A Review of the recent December 2009 Financial Performance of selected companies in Zimbabwe - Chapter 1

Introduction
This reporting season has seen a mixed bag of results from both listed and unlisted counters in Zimbabwe. The truth is that many companies are trying to get the basics right. These includes capitalisation, strategy implementation, working on the road to IFRS compliance and managing the risks associated with working in a multicurrency environment.

There is evidence that some financial sector players still have capitalisation challenges and have posted losses at the back of a subded trading environment.
Capital raising and working capital will remain a major challenge with local investors and institutions hoping to hold on to their shareholding as much as possible and as long as possible. However most will have to relinquish their comfort zones and move fast albeit in an environment of limited liquidity and financial engineering to remain relevant on the shareholding matrices of the various organisations.
ROA in the banking sector is low but the insurance sector seems to be performing well in terms of sweating shareholder capital. The returns in the banking sector seem to reflect the conservative lending attitude calibrated to the country risk profile and subdued level of economic activity in the economy.

TN Holdings
The Holding company posted a loss of USD1,1m. This is at the back of expenses incurred in bankrolling a banking project and retaining staff.

The group seems to have taken the FBC Holding Group strategy of taking over noncore business onto its balance sheet through the takeover of Tedco Company. We will wait to see how the synergy effects of this reverse takeover will takeoff.

The financials still reflect the IFRS challenges bedevling the companies of Zimbabwe. These are the redenomination of share capital, determination of deferred tax, impairment losses and devaluation of property, plant and equipment and investment property.

The Nominee Balance sheet of the TN Asset Management with a balance sheet value of USD27,9m is quite significant though there is need to increase the share capital of the Company to match the signicant risks associated with a growing nominee balance sheet.

Lafarge Cement Zimbabwe Limited
The Cement company has held its own in the recovery process of the country even though activity in the construction sector is still subdued. With profit at USD5,2million the company did well.

The cash resources however at USD620k are not so healthy reflecting the working capital challenges of many local companies. This is further reflected by the Borrowings of USD1,6m.

The exchage loss of USD0.4 million reflects the significant exchange rate risks affecting both liabilities and assets of companies.

Risk management will remain a priority for many boardrooms going forward.

TA Holdings Limited
The financial results of the group have shown the positive impact of a diversified group and surely Shingi Mutasa and his investment group are doing well. With a strong balance sheet of USD162m there is evidence that the group has grown over the years and value is being created especially in the markets outside Zimbabwe i.e. Botswana, South Africa and Nigeria.

Its interesting that the group has made an investment in PG Group and this shows its interest in the construction sector.

Unlike exchange translation losses incurred by ABC Group, TA Holdings had positive translation exchange gains of USD3.2million which augured well for the total comprehensive income for the group. This goes to show the impact of prudent exchange rate risk management.

Total Comprehensive Income after tax stood at USD710 532. The profitability of the group was impacted negatively by the loss of USD2m arising from Zimbabwean operations and associated companes namely Sable Chemicals and Cresta Zimbabwe. Cresta was affected by all time low occupancy rates standing at 40% and revenue per room (REVPAR) of USD37.3 which is quite low given that the breakeven hotel rates should be around USD50-USD70.

Cresta’s performance does not compare favourably to a sister associate company, Cresta Marakanelo with REVPAR of USD59 and occupancy rate of 67%. In the hotelling business it is all about volumes and one hopes Cresta in 2010 will do more to boost its Zim operations especially with the World Cup on the shores of SA already!

The cash resources of the group are quite healthy with the company sitting on USD11.8 million of cash resources of which USD11.7million (more than 90%) are outside Zimbabwe. This shows that the company is still cautious of the sovereign risk of the parent country Zimbabwe and would want to manage this risk going forward.

