HARARE – Proplastics Limited expects profitability to improve by year-end on the stability in the exchange rate and increased plant capacity after recording losses in 1H22.
The group recorded an $ 89.7 million HY-22 loss (historical) attributed to exchange losses amounting to $441 million resulting from overdue payments of foreign creditors. By the end of H1-22 the ZWL was trading at 362/USD on the auction system against an average parallel market rate of 600 which presented a difference of 65.5%. However, the exchange rate market has achieved some stability with the difference between the official rate of 638 and that of the parallel market of 750 narrowing to 17.5%.
In its nine months trading update to September, group revenue was up 18% ahead of the comparable period a year earlier which is a result of price adjustments in response to inflation. However sales volumes were 10% down due to depressed disposable incomes as well as 30% decline in exports. The group said sales volumes are likely to remain flat until year end given the onset of the rainy season but enhanced factory capacity will be able to convert all anticipated orders.
Current sales ratio is now skewed in favor of the United States Dollar from both domestic and export proceeds which has enabled the group to sustain all import requirements.
The group is encouraged by the exchange rate stability currently prevailing which should be able to preserve the value of its USD earnings when converted to the ZWL- the reporting currency. Government has kept a tight money supply and also made interventions to absorb excess liquidity through the introduction of gold coins. It also embarked on a drip-feed payment system to suppliers of its development projects who were flooding the market with the ZWL. Consequently, this has given the group confidence in the H2-22 profitability.
The group has a significant number of foreign obligations given that 90% of its raw materials are imported and stability in the exchange rate should be able to increase its profitability. However, the 200% interest rates on local borrowings is likely going to increase financing costs to the business. Recently, the RBZ Governor stressed the need to stay the course until a time exchange rate market is consistently stable.
Gross profit margins have since started to improve due to efficiencies realized from the plant modernization initiatives. A total of US$2.7m was spent on capital equipment in the nine months of trading with the newly commissioned PVC line already contributing 12% to the total production volumes since April 2022 while the new injection molding machines and molds resulted in a 10% increase in total volumes for the period.
Power supply is expected to improve as the Group, in partnership with the electricity distributor, have embarked on the replacement of the underground armored cable that is fraught with faults with a semi dedicated overhead power line. This should be able to circumvent electricity supply disruptions which saw the group lose 19 days of production during H1-22.