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After growing by 10,5 percent in 2012, Zimbabwe’s real GDP growth rate in 2013 sharply regressed to 3,4 percent as the economy showed serious signs of distress.
The economic outlook for 2014 thus far is also looking bleak with leading economic indicators such as inflation and stock market performance all pointing to a continuation, if not a worsening, state of affairs.

Inflation on the back of weak consumer demand turned negative in February 2014 at -0,49 percent, while The Zimbabwe Stock Exchange industrial index, has since January 2014 been on a free fall, closing the first quarter of 2014 at negative 12,8 percent on the back of poor corporate earnings and weak market demand.

Coincident indicators such as bank deposits and lending, Government finances and corporate earnings, are also pointing to a depressed 2014 economic outlook. Bank deposits (excluding interbank deposits) declined by 1,11 percent from $3,93 billion in December 2013 to $3,89 billion in January 2014.

Private sector lending on the back of liquidity challenges, a constrained deposit base and increasing non-performing loans also declined on a month-on-month basis by 2,3 percent from $3,65 billion in December 2013 to $3,57 billion in January 2014.

Furthermore, Government finances continue to decline with total revenue collections for the month of January 2014 standing at $266,6 million against a target of $278,6 million resulting in a negative variance of $12 million.

Financial results of listed companies that have been published since the fourth quarter of 2013 have generally been disappointing as most companies recorded much lower profits and in some cases, losses, compared to prior year owing to the depressed economic environment.

Lagging economic indicators such as GDP growth, balance of payments, and unemployment are also expected to remain subdued, as the broader economy struggles.

Upon the conclusion of the 2014 Article IV Consultations with the Zimbabwean Government, the IMF highlighted that to reverse the current undesirable economic downturn, the country must pursue strong macroeconomic policies such as, the building up of fiscal and external buffers and increasing budgetary resources going to non-personnel related spending, the implementation of structural reforms to foster investment, improve the business climate, and strengthen governance and institutions, and also through increasing the transparency of the minerals regime.

Against this background it is clear that the country’s poverty is by choice, as most of the serious macroeconomic problems that the country faces can be resolved internally through the implementation of good, fair, and transparent economic policies.

An overview of full and half year financial results that were published during the first quarter of 2014 reveals that most companies underperformed prior year performance.

The leading reasons for their under performances were mainly, but not limited to, decreased revenue, increased operating costs, increased bad debt impairment charges, and increased financial costs, all of which were a function of the current tough operation environment.

However, there were a couple of turnaround stories, most of which were as a result of rigorous cost cutting implemented during the year and management foresight.

In the banking sector most banks recorded a decline in their earnings mainly because of a decline in non-funded income, and also because of an increase in impairment provisions as non-performing loans continued to spiral out of control.

The Reserve Bank of Zimbabwe Memorandum of Understanding with banks was the main reason behind the decline of non-funded income across the sector, and this source of income is expected to remain depressed going forward as banks now have to seek approval from the Central Bank, whenever they want to increase their bank charges and fees.

The best performing listed bank remained CBZ Bank which earned a profit after tax of $18,77 million for the full year 31 December 2013 compared to $33million in 2012. CBZ Bank for the first time made a more realistic impaired provision of $18,3 million compared to $4,2 million in 2012, which was a welcome development, but however more impairments of the same magnitude may be required going forward to totally clean out their loan book which as at  December 31, 2013 stood at $898,9 million.

The decline in consumer demand adversely affected listed companies in the retail, tourism, food and beverage sectors. Under retail companies, Innscor experienced a decline in attributable profit from $20 million in half year 2012 to $16,25 million as at half year 2013.

Looking at the just ended first quarter of 2014, a rebound in earnings is highly unlikely as aggregate demand has remained fairly weak.

Clothing retailers Edgars and Truworths had different fortunes with Edgars growing its full year earnings from $3,79 million in 2012 to $4,24 million, while Truworths had a marginal decline in full year earnings from $1 million in 2012 to $987 426 in 2013.

Both clothing retail companies continue to benefit from providing credit to customers with their biggest challenge remaining their ability to managing their debtor’s book well.

In the tourism sector only one of the two listed companies have published their full year results, but what is apparent is that although domestic tourism remains weak, regional and international tourist arrivals into Zimbabwe remain robust.

RTG for the first time since dollarisation turned profitable earning a profit of $1 million against a loss of $5,9 million in prior year.

The new management at RTG seems to be doing all the right things and it is hoped that the company can sustain its turnaround going forward.

Listed companies in the food industry also had a lukewarm performance because of depressed consumer demand. National Foods, despite having improved revenue compared to prior year incurred a slight decline in half year earnings from $7,6 million in 2012 to $6,8 million in 2013.

Furthermore the company managed to generate a positive net cash flow from operations of $6.9million in 2013 compared to a negative $24,5 million in 2012.

Colcom Holdings experienced a 13 percent increase in half year revenue, on the back of a 103 percent increase in revenue from Associated Meat Packers, but Colcom Foods continued to underperform, incurring a 10 percent decline in revenue.

Overall Colcom Holdings earned an improved $2,2 million in half year 2013 compared to $1,2 million in 2012. Under listed beverage companies, DZHL posted a full year loss after tax of $2,15 million compared to a profit of $7,55 million in prior year.

DZHL incurred a $4,6 million once-off cost relating to retrenchment costs, and impairments of plant, equipment, and inventories. With these non-recurring costs now out of the way, DZHL is expected to return to profitability in 2014.

