OK Zimbabwe is expected to benefit from seasonal demand and increased disposable incomes among consumers over the festive season, paving the way for a sustained recovery in volumes and profitability, an equity research firm has said.
IH Securities, said increased demand and liquidity among consumers would spur sales growth, however downside risks remain the spike in Covid 19 cases which may pre-empty reduction in trading hours from possible escalation of lockdown measures.
“OK Zimbabwe has continued its extensive capital expenditure campaign with the view of upgrading stores and extending reach into new locations which potentially points to increased competitiveness for the business.
“From Financial Year 2021, completed refurbishments and the new branches were well received in their respective markets and made a significant contribution to the Group’s sales.
From a combination of volume performance and re-adjustment of pricing points, we forecast revenue for FY22 to grow 130 percent on the preceding financial year to $61,78 billion,” IH Securities said.
The research company said OK Zimbabwe was traditionally a low margin business and the further corrections are still foreseen as the entity was punching above its historical averages due to inflationary distortions on the cost base.
“We expect the EBITDA (earnings before interest tax depreciation and amortisation) margin to ease from 9,9 percent in FY21 to 5,8 percent in FY21. However, in our view corrections should bottom out by FY23 all things held equal.
Pressure on margins and overall profitability remains notably with the prohibitive cost of borrowings and ballooning transaction charges being key concerns for the business,” read part of the report.
OK Zimbabwe posted a steady topline performance during the first half of its 2022 financial year, amidst relaxation of Covid-19 induced lockdown restrictions.
Revenue grew 163 percent to $22,93 billion underpinned by resurgent volumes, at a 43 percent year on year recovery.
However, costs continued to escalate relative to earnings. Intermediated money transfer tax (IMTT), staff costs, electricity charges, rentals, bank charges, cleaning expenses and security charges are the cost lines that contributed most significantly to overheads growth.
IH Securities said whilst the business implemented a raft of cost containment measures, the overhead increases were driven by exogenous factors such as NEC wage adjustment and expansion of IMTT thresholds which impacted the Group’s profitability.
“Other operating expenses grew 61 percent to $1,67 billion from the prior year,” said the report. According to OK Zimbabwe, IMTT burden on the business grew significantly eroding the business’ gross margins.
In addition, IMTT expense being non -tax deductible further compounded the tax burden on the business leading to an effective tax rate for the group at 39,4 percent compared to 27,2 percent recorded in 1H21.
IH said capital expenditure activities remained a priority for OK Zimbabwe with $1 billion being spent in the period for further shop refurbishments. – Herald