News Column

Seed Co's Performance Okay but Maybe They Need to Do More

July 11, 2014



The Herald Business only carried a small part of Seed Co Limited financial results for the year to March 31, 2014. However, because of the various briefings during that particular week, there was no time to move the results comment. Just as a recap:

Group revenue for the March full year went up 9 percent to $120,19 million while gross profit improved by 6 percent to $53,71 million.

Operating profit was 18 percent down at $18,59 million and net profit decreased 5 percent to $11,83 million. The F14 margins remained flat at 45 percent due to write down off some old stocks that no longer had minimum standards of vigour and germination.

The overall gross margins are expected to increase to 49 percent from 45 percent in the new year as most of the old stocks were written down in the F14 financial year.

From the results, Seed Co is one company that still has a decent balance sheet in spite of its major shortcomings.

It is currently trading at a premium of its book value. However it is surprising that in spite all it has at its disposal the company is not making decent profits. The cash flows are in precarious state with a lot of outflows that do not add value to the business at all.

The company is expecting $28 million in new capital from its new equity partners but what is worrying is that the funds are going to be utilised for debt repayments.

The debt the company has failed to repay from its own resources. Such structural weaknesses are as a result of inconsistencies in strategy on the part of the management team.

One big problem which we have noted in Zimbabwe, Seed Co included, is that most of our managers when raising capital from shareholders or in the case of Seed Co from new investors usually go for the least amount of capital they can raise based on a hypothetical scenario with no scientific explanation.

Just plain wrong financial models run on an excel sheet! One wonders if they expect the money to miraculously expound and make the problems suddenly go away.

Why not go for the full amount in stages over a period of time? A round of funding with each round unlocking value for shareholders at each stage would be appropriate.

Seed Co requires in excess of $50 million to really un-pollute its balance sheet. Will the $28 million meet that requirement?

Is this an appropriate solution to the group's woes? Did they consider a lot of other factors within the operating environment that can suddenly change and make $28 million into nothing?

In the first place it was only a small amount of debt that triggered the sequence of events, and eventually the debt ballooned and spiralled out of control.

The majority of the countries the business operates in are sometimes volatile and sudden events like currency depreciation in Malawi or the liquidity crisis in Zimbabwe might significantly alter the company's results of operation and financial condition making a $28 million capital injection inadequate.

We have a host of other problems at the company which need urgent fixing. What value is there for investors if the company continues to perform just okay?

The company is like a lazy monster just guzzling expenses. Over the years the company has returned little to shareholders.

One dollar invested in 2009 is now worth about an odd 30c. Is this what shareholders signed up for? Even the coming on board of Limagrain is yet to unlock that value which has been dislocated thanks to delays by AICO to decide on the future of Seed Co.

The company's like-for like sales are completely pointing to a business that is failing to grow organically, there is basically no value creation for shareholders.

The Like-for-Like are actually falling. Earnings are falling each year, and yet we hear promises continually at AGMs and briefings.

But in all fairness we have heard those before, and honestly management now needs to convince investors and analysts about their ability to turn the ship around.

Last year Seed Co's management forecast growth in margins but somewhat it did not turn out that way but instead the margins were flat.

Given that miscalculated forecast should we believe them when they forecast that in the forecast period margins will grow to 49 percent from 45 percent? Not in any way. There have been just too many broken promises and miscalculations.

And then there's the template of the Government debt. . .! We would love to say more on this . . . but not now.

It is mystifying that the management at Seed Co send confusing signals about their strategy. Which really is which?

On one hand we have stock write downs because of bad seeds. On the other we have what they called a deliberate strategy to minimise stock levels for what they called stock optimisation. Now which was a result of the other?

Because this is now seems like a chicken and egg situation. So investors and analysts would like to pose some questions to the Nzwere-led management team.

How much in value were the stock write downs and are they any part of 23 percent deliberate strategy to reduce inventories (please note the interchange of the two; stock and inventory)?

How do you reduce inventories when your maize and cereal volumes are growing, and yet your sales are near flat (this spells price reductions of some sort somewhere)?

Maybe this "inventory optimisation" is somewhat of a little anecdote, to make some of these guys look as if they are some sort of technocrats other than jet setters across the continent.

In the past we have continually highlighted the cost structure of Seed Co. Focus is still in growing the business of which in our opinion cost rationalisation and containment is what is urgently needed at the company. Increasing the company's presence in countries with untradeable currencies which also happen to be unstable is not being wise.

Simply put, this is wrong allocation of capital. It would have been critical to reduce costs and then once that's in the bag then focus on growing the business.

We certainly hope that these kind of wrong decisions are not as a result of too much jet setting into those markets.

The decline in profitability is not expected and investors should not tolerate such performance. The management term might be given some benefit of doubt this time around, but next year there should not be any excuses!


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Source: AllAfrica


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