The mining sector had the worst full results for 2013 on the ZSE, with Hwange Colliery leading the pack after incurring a record breaking full year loss of $30,86 million for 2013 against a profit of $3,13 million in 2012.

In our opinion, a loss of such magnitude should be accompanied by the resignation of the Board of Directors and top management of the company, as it is clear from a minority shareholder perspective that they have failed dismally in their fiduciary duties.

Furthermore considering the fact that Hwange is a strategic company in this economy, such an abnormal loss must also be investigated thoroughly by the relevant authorities, as the prejudice to shareholders is just too big to ignore.

Falcon Gold also had a swing in fortunes after making a loss of $12,6 million as at  September 30, 2013 against a profit of $4 million in 2012.

Falcon Gold’s loss was mainly amplified by an $6,4 million impairment on Dalny Mine assets as a result of the downward pressure of metal prices, an increase in operating costs, and finally the lack of access to funding.

RioZim Limited had much improved revenue which was up from $72,4 million in 2012 to $105,7million in 2013. Because of weak gold prices during 2013, their gross margin was much lower compared to prior year, with the company benefiting mainly from a $2 million decline in finance costs and a profit from associate Murowa Diamonds of $823 000, resulting in an improved full year loss of $4.6million compared to $5,5 million in prior year.

In our opinion, with Empress Nickel Refinery now back online, it is only a matter of time until RioZim claws its way back to profitability.

The insurance sector is probably the most difficult sector to analyse because of the sector’s twisted accounting policies. First Mutual Holdings recorded a massive negative 83,39 percent drop in attributable profit from $9,8 million in 2012 to $1,6 million in 2013.

Regardless of this fact, the group went on to declare a dividend of 0.1cents. After a 2 percent increase in rental income, a marginal increase in average rentals per square metre

from $8,18 in 2012 to $8,25 in 2013, a decline in the occupancy rate from 78,9 percent to 76,4 percent, a decline in the collection rate from 91 percent to 86 percent, and finally a decline in rental yield from 8,6 percent to 7,9 percent.

The group went on to revalue their investment properties upwards by $8 million, which in our opinion, is too much and unrealistic given the current economic environment.

Furthermore, the main reason behind the company’s huge drop in earnings was a $16,8 million negative swing in shareholder risk reserves from a positive $12,3 million in 2012 to a negative $4,4 million. Fidelity Life’s total revenue declined by 9,51 percent to $24,6 million translating to attributable earnings of $2,1 million for 2013, compared to $3,8 million in 2012.

Nicoz Diamond, one of the best performing short term insurance companies, surpassed $30 million in gross premium written mark, but because of an increase in claims, operating expenses, and taxation, the group incurred a marginal decline in attributable profit from $2,4 million in 2012 to $2,25 million in 2013.

Other listed companies in the real sector of the economy also had a tough 2013, with companies such as Turnall Holdings having to impair $3,3 million in debtors resulting in a full year loss after tax of $2,56 million compared to a $1 million profit in 2012.

Lafarge Cement also registered a lower profit for the year at $3,49 million compared to prior year $4,6 million, owing mainly to a 3,3 percent decline in revenue to $67,6 million for the
year.

Zimplow Holdings’ revenue for 2013 improved by 34,2 percent to $39,9 million but their operating profit was down 85,3 percent to $348 806.

On the back of a $1,2 million property fair value gain, Zimplow managed to achieve an attributable profit of $497 900 in 2013 compared to an $812 754 loss in 2012.

TSL Limited was amongst the few solid performers in the real sector of the economy after earning a full year profit of $6,8 million against $5,5 million in prior year.

TSL was aided by a $3,3million fair value gain on their investment properties, but justifiably, after they had invested heavily in repairs and maintenance resulting in an increase in third party tenants to 25 percent.

Zimpapers Limited also had a much improved 2013 after growing its revenue by 8,45 percent to $44,9million, resulting in a 761,86 percent increase in earnings from $62 186 in 2012 to $535 955 in 2013.

Overall the 2013 financial reporting season has generally not been good and looking at the deterioration of economic fundamentals during the first quarter of 2014, the outlook for a lot of companies is not looking promising.

The Zimbabwean Government needs to re-look at some of its economic policies in line with the recommendations put forward by the IMF, so that the economic situation does not deteriorate any further. Failure to address these pertinent will only yield another if not worse financial reporting season.

The two most important results on the ZSE namely Delta and Econet are yet to be published, and are expected to give the market direction depending on how they have performed.

From a technical analysis perspective, our view is that the market has the potential of declining to around 150 points depending on what set of full year financial results Delta and Econet produce.

Furthermore the reintroduction of the Government bond market will also provide additional competition for the equities market as large institutional investors may want to diversify their risk as well as meet prescribed asset thresholds.

However, despite the above facts, a bear market also provides opportunities for investors to buy blue chip companies at huge discounts to their fair values.

Furthermore there are also companies that incurred once-off costs in 2013, that might bounce back into profitability in 2014 regardless of the economic environment.

Recovery stocks will also be available for the picking; therefore opportunities will always be there on the market for the intelligent investor.

Upon the conclusion of the 2014 Article IV Consultations with the Zimbabwean Government, the IMF highlighted that to reverse the current undesirable economic downturn, the country must pursue strong macroeconomic policies such as, the building up of fiscal and external buffers and increasing budgetary resources going to non-personnel related spending, the implementation of structural reforms to foster investment, improve the business climate, and strengthen governance and institutions, and also through increasing the transparency of the minerals regime.

• This article was written by Zimnat Asset Management for FinX.