4 October 2002

Zimbabwe: Barbican Asset Management

ARISTON is a company in the industrial agri-processing sector. The company was founded in 1947 and listed on the local bourse in 1948. It is a holding company with subsidiaries and associated companies, the nature of whose businesses range from agriculture, financial to horticulture.

The group's subsidiaries are Southdown Holdings Ltd, Ariston Management Services (Pvt) Ltd, Claremont Orchards Holdings (Pvt) Ltd, Plus Financial Holdings Ltd and Katope Zimbabwe (Pvt) Ltd. Souththdown Holdings Ltd owns three tea estates in the picturesque Chipinge and Chimanimani areas.

The infrastructure includes coffee, macadamia trees, together with tea factories, schools clinics and workers' houses. It is leased to the group's operating company.

Ariston Management Services (Pvt) Ltd trades as Southdown Estates, Kent Estates and Claremont Orchards. The company is responsible for the operation, management and development of the group's tea, coffee and macadamia interests at Southdown. Kent is situated at Norton and exports roses. It also produces over a million broilers, beef and irrigated crops annually.

Claremont, being the country's leading producer of pome fruit and stone fruit, satisfies both the local as well as the international market. Claremont orchards holdings own land in the Nyanga area, which is under Claremont Orchards.

Plus Financial holdings have subsidiaries which are Tetrad Securities, Tetrad Asset Management and Tetrad Financial Services. Katope, which is into the marketing and exporting of fruit worldwide, is an international organisation and operates a citrus packshed at Shamva. It is a major supplier of fruit and vegetables to a leading supermarket chain.

Shareholding

The company has a well-diversified shareholding structure. The top five shareholders are Barato Holdings, Zimcor Ltd, Commonwealth Development, Old Mutual Assurance Company of Zimbabwe and NRZ Contributory Pension Fund which collectively hold more than 65% of the shares in issue. Worthy noting is the significant interest by institutional investors in the counter.

At the end of the day the liquidity of the counter is negatively affected as can be shown by the counter's daily trading average of only 64 000.

However, it is also important to note how this helps the share to tightly hold even when the whole market goes under siege. This is good as shareholders can confidently preserve wealth in the stock.

The company performed well despite the harsh economic environment. The group's operating profit shot up by 384% to $236 million. Attributable profit to shareholders went up 232% to $233 million.

It is interesting to note that although the share base of the company expanded, this did not dilute the company's earnings per share, which jumped to 200% to 101 cents. Operating margins increased despite the inflationary pressures, which the entire economy is facing.

Price increases as well as improved efficiency in containing the operating costs helped the company achieve this. The company has slightly increased its use of financial leverage. This is a positive development considering the unrealistic nature of interest rates.

Return on equity more than doubled although the number of shares increased, which is a clear indication that the company has improved its performance.

Features

Because the group portfolio consists of a bundle of entities each into a unique though related function, the group is well shielded from risk. This is clear from the group's product range, which spans from agricultural produce to financial services.

It is important to note that the organisation enjoys the benefits of synergies. The group also exports some of its produce. Since the group and its subsidiaries fall under the agriculture sector, demand for the group's products is assured and sustainable. Because the company is a foreign currency earner, it is to some extent shielded from foreign exchange risks.

Challenges

The prevailing macro-economic conditions present a great challenge for business transacting. The shortage of foreign currency is a drawback for companies which use forex in one way or another. The shortage of consumer basics like fuel also retards business growth.

The general deterioration of human welfare at national level reduces the propensity to consume. In that instance, the effective demand for consumables is negatively impacted on. The much talked about drought is also a threat to operations, which are agro-based.

Valuation

The company currently enjoys a PE of 14,6. Based on the counter's average EPS growth, the counter is trading on a forward PE of 9,8x. This shows that the share is cheap as the market PE stands at 17,93 at the moment.

Although the share price has lagged behind the market for a long time, it seems to have firmed substantially. In actual fact it outperformed the market between May and July 2002.

The government has pledged to support the current agrarian reforms. It is in the interest of such developments that counters which are agro-oriented, will stand to benefit. At the end of the day, the share prices of such counters will positively respond.

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