Chairman’s Statement and Review of Operations
COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD 29: FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
The Group adopted the Zimbabwe Consumer Price Index (CPI) as the general price index to restate transactions and balances as appropriate. Non-monetary assets and liabilities carried at historic cost have been restated to reflect the change in the general price index. Monetary assets and liabilities and non-monetary assets and liabilities carried at revalued amounts have not been restated as they are presented at the measuring unit current at the end of the reporting period. Items recognized in the statement of profit, or loss have been restated by applying the change in the general price index from the dates when the transactions were initially earned or incurred. A net monetary adjustment was recognized in the statement of profit or loss. All items in the statement of cash flows are expressed in terms of the general price index at the end of the reporting period. Comparative amounts in the Group financial results have been adjusted to reflect the change in the general price index. Financial statements prepared under the historical cost convention have also been presented as supplementary information. The auditor has not expressed an opinion on these historical results.
The CPI increased from 2,986.44 in June 2021 to 8,707.35 in June 2022, representing a 191.56% increase in the period under audit, this is compared to the Reserve Bank of Zimbabwe Auction rate which increased by 328.77% during the same period. Due to the disparities currently prevailing in the economy, significant distortions can occur in the preparation of inflation-adjusted financial statements in accordance with the requirements of IAS 29. Of significance in the inflation-adjusted financial statements is a net monetary loss of ZWL$ 7.04 billion in the current period. Despite this net monetary loss, the Headline Earnings Per share increased by 124%.
The indexed cost base and high interest rates had a significant impact on the Group’s financial results. Management will continue to adapt business units’ operating models to manage business growth and sustainability.
OPERATING ENVIRONMENT AND OVERVIEW
The global economy continues to suffer from a series of destabilizing shocks. After more than two years of the Covid-19 pandemic, the ongoing Russia/Ukraine war in Eastern Europe has had global effects on commodity markets, supply chain and increased levels of inflation that resulted in a slowing down of global economic growth. The Zimbabwean economy was not spared as it is also impacted by the spill-over effects of these geopolitical tensions. The second half of the financial year brought about concerns of instability as inflationary pressures were being felt on the back of the volatile exchange rate. Since June 2022, the Zimbabwe economy has witnessed shock therapy through the measures taken by fiscal and monetary authorities and the desired effects have materialized. The lack of clarity in the legislation relating to the currency of payment of certain taxes creates uncertainties and poses business risks especially in an environment where there are material disparities in the exchange rates.
In Zambia, the consumer demand remains constrained although the economy shows signs of recovery as evidenced by a stable exchange rate and declining inflation.
Malawi, on the other hand, continues to suffer huge forex shortages, with official currency exchange rate depreciating by 25% in last quarter. Some companies are either closing or downsizing.
FINANCIAL OVERVIEW
Commentary of the Group’s financial statements is confined to the financial information prepared under inflation adjusted terms.
The impact of improved business activity during the reporting period grew demand resulting in volumes above those reported in the comparative period. The Group reported revenue of ZWL$75.534 billion during the year to achieve a 32% growth compared to the comparative year. The revenue growth filtered into gross margin which increased by 92% on prior period. Operating expenditure increased by 57% on comparative period due to indexing of cost base to the US$. The Group posted an operating profit of ZWL$14.448 billion, representing a 149% increase on the comparative period. Profit before tax of ZWL$7.423 billion was reported which was 146% ahead of prior year. Basic Earnings Per Share and Headline Earnings Per Share both improved by 123% and 124% respectively.
The Group’s statement of financial position remained solid. Net borrowings increased by ZWL$1.85 billion mainly to support strategic working capital investments. The increase however had an impact on the results through high finance charges and this is being managed going forward.
The Group generated cash of ZWL$2.724 billion from operations which was up 148% from the comparative period. This translated into enhanced free cash generation enabling the Group to easily incur capital expenditure for the year totaling ZWL$2.01 billion. The Group’s free cash generation will enable it to execute exciting expansion opportunities like the 10,000-bed production facility.
SUSTAINABILITY REPORTING
The Group continues to apply the Global Reporting Initiatives (GRI’s) Sustainability Reporting Guidelines as part of its commitment to ensuring the sustainability of its businesses. The Group will continue to uphold these practices and values across its operations to ensure that long-term business success is achieved in a sustainable manner.
OPERATIONS
The main operating business units in the Axia Corporation Limited Group are TV Sales & Home (TVSH), Distribution Group Africa (DGA) and Transerv. TVSH is Zimbabwe’s leading furniture and electronic appliance retailer with sites located countrywide. DGA’s core areas of expertise lie in inbound clearing and bonded warehousing, ambient and chilled warehousing, logistics, marketing, sales, and merchandising services. Transerv retails automotive spares and accessories through retail stores and fitment centers to service the needs of its customers.
TV Sales & Home
Revenue growth of 38% to prior year was recorded during the year whilst volume performance increased by 8% over prior year. Year on year volume growth benefited from a consistent and broad product offering as well as successful market activation promotions rolled out during the financial year. Quarter four volume performance, however, was 8% below the comparative period as the June volumes and sales were below expectations due to the inconsistent pricing of goods in response to the unstable exchange rate which exerted pressure on pricing. The hiatus caused by authorities’ clampdown on currency rates has resulted in a proliferation of informal trading and grey imports.
Collections on the debtors’ book have remained solid. The debtors’ book growth, however, has continued to slow down in the last few months given the prevailing high interest rates. Management will continuously assess the business’ credit model to deliver affordable credit offerings to customers, in both local and foreign currencies.
The business increased its store network by opening a new store in Bulawayo. Plans are underway to enhance the retail store network which include opening new stores in the coming financial year coupled with upgrades to outlooks of existing stores to improve customer experience. Two new stores were opened in Harare in the months of July and August 2022. Volumes are expected to recover in the new financial year following the addition of a new home appliances and homeware distribution business at the end of the year under review.
As highlighted in the interim report, TV Sales & Home increased its shareholding in Restapedic from 49% to 60% effective 1 July 2021. An amount of US$860,000 was paid for this additional investment. This increase in shareholding enabled Restapedic to invest in a 10,000-bed production facility which is under construction in Sunway City, Harare. Significant progress has been made in the construction of the new bedding factory facility which is set to open in January/February 2023. During the year, Restapedic experienced intermittent raw material supply gaps attributed to delays in the auction payments which negatively impacted the imports supply chain resulting in a downturn in volumes during the fourth quarter. The bedding business attained revenue growth of 33% and marginal growth on volumes compared to prior year.
Revenue and volume performance for, Legend Lounge, the lounge suite manufacturing business increased by 212% and 231% to the comparative period respectively. The expansion of Legend Lounge’s manufacturing capacity remains a key focus with sustained investment in new product development as well as re-engineering of the entire lounge suites range to enhance customer experience.
Distribution Group Africa (DGA) – Zimbabwe
Year to date volumes were 18% below the prior comparative period but fourth quarter volumes were 3% above comparative period.
Effective 1 July 2021, DGA Zimbabwe acquired a 50% stake in National Foods Logistics, a warehousing and distribution company that provides National Foods Limited with its warehousing and distribution requirements. The purchase and funding consideration for this transaction was US$1.1 million. The transaction was approved by the Competition and Tariff Commission “CTC” on the 4th of March 2022.
The business continues to safeguard and grow shareholder value by embarking on projects that generate positive cash flows and achieve the required returns. The business remains poised to exploit opportunities from economic activities in the informal business sector that will not require extended credit terms.
Distribution Group Africa – Region
In Zambia, the consumer demand remains constrained although the economy shows signs of recovery as evidenced by a stable exchange rate and declining inflation. Year to date volumes and revenue decreased by 15% and 3% respectively compared to prior year owing to some disruptions in supply chain. The strengthening Kwacha enabled the business to take advantage of Forward Exchange Contracts thus enabling pricing at reasonable rates. The business increased its profit after tax by 257%. Management’s focus is on business growth and new agencies will be targeted and evaluated.
Malawi continues to face shortages of foreign currency and the Malawian Kwacha depreciated by 29% during the reporting period. Despite the foreign currency challenges, the business witnessed a 46% growth in volumes which resulted in a 103% increase in revenue over the comparative year. This was primarily a result of the addition of two key distribution agencies in the first quarter of the financial year which led to improved profitability. Management’s focus is on managing foreign suppliers and exploring ways to generate foreign currency to settle foreign suppliers.
Transerv
The results of Transerv were disappointing as profits achieved were below expectation. The business experienced severe challenges in pricing and obtaining foreign currency to always ensure adequate stocking levels. Volumes increased by 7% to the comparative period which resulted in improved revenue. Management will continue to focus on improving revenue generation, obtaining the right stock mix and managing the operating costs to ensure that the business improves its profitability.
The business increased its store network throughout the country with the aim of bringing convenience to the market and providing an excellent customer service. New retail branches were opened in Chiredzi, Victoria Falls and Zvishavane as well as new fitment centres in Groombridge, Avondale (formerly Autocycle) and Chikwanha in Chitungwiza. Plans are underway to open at least six new stores during the coming financial year as part of the drive to increase footprint throughout the country to ensure that customers enjoy shopping convenience.
IMPACT OF COVID-19
During the second half of the financial year, business operations were conducted on a ‘business-as-usual’ manner across all economic sectors as the economy continues to recover from outbreak of the Covid-19 because of the sustained reduction in new cases.
The Group remains focused on ensuring the safety and health of its employees, customers and other stakeholders and thus, will continue to implement and observe COVID-19 guidelines approved by the World Health Organisation and the Ministry of Health and Child Welfare, throughout its operations. The Group applauds the Government on the nationwide vaccination program for COVID-19 and has been encouraging its employees to make use of this opportunity to get vaccinated.
At present, the financial status of the Group remains healthy, and the impact of COVID-19 has not created any issues from a solvency or liquidity perspective. The Group remains resilient and determined to withstand the risks associated with COVID-19.
PROSPECTS
The increase in prices of key inputs due to the ongoing Russia/Ukraine war and the low 2021/22 agricultural output, pose risks to the economic outlook. The operating environment remains challenging and both fiscal and monetary authorities face a huge task of continuously addressing macro-economic adversities on the back of an unfolding global recession. We remain hopeful that progressive and consistent policies will be adopted and that they will be aimed at building confidence and promoting stability in the market.
The warranted stance taken by both fiscal and monetary authorities will assist in stabilizing the exchange rate although this will tend to dampen demand in the short term. This position taken by authorities helps to counter arbitrage gap which will have positive effects on the entire economy. The Group, however, maintains a positive long-term view and will continue to seek opportunities to preserve and grow stakeholder value. With the current strong Group balance sheet, the Group’s business operations are well set to weather the challenging operating environment across all its operating regions.
The Group’s management teams will continue to optimally manage gearing levels, with focus on the amount and cost of debt deployed across the Group. There will be ongoing focus on the execution and completion of the bedding and lounge suite production facilities. New retail stores will be added to the current network whilst optimizing major distribution agencies in Zimbabwe and the region will continue to be an area of focus.
DIVIDEND
Based on the historical results, the Board has declared a final dividend of ZWL$1.10 (ZWL 110 cents) per share in respect of all ordinary shares of the Company. This brings the total dividend paid for the year to ZWL$1.76 (ZWL 176 cents). The final dividend is payable in respect of the financial year ended 30 June 2022 and will be paid in full to all ordinary shareholders of the Company registered at close of business on the 14th of October 2022. The payment of this dividend will take place on or around the 18th of October 2022. The shares of the Company will be traded cum-dividend on the Zimbabwe Stock Exchange up to the 11th of October 2022 and ex-dividend as from the 12th of October 2022.
The Board has also declared a final dividend totaling ZWL$30 million to the Axia Employee Trust (Private) Limited which will be paid on or around the same date.
APPRECIATION
I express my sincere gratitude to the Board of Directors, executives, management and staff for their ongoing efforts during the year under review. Their commitment, despite the challenging operating environment, is greatly appreciated. I also take this opportunity to thank the Group’s valued customers, suppliers and other stakeholders for their continued support and trust.
L E M NGWERUME
Chairman
28 September 2022
