Meikles addressing succession issues as H1 profitability rises


HARARE (FinX) – Meikles says it is currently addressing the issue of succession of executive management and the appointment of additional independent non-executive directors. Meikles has been under an executive chair since June 2011 but now the group says it is currently looking at succession and additional skills to the board and management.

In its results statement for the six months to September 30, 2019, Meikles said that the sale of Meikles Hotel, which was approved by shareholders last week provided financial strength, which would help and unlock an ability to process various developments in line with the planned reconstruction in group activities.

Last week, shareholders approved the sale of the iconic Meikles Hotel for US$20 million proceeds of which will be applied towards projects at Tanganda and Vic Falls Hotel. According to the group the sale of the hotel will reduce the need for additional borrowings. (Watch the AGM on Tambarara

In terms of historical financial performance, the group reported a 231% increase in revenue to $1.07 billion from $324.44 million last year. EBITDA was $223.5 million from $31.8 million previously. Profit from continuing ops was at $158.5 million, a growth of 885% from prior year but other comprehensive income showed a significant uplift $336.38 million, which is due to exchange gains on translation of foreign assets.

At TM Supermarkets, revenue grew 208% to $940.9 million on the back of inflation but units sold declined 22% due to shrinking disposable incomes. EBITDA for the chain was up 477% to $125.9 million. PAT was $50.8 million after deducting $54.6 million exchange losses arising from foreign denominated balance owed to Pick n Pay South Africa for merchandise supplied. As at the end of November 2019, the balance had reduced to ZAR 29 million from ZAR100.4 million at the beginning of April 2019.

In terms of refurbishments, renovation works at the Marondera Mall had been completed with the complex opened at the end of November. Five branches were refurbished during the period while two new stores are expected to be opened in the first quarter of the year.

At Tanganda, revenue grew to $104.3 million from $15.7 million achieved during the comparable interim period. EBITDA at the unit was $96.8 million from $8.4 million last year while PAT grew to $110.3 million from $5.7 million. Bulk tea export sales of 3 669t were marginally up from 3 638t sold last year. The average price was down to US$1.47/kg from US$1.68/kg. Bulk tea production declined 25% due to the effects of the drought as well as downtime at the factories due to power cuts. Volume of tea and coffee sales to the domestic market reduced by 25% due to diminishing disposable incomes.

Macadamia production grew 234% to 779t. At the end of September, 463t of the top graded crop had been sold at an average price od US$5.04/kg against 374t sold at US$5.07/kg. Avocado production grew 44% to 1 908t at an average price of US$1.62/kg, which was an increase of 60% on last year. The higher price compensated for the low grade as the crop had been affected by two hailstorms and Cyclone Idai.

The group will now focus on building internal power generation capacity and work on the 1.8MW solar farm will begin before the end of March 2020. Similar projects will be rolled out to the remaining four estates.

Hospitality revenue (on continuing operations) grew to $33.1 million although REVPAR in US terms retreated 1% to US$194. Room occupancy declined to 67.07%  from 72.56% while the average daily rate was up 5% to US$287. EBITDA grew to $14 million from $2.5 million in the previous year. PAT was $26.2 million from $1.8 million. Refurbishment is scheduled to commence in January 2020.

At Meikles Hotel (discontinued operations), revenue was $31.8 million from $6 million. Room occupancy retreated to 38% from 45% in the comparable year ago period. REVPAR declined to US$56 from US$61. EBITDA grew to $10.7 million from $900 000 last year.

The group closed all branches of department stores at the end of June 2019. Consequently, operations up to the date of closure and assets if the department stores were reclassified to discontinued operations. Revenue from the stores was at $600 000 while the group had a loss before interest tax, depreciation and amortisation was $2.1 million.

Cash closed at $73.4 million after deducting bank borrowings with an objective of expunging bank loans at the holding company and department stores before March 2020 and also to expunge fx denominated liabilities and eliminate the occurrence of exchange losses going forward.

Our Thoughts on Meikles

The last few years for this company have been neither different nor appealing and if anything, have contributed more to the deterioration in the value of the actual Meikles brand. A lot of things have gone wrong and perhaps for John Moxon, it’s his legacy that the mess the group is trying to clean up now happened under his watch as the group sought to expand directionless into anything (Mega Stores, Mining etc) without a lot of sense while it kept on relying on funds from the central bank, a matter which is still to be resolved. It was always going to be that the company would only disintegrate as the last solution and it has as a consequence lost some of the country’s great brands.  Of course they were warned…this is what we said in 2015

Soon or later Meikles is going to need to sort out the mess it finds itself in. The earlier the group does that, the better. We cannot emphasis this more, and if we look deeper into these numbers we have no doubt that the group really needs to raise capital even as it continues to work on cost cutting initiatives. The group has a negative working capital position and this would not have had us worried if there was some depth in terms of financial performance. The loss and the strained cash from operations as a result are worrying indicators of a few things going wrong at the group. We had initially anticipated a resurgent of the group with TM and Mentor Africa being the major focal point of growth. Instead we have a group that is growing into many segments and business units that it is now difficult to really see what the group is trying to achieve. There is no clear cut business model to talk about and the strategy is questionable. In the end it seems as if anything that has a green buck label at the back or even a mirage is now game.

 If we were to dissect the group into a sum-of-parts we can tell where there is value and potential growth opportunities. Supermarkets and agriculture are the most attractive and this is where we believe the group should mostly focus. Meikles in the long run is better of split into separate entities as a way of creating value for shareholders. We can get four good companies out of the group.

The jury is still out on the business case on the utilisation of the hotel proceeds but it is important that the group improves operational efficiencies at the remaining units. While the operating environment is somewhat challenging the crux of the matter is how effective is the company effective at managing some of these risks and do they have mitigates in place?  The company’s cash is obviously under some strain as the group tries to avoid borrowings and because of exchange rate losses. The declining trend has been characteristic over the past few years. Operating costs will need to be controlled further as they show little difference with the growth in revenue at 189% vs 231% and this was at a period at which a lot of utilities had not increased in line with inflation. This has a potentially straining effect on the company and its future financial condition which might see it possibly turn to additional capital.

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