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Farai Murambiwa Business Correspondent
Powerspeed released a pleasing set of financials for the period ended September 30 2013, buoyed in the main by the transformation of the company from a manufacturer and wholesaler of electrical products to a general hardware retailer. The move was inspired; Powerspeed which faced continued contraction is today seized with a challenge of managing its own growth.
The future looks bright, and management believe that should the momentum of the past three months be maintained, Powerspeed will at least double its net income.

Powerspeed’s history dates back to the 1970s when it operated as part of Mashonaland Holdings, then a diversified conglomerate with operations spanning the breadth of the Rhodesian economy.

When Zimbabwe liberalised its economy in the 1980s, the structure was deemed to be inefficient and the group was subsequently disbanded with Powerspeed being born out of the integration of a private company called Industrial Electric Holdings and all the electrical divisions of Mashonaland Holdings.

Today the group supplies a full range of electrical products and services across all sectors of the economy and has recently added retailing of general hardware to its portfolio of offerings. The retail segment now accounts for 50 percent of the group’s sales.

FY 2013 has been a year of transformation. New branches were opened in Victoria Falls, on Harare Street (Downtown Harare), Harare CBD, Chinhoyi as well as Gweru. Further to that, the Kwekwe, Msasa and Mutare branches were relocated to bigger premises, while the Bulawayo, Chiredzi and Masvingo branches were renovated and branded Electrosales.

This massive programme was tied down with a central warehouse connected to all stores via a state-of-the-art ICT system that had made stock movement very efficient and retail space optimisation possible.

Focus is now on consolidating these gains thereby making the system even more efficient so that further expansion will simply be a plug and play exercise.

The retail branch rollout might have been the highlight, but what management did with the non-retail entities is commendable and speaks volumes of the visionaries driving this business.

The engineering unit, which was previously the company’s flagship, has been transformed into special project implementation units, which, apart from satisfying specialised needs of clients, stands ready to offer support to the retail network.

Wholesaling to major projects and industrial clients is handled by this team which rides on the retail network in delivering to clients.
The effect has been that the transformation did not call for retrenchments, and most importantly the company retained its engineering skill base intact and can thus recommence operations quickly if the need arises.

Further, the special projects units are paying for themselves and will not need to be subsidised by the retail arm in future. Financial performance reflected these positive changes. Revenue for FY 2013 ended 2,1 percent lower than the same period in 2012 owing largely to reduced credit sales and unavailability of shop floors as the above-mentioned renovations progressed.

The group deliberately curtailed credit sales in response to the tight liquidity conditions in the market that have impaired the ability of some clients to pay.

Management disclosed that the few debtors that remain are high quality and have had an association with Powerspeed for a long time offering comfort that the debts will be honoured.

What the company lost in terms of sales, it however more than made up for it with fatter margins which added 2,4 percentage points to end at 30,4 percent. The sustainable long-term gross margin stands at circa 32 percent, but can evolve depending on contribution from the retail arm.

Hardware stores can achieve margins of up to 36 percent hence higher levels of contribution will lead to even wider margins for the group.

Opportunities to expand margins are available, notwithstanding the fact that they look good currently. Merchandise sourcing is one area that is receiving significant management effort.

Powerspeed is actively perusing avenues to cut the middleman and bring cheaper products to its clients while improving its margins at the same time.

The company has an order pooling arrangement with like-minded retailers in South Africa, which allows it to access bigger discounts from manufacturers.

Sourcing locally also presents opportunities for margin expansion. The company will use local suppliers where they can beat landed costs of imports or where they represent international brands and can supply at good prices.

Branch expansion came with a surge in operating costs which went up 9,5percent leading to a much larger decline in operating income (-16,6 percent). This is set to correct for FY 2014 and beyond when efficiency improve, while the group is able to fully utilise its retail network.

Powerspeed’s net finance costs declined from US$0,67 million to US$0,55 million ensuring net income could only decline 5,5 percent to US$0,65 million.

The company’s basic earnings per share worked out to US0,12 cents, 14,3 percent lower that FY 2012 out-turn.  The group’s balance sheet is solid. Total assets stand at US$16 million, funded by US$8 million of shareholder funds US$3,7 million loans and other non-interest paying liabilities.

The transformation of the group also brought changes to the balance sheet. Powerspeed managed to reduce debtors from US$2,8 million to US$1,8 million and applied the released cash to funding inventory.

This move is value adding, but there is again significant room for improvement. The group’s inventory (US$9,2 million) is funded only to the tune of US$6,4 million by suppliers and debt, the balance coming from the group’s own resources.

As the retail arm consolidates, it shall become possible that Powerspeed get enough credit facilities from suppliers that can cover its stock requirements. This will free more cash and enable the debt position to decline and more money to be retained for the benefit of shareholders.

Powerspeed looks geared for rapid growth over the next few years. Market capitalisation stands at US$7 million making the group one of the penny stocks on the ZSE.

Recently released financials leave the historic PER at 15x, which looks expensive, but when one considers management’s guidance for earnings to double, the forward PER of 7,5x looks undemanding for a company that at the onset of a growth phase.

It is therefore not remote to expect the market to exceed US$10 million over the next 12 months and the same strong growth to be registered beyond 2014.