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Axia overstocks inventory to checkmate supply bottlenecks as profit dips

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Axia Corporation chairman, Luke Ngwerume

AXIA Corporation says delays in foreign payments and securing import permits has prompted it to take pre-emptive action to secure additional inventory which has resulted in a change of its working capital profile formation.

Group chairman, Luke Ngwerume, in a statement accompanying the company’s financials for the six months ended 31 December 2016, said the company accrued increased working capital as a result of a trade and receivable balance which grew remarkably in the region, distribution, furniture and electronic appliances retail operations, due to an investment in payments to suppliers to secure supply of inventory.

“The group will continue to aggressively grow inventories to mitigate against the ever present risks surrounding securing import permits and making foreign payments,” he said.

During the period, inventories grew 24,49 percent to US$40,26 million, compared to US$32,41 million same period in prior year; while trade and other receivables grew 11,24 percent to US$48,64 million from US$43,72 million in 2015 during the same period.

Group revenue increased 14 percent to US$119,53 million compared to US$104,46 million in prior year, largely driven by revenue growth in TV & Home and Distribution Group Africa Zimbabwe. As a result, the group achieved an operating profit of US$11,15 million and a profit before tax of US$10,69 million.

In terms of operations, TV Sales & Home achieved a 54 percent growth in units sold resulting in a 33 percent growth in revenue largely spurred by growth in cash sales. Ngwerume said the business’s upturn in trading, which started in April 2016, has continued.

During the period, the instalment’s debtor’s book increased 12 percent over the comparative period and Ngwerume said the quality of the book remained good throughout the period. “While the business has increased focus on locally manufactured good, foreign payments remain a challenge not only for the business imported products, but also for its local suppliers for their imported content.

“The business has however managed to maintain consistent supply of products by forging various proactive relationships with its merchandise and service provider’s partnerships,” he said.

Ngwerume said TVSH continues to grow by taking advantage of available opportunities, adding new store in Mutare in December and committing to three new stores in Harare during the second half of the year.

Transerv suffered a seven percent decline in revenue due, to challenges on supply of key stocks, particularly batteries in the first quarter due to delays in obtaining import permits.

The situation, according to Ngwenya, has however started to improve towards the end of the reporting perio; adding that, notwithstanding the controlled overheads, reduced margins from lost sales and transaction costs resulted in a drop in operating profit of 29 percent compared to prior year.

Distribution Group Africa Zimbabwe, despite issues of import permits and settling foreign suppliers, performed well, recording volume growth at 32 percent, resulting in a 23 percent increase in revenue and this was largely attributable to the acquisition of new distributorship agencies during the period.

Gross margin was nine percent lower while operating profit was down 12 percent from prior year as a result of the rental income that is no longer being accrued from Spar Distribution after it was sold by Innscor Africa.

Distribution Group Africa Region posted a subdued performance with turnover and operating profit declining 11 percent and 57 percent respectively from prior year mainly attributed to harsh economic environment in Zambia and Malawi economies.

Looking ahead the chairman said the group remains confident it will continue operating profitably despite a tough trading environment. Ngwerume said the current environment will necessitate the group taking action in managing resource allocation proactively, settling high risk foreign creditors and managing suppliers of goods and financial services with regards to efficient sourcing of and payment for inventories.

Our Thoughts on Axia

Although the diversified company’s revenue for the half year to December 2016 increased by 14 percent to US$119,5 million, compared to the same period in the prior year; it was 40 percent down compared to the half year to June 2016. Firstly, this is a period when the monitoring of imports quality by Bureau Veritas, which was contracted by government, started to gain momentum. Secondly, it is also when government introduced SI64 which controls the importation of goods that can be locally manufactured. These two developments, among other factors, had their costs and benefits to the operations of Axia.

There company experienced a drop in profitability and going forward management has to be more innovative in terms of crafting efficient methods of optimally exploiting the current business and macroeconomic environment to generate dynamic returns. The decision by the Group to secure additional inventory owing to the delays in foreign payments, while it has the advantage of getting discounts associated with buying in bulk, poses a challenge of storage capacity and the costs of warehousing the stock. It also implies incurring additional insurance costs and might also require additional security to guard against pilferage. Tying too much cash in inventory might also affect the Group’s liquidity status.

Transerv remains a problem child as its 29 percent drop in operating profit compromised the overall profitability of the group. TV Sales and Home was the main anchor of the Group, posting a volumes growth of 54 percent and a revenue growth of 33 percent. This growth, in our view, was mainly as a result of demand shift, not demand growth. Going forward, demand is expected to gain relatively as the year progresses, spurred by sales of tobacco and other agricultural activities; although inflation will creep in to eat into the disposable incomes of people and deplete their real spending levels. TV Sales and Home is however likely to benefit from the gaining demand. The projected increase in the industrial capacity utilisation might also increase business for the Group’s subsidiaries such as DGA and Transerv.

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