LONDON (Alliance News) – Cambia Africa PLC on Friday reported a strong interim profit growth but warned of the perils ahead as the country it operates, Zimbabwe, tries to introduce a new currency.
Shares in the investment company were down 20% Friday morning at 0.92 pence each.
The company’s two wholly owned operations in Zimbabwe are payment service provider Payserv and industrial equipment supplier Millchem.
In the six months to the end of February, Cambria Africa reported pretax profit of USD2.1 million, 50% higher than the USD1.4 million recorded in the same period a year prior.
Payserv saw its earnings before interest, taxes, depreciation and amortization rise 32% in the first half to USD2.0 million. Millchem reported a 1.8% Ebitda rise to USD112,000.
Group revenue in the first half slipped 4.3% to USD4.4 million from USD4.6 million the year before.
Zimbabwe introduced a local currency for the first time since 2009. The Reserve Bank of Zimbabwe officially decoupled its local currency from the US dollar, naming the new currency the RTGS dollar, with the symbol ZWL.
The bank then “effectively devalued” the new currency towards the end of the period. The rate fell from parity to the US dollar to ZWL2.50 to USD1.00 and closed at ZWL2.50 at the end of the period.
On Friday, the interbank rate stands at ZWL5.22 with the parallel rate thought to be at ZWL7.4 against the US dollar.
The company said its earnings in the second will be hurt as a result of the “rapid devaluation” in the exchange rate.
“Cambria has actively ameliorated this impact by reducing expenses, hedging its assets and cashflow, minimizing and hedging its cost of capital,” the company added.
Chief Executive Samir Shasha said: “I disagree that the Monetary Policy Statement of February 2019 or October 2018 resulted in a ‘devaluation’ and subject to currency translation. I believe it is a change of the functional currency of Zimbabwe from US dollars to a new currency just as the Euro replaced multiple European currencies. Therefore, we anticipate changes to the accounting treatment of audited results to be put into place which may or may not impact the results reported here.”
He continued: “In our financial 2018 annual report, we stated that companies that have survived seismic shifts in Zimbabwe’s fortunes have come back stronger and more profitable. As borne out by our mid-year results, we continue to believe that Cambria is expected to survive the dislocations created by these events. However, there are risks to our strategy and systemic risks that Cambria is faced with, at least in the short-term.”
The central bank has committed to honour legacy foreign debt at parity, which is expected to save Cambria about USD1.6 million in potential foreign currency losses. In the period Cambria posted a foreign currency gain of USD107,000.
Shasha added: “The strategic risk Cambria faces, is the refusal of some Paynet clients to be invoiced by Payserv Africa in US dollars and the subsequent loss of their customers. Depending on which clients, if any, exit the Paynet Payment Platform, real revenues may fall. On the other hand, since Paynet will continue to deliver payment instructions to all institutions, it may be able to recover its transaction volumes.”
Shasha said the company also faces the systemic risk is the introduction of the new currency fails, which could lead to a “significant slow down in the economy”.
“The economy has already been dampened by a 2% tax on almost all financial services and an average 3% transaction fee levelled by Ecocash on the bulk of consumer transactions which they control. It is hard to imagine how Zimbabwe’s economy can withstand a real as opposed to a nominal 5% contraction,” he said.
Source: London South East