the period under review, the gap with the alternative market rate remained high,” he said.

It experienced considerable exchange losses as a result of the significant volatility in the currency rate and the fact that the company has a sizable amount of foreign debt given that 90% of its raw materials are imported. For the period, exchange losses totaled ZWL 255 million, up from ZWL 29 million in the previous period.

At the end of June 2022, there was US$3.7 million worth of outstanding foreign debt. As a result, the group’s EBITDA decreased from ZWL 616 million in the previous period to ZWL 297 million. The company reported a break-even before tax and a loss after tax.

The official currency rate likewise declined over the course of the review period, ending at ZWL366 to 1 USD as opposed to ZWL111 in December 2021. This equates to an increase of 203%. In a similar vein, the CPI index increased from a closing rate of 3,977 to 8,707, or a shift of 120%.

“All these changes had a signi­ficant impact on the ­financial performance of the business which, despite recording a trading pro­fit from normal operations, reflected a loss for the period as a result of having to account for signi­ficant exchange losses arising from the inability to pay foreign creditors timeously,” said Sebborn.

It did not declare an interim dividend, citing the need to reduce foreign-related obligations.

Although it anticipates that the operating environment will remain difficult, the group still expects that demand for its products will increase, which will boost performance in the second half of the year.

“We expect this demand to be underpinned by both public and private sector-initiated projects.”

Our thoughts

Looking ahead, the company will likely see its margins fall under significant pressure from incoming price adjustments and inflation-lagging costs. Electricity tariffs are expected to rise, while the company has already reported increasingly erratic power supplies. The government’s drive towards infrastructure development could be a boon for the company, but as noted, the competitiveness of the local industry poses a significant challenge – Harare

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