Chairman's Latest Statement
The past 12 months ending December 2009 constituted a year of mixed fortunes for TA Holdings. The Group reported a disappointing loss of USD1.4 million on its consolidated profit and loss account, primarily due to the impact of losses incurred at Sable Chemicals Limited (Sable).
On a very positive note, our shareholders equity increased from USD35 million on June 30, 2009 to USD 60 million on December 31, 2009 after recognizing asset uplifts in Associates (Sable and ZFC) arising from revaluation of property, plant and equipment. Additionally, the Company’s overall exposure to debt remains exceptionally low at only USD3 million. As I shall explain later in this statement, some care should be exercised in the current climate to interpret TA’s Balance Sheet. Akin to most companies currently with assets in Zimbabwe