Stanbic Bank
Nothing beats a sound bank with a sound balance sheet! This is the case of Stanbic Bank, modelled around the basics of banking – mobilise deposits and deploy in the interbank market and loans to various sectors. There is little financial engineering and fancy financial instruments on the bank’s books and yet the company posts what seems to be the best profit so far of USD6.7m from the banking sector results.

Most depositors such as NGOs and embassies bank with Stanbic and this seems to be reflected in the strength of the balance sheet standing at USD201m. This translates to ROA of 3%.

The bank is adequately capitalised with Tier 1 Capital standing at USD18.5m way above the minimum prescribed capital of USD12.5m. The shareholders do not have to do much and of course the the bank benefits from centralised technical support from Standard Bank in areas such as credit and risk.

The synergies with the parent group are also reflected in loans amounting to USD2.5m which were forgiven by Standard Bank group, further boosting the group’s profits and lowering its gearing ratio.

This shows that the parent company sees value in maintaining its value in Zimbabwe. Unlike MBCA which did not post good results, Stanbic Bank has prooved that one does not need to do much to sell an established brand such as Stanbic.

Local banks should know that depositors are now looking at the soundness of the balance sheet, good service and risk management systems before depositing funds in any institution. The funds under custody of USD167m further reflect the confidence clients have in the soundness and reliability of the financial institution.

Renaissance Financial Holdings Limited
If one thinks, TA Holdings is a monster of a group, then pause for a moment and look at Renaissance Financial Holdings Limited. With a balance sheet of USD173m, slightly more than USD162m of TA Holdings, the group has done far much better in terms of profitability with USD9.2m total comprehensive income attributable to non-controlling interests and USD1.2m to equity holdings of the parent.

A closer analysis of the segment performance reveals that much of the profit was generated by the insurance arm of the group, Afre Corporation which posted USD31.6m total comprehensive income for the year.

Renaissance Capital in Uganda continues to post losses and one hopes this business segment was a worthwhile investment given that Uganda still has its civil unrests affecting parts of the country. The other business segments, RFHL, Stock broking and renaissance merchant bank posted losses at the bank of a challenging environment for a financial services sector not involved in mobisiling cheap deposits.

The merchant banking model is facing challenges in Zimbabwe given a financial market without much depth and lackingz financial engineering. This has seen merchant banks such as Interfin looking at penetrating the retail banking sector through the planned takeover of CFX bank.

Nicoz Diamond
The insurance company posted a humble USD1.8m for the year ended 31 December 2009. The balance sheet stood at USD17.7m reflecting the USD4m rights issue concluded in December 2009.

Given the small balance sheet, the ROA is obviously quite high standing at 10.2% which shows management is doing well to sweat its capital in the face of limited resources.

Turnal Holdings
The total comprehensive income of USD8.1m was largely driven by revaluation gains in property plan and equipment. This non- cash gains were reflected in the cash and cash equivalents balances of only USD996k.

The performance of this company will be closely linked to the performance of the construction and housing sectors. As the economic recovery continues, the group is likely to post better results. However the profitability of the company is commendable with ROA standing at 24.7%.

Fidelity Life Assurance of Zimbabwe
Fidelity Life stood its own in this reporting season posting total comprehensive income of USD2.3m with a balance sheet size of USD15.9m translating to ROA of USD14.5%.

The group’s performance was largely sparred by good performance of Fidelity Life Assurance of Zimbabwe contributing USD2.1m (91.3%) akin to the Afre Corporation performance although on a much smaller scale.

Zimbabwe Actuary Consultants only contributed USD5k to the group profits and in my view is a reflection of the skills gaps in qualified actuaries in the local market.

Dony Mazingaizo has an interest in Financial Management & Financial Reporting

FBC Holdings End of Year 2009 Audited Financial Results

For a bank that i worked for, one would naturally want to see how it is performing. The bank is obviously driven by entrepreneurs who are looking at the slightest opportunity to create value for its shareholders.

The profit results were largely a reflection of 2 main things, low interest income as reflected by the high cost to income ratio of 80% and once off gain of USD4,8m on acquisition of turnall holdings limited which was a conversion of debt to equity. This gain had a favourable effect on the profit of the group.

The disposal of non core properties and equipment also created value for the group translating positively on the cashflows too. This reminds me of the Path to Growth (PTG) initiative that was followed by Unilever some time ago to create value through disposal of non-core operations. Such strategies are obviously needed for survival and unlocking shareholder value.

FBC Building society still reflects the challenges of the mortgage market with disposable incomes of households still limited to fund house development. However the proposed recapitalisation of the society should put it on a solid footing for the future.

One remains to see how the Turnall investment will be handled as it is definately non-core but this could herald a diversification stragegy on the part of the group.

The stragetic alliance of the group with NSSA was reflected in the board with the appointment of Mr Matiza to the group board. NSSA continues to be a significant shareholder in the group with significant stake in FBC Building Society.

There was no impairment of investment properties showing that there was no excessive valuations done in the 2008 periods and the marginal fair value gain of USD12K had a positive contribution to the total income of the group. Other companies have been posting impairment losses on properties.

Operational Risk remains a major concern for the bank as it is for many banks in the country which have been affected by roberries and thefts. However the bank seems to have put in place strategies to curb further losses by having staff rotations and Operational Risk Assessments.

The country is behind Basel II implementation targets as many other jurisdictions such as South Africa have already rolled out Basel II. With Basel III already being mooted on the back of revisions to Basel II, one can only hope that the implementation of th Capital Accord is fast-tracked so that the country keeps pace with the global financial and prudential developments.

FBC has however already implemented the piecemeal guidelines on Basel II outlined by Reserve Bank.

One sincerely hopes the stock market will reflect the performance of the bank as the shareprice has been heavily discounted over the years trailing the likes of NMB Bank which has a very small balance sheet compared to FBC Holdings!

Dony Mazingaizo has interest in Financial Management and Financial Reporting

ABC Holdings Results for YTD 31 Dec 2009 showing strong growth

The results of ABC Group - a regional financial institution registered in Botswana have shown significant growth with the balancesheet growing by 11% which would be above the growth in GDP in many of the countries where the group has a footprint. However, the results show the effect of the global recession and credit crunch that affected its Zambian operations. I think this might necessitate a need to invest in fresh blood in the employees of that country!. However this also shows that credit risk and risk management in general will remain key issues for the banking industry going forward.

Group total comprehensive income was affected by revaluation losses on owner occupied property of USD5.4K . The investment property also had write downs of BWP14.6K . This reflects the stress in the property market prices in the region and Zimbabwe in particular.

Exchange rate risk is also reflected in the exchange losses on translating foreign operations with USD11.02K knocking the total comprehensive income thus weighing down on the total comprehensive income which reflects a total loss of USD5.7K.

The cashflow which is the lifeblood of any business showed positive changes over the 2 years with an increase of BWP338K registered over the period. The once off disposal of associate registered a profit contributing positively to the cashflows.

Segmental results show interesting growth in Mozambique and Botswana and these seem to be jurisdictions of promise in the SADC region despite the Diamond prices that remained depressed in 2009.

The Group Chairman, an astute entrepreneur and engineer, Mr. Chdawu resigned after 9 years serving the company and one hopes for continued growth in the Bank into a true pan-african entreprise

Dony Mazingaizo has an interest in IFRS and Financial Management

Black Economic Empowerment and the Future of Zimbabwe

I think in the minds of many, there is concensus on the need for black economic empowerment in Zimbabwe, also called BEE in South Africa. The real challenge seems to be on the operational modadilities.

In addition if one looks at the case study of South Africa, one realises that BEE is more than just share ownership, but looks at other broader equity issues such as preferrential procurement, and skills training. In addition the BEE environment in South Africa in cemented by codes which have gone through periods of ammendments largely due to evolutionary consultations done with other stakeholders.

There is more that can be done by the government of Zimbabwe to create an enabling investor climate during this recovery period while balancing off the need for economic participation by locals.

Dony Mazingaizo, has and interest in IFRS and Financial Management

Review of 2010 Budget for Zimbabwe - Whereto from Now?

The Finance Minister, Hon. Tendai Biti, had a challenging and unenviable task of balancing growth prospects and current expenditure requirements. A challenging task indeed given the difficuties in mobilising funds to finance the anticipated/projected budget deficit of USD810 million. One shudders to think wether multilateral and bilateral support from insitutions and donors will be mobilised to fund part of the budget let alone the deficit given revenue inflows of USD1.4 billion.

A balancing act of presenting a pro-poor budget and need to stimulate growth. There were good concessions and stimulus though, including a vote to women and youth empowerment, PAYE Relief and Bonus of USD400, reforms to VAT and corporate tax reduction to 25%, reduction on customs duty for small vehicles albeit at the expense of the local motor manufacturing and dealer industry.

The proposed reforms to tax legislation is welcome but one hopes that this will be supported by reforms to the companies Act which is long over due. There is however confidence that the budget is a starting point beyond which we expect in 2011 to have more allocations to Capital Expenditure so that a mimimum of at least 20% is allocated to infrustructure.

There is however little incentive for people in the dispora right now to come and invest as the investment climate is not yet condusive much weighing down on the GPA developments. The same applies to donors who are literally waiting on the sidelines to see how things will proceed going forward.

I think the hope factor will drive the country and a lot of optimism too. A lot of attention on the key economy enablers such as water, transport , and electricity will go a long way in ensuring (a) availability and (b) competitively priced energy and water inputs into the manufacturing process. Already the signing of BIPPA with South Africa as a positive indication and as remuneration levels are adjusted to the region, skills retention will ensure the much needed skills for the local industry.

Like Martin Luther said " I have a dream..." one hopes politicians will retain their political daggers and focus on reforms especially with a key focus on the legistlation reforms, public finance management systems, parastatal reforms and clear debt clearance strategy to ensure that we are on a clear path to recovery. I am not a proponent of having Zimbabwe as part of the Highly indebted Countries as the structural adjustment programmes that come with such designation can be disastrous. History is litterd with such failures!

As south africa prepares for the World Cup in 2010, one hopes as a country we will benefit from the positive spin offs from that country but both government and the local industry have been slow in strategic positioning to reap the benefits of this event or is it much left for a little late!

We will be judged by future generations by what we could have done better to heal the world and make it a better place.

Dony Mazingaizo has an interest in IFRS and Financial Management

EMERGING IMPACT OF RISK MANAGEMENT ON TREASURY

Introduction and global context
The financial manager is faced with 3 major decisions, the dividend decision, investment decision and financing decision in an effort to increase shareholder value. The financing decision is the focus of treasury management.

The Subprime crisis that hit the United States of America in late 2007 to 2009, which later deteriorated into a global recession has resulted in many questions being asked and solutions being sought to come up with long term solutions to avert such a disaster in future.

In assessing the reasons for the Subprime crisis, among other factors, the failure of sound risk management practices in financial institutions[1] and modelling challenges was identified as key[2].

One of the major areas of focus lately has been on risk management and how accountants can make a contribution to risk identification and management[3].

Risk management is the identification and evaluation of actual and potential risk areas as they pertain to the company as a total entity, followed by a process of either avoidance, termination, transfer, tolerance (acceptance), exploitation, or mitigation (treatment)of each risk, or a response that is a combination or integration.

The ongoing recession has seen efforts towards recovery with liquidity injections, IFRS changes and efforts towards regulation of investment banks, hedge funds and credit rating agencies which were identified as key participants in the credit crunch.

Developing countries such as Zimbabwe have not been spared from the global recession with the liquidity crunch affecting the ongoing efforts towards recovery, recapitalisation of industry and infrastructure development.

Small organisations which previously did not have any risk management policies and procedures are being challenged by the environment to come up with their own and demystify risk management[4].

In Zimbabwe, the adoption of a multicurrency environment in early 2009 with the United States Dollars, Rands and Pula being some of the preferred currencies has resulted in companies refocusing their attention on risk, treasury management and internal controls in order to minimise loses and maximise the benefit of available working capital at the back of limited credit being offered by local banks and offshore markets.

Risk Management
Financial management principles assumes that businesses and their custodians are naturally risk averse and hence the need to minimise exposure to whatever risk as much as possible.

Enterprise Risk Management (ERM) is defined as comprehensive risk management that allows companies to identify, prioritise, and effectively manage their crucial risks. An ERM approach integrates risk solutions into all aspects of business practices and decision making processes[5].

There are essentially four key pillars of a sound risk management framework namely:
adequate board and senior management oversight;
sound risk management policies and operating procedures;
adequate management information systems;
strong risk management, monitoring and control capabilities and adequate internal controls.

Although some institutions address risk as part of their strategic plans, governance structures and project-specific business proposals, best practice in risk management in any institution requires risk to be enshrined in an Enterprise Risk Management (ERM) Policy or Framework championed by the Chief Risk Officer or risk department and approved by the board of directors.

In smaller organisations without stand alone risk functions, the CFO is responsible for monitoring and managing Enterprise Wide Risks.

Broadly considered, an ERM policy may identify the following:
responsibility of the board towards risk;
responsibility of management towards risk;
risk tolerance and appetite of an institution;
expertise required;
training needs;
management information systems (MIS) – addressing security, integrity and availability of information;
monitoring and reporting;
codes of conduct;
internal controls and segregation of duties;
exchange control regulations;
risk categories relevant to the organisation;
risk limits;
disaster recovery;
business continuity planning;
role of internal audit;
role of risk department; and
risk mitigation.

An ERM policy identifies the main risks that an institution is exposed to. Some of the major enterprise wide risks are:
strategic risk;
market risk;
operational risk;
legal risk;
reputation risk;
liquidity risk;
political risk;
technological risk;
sovereign risk;
credit risk and
compliance risk.

These risks are not cast in stone and an organisation needs to continuously assess emerging impact of other risks and lately environment risk has been a major risk given the focus on green reporting and environmentally friendly business practices.

Risks relevant to treasury management
Risk management in inextricably linked to treasury management and all organisations not only financial institutions have had to embrace sound risk management practices and in some cases revise the existing controls.

In practice, addressing risk management with relation to treasury can be done in the ERM framework of the organisation or through separate treasury management policies. The specific risks that are related to treasury include the following:
currency risk;
interest rate risk;
settlement risk;
concentration risk;
commodity risk;
equity risk;
credit risk;
fraud risk;
liquidity risks;
systematic risk;
systemic risk; and
off-balance sheet risk.

These risks can further be broken down into specific risks that are relevant to an institution for example in financial institutions; interest rate risk has the following sub-risks:
repricing risk;
basis risk;
yield curve risk; and
optionality risk.

Any sound guidelines on treasury related risks should focus not only on identifying the risks but on the following:
1. definition of risks;
2. potential impact assessment;
3. direction of risk/probability;
4. monitoring tools; and
5. mitigation/hedging strategies.


Treasury and internal control environment
The internal control environment for any treasury function needs careful consideration. An internal control environment encompasses the overall attitudes, awareness and actions of senior management towards internal controls.

Essentially the board of directors sets the tone of the internal control environment by approving and amending key policies and procedures in line with changes in the operating environment.

In a financial institution, there is need for segregation of duties with clear separation of front, middle office and back office to avoid the famous Nick Leason effect. A code of conduct guiding operations of treasury officers is key is this regard.

The Barings crisis and recently Societe Generale debacle continue to underscore the need for sound internal controls and secure Management Information Systems (MIS) which cannot be manipulated to cover losses.

Centralised treasury
The liquidity crunch being experienced by many companies because of the global recession has resulted in a key focus of centralised treasury to maximise deployment and investment of available cash resources. This is essential for holding companies with subsidiaries and plays a role in having a coordinated management to the risks associated with treasury.

Already developing countries are harnessing the advantages of establishing centralised treasury Departments. Big companies in Zimbabwe such as Delta Corporation, CFI Holdings, and African Sun have centralised treasury Departments to manage their working capital.

The key functions of centralised treasury are:
funding management;
liquidity management;
investment management; and
currency management.

Identification of the key risks associated with these functions and actively managing them is very important for any organisation and cannot be left for specialised personnel alone, accountants need to play a key role.

Risk Management and Financial Instruments Hedging
From an IFRS perspective, IAS 39: Financial Instruments: Recognition and Measurement requires institutions to make use of hedges if, among other things:
they are highly effective; and
in line with a documented hedging policy[6].

This further highlights the need for an ERM Policy/Framework to underpin any treasury activities undertaken by an organisation.

Risk management and King III
The King 3 guideline on corporate governance, developed by the Institute of Directors of Southern Africa to replace King 2 effective from March 2010 reinforces the importance of risk management and highlights:
the board’s responsibility for risk governance;
management’s responsibility for risk management;
risk assessment;
risk responses;
risk monitoring;
risk assurance; and
risk disclosure.


Conclusion
Risk management in general, and its impact on treasury in particular, has received growing attention due to the sub prime crisis and the liquidity crunch.

One key lesson emerging is that there is need for institutions irrespective of size to formalise and review their risk management structures in line with best practices.

King 3 Code of Corporate Governance actually recommends that the board of directors should review the implementation of the risk management plan at least once a year.

The benefits for organisations are immense including low insurance premiums, low exposure to risk, reduced shocks and contagion effects to systemic risk and reduced compliance costs to regulatory requirements (especially for financial institutions).

Robust risk management also ensure reduced allocations of capital for operational, credit and market risks in line with Basel II for financial institutions.


[1] ACCA Policy paper, September 2008 – Climbing Out of the Credit Crunch
[2] Bank of International Settlements (BIS) November 2008 – Supervisory guidance for assessing banks’ financial instruments fair value practices.
[3] ACCA & CFO Research Services, August 2009 – The CFO’s new environment
[4] ACCA July 2009 – The Risk Register, Basic Principles for Small Companies
[5] King Code of Governance for South Africa, 2009, Institute of Directors of Southern Africa.
[6] IAS39, Financial Instruments: Recognition & Measurement, paragraph 88

Dony Mazingaizo, ACCA has an interest in Financial Management and IFRS

Capital Appraisal - Adjusted NPV and Adjusted IRR

The sole objective of capital appraissal is to identify projects that add to shareholder value/shareholder wealth.

Its interesting to note the developments that have taken place in investment/Capital appraisal to cater for the deficiencies in the traditional appraisal methods such as NPV and IRR. With Adjusted NPV, projects that could be declined because of negative NPV can, with further analysis of the tax shield effects show overal positive NPV. Tax shield from interest rate is a critical component in financial management. This analysis can also assist financial managers to derive the Weighted Average cost of capital (WACC) where such information as the target capital structure is not readily apparent from the financial strategy and financial information of the business.

In environments with high tax rates such as Zimbabwe (30.9% corporate tax), the tax shield effect would require serious consideration in investment appraisal.

With the target growth rate of 4% (Ministry of inance) /3.7% World Bank for 2009, one would expect capital projects to slowly come back to the market and financial managers would have to advise management appropriately on any capital investments by due investment appraisal and taking into account qualitative & risk factors such as sovereign risk.

Dony Mazingaizo has an interest in IFRS and Financial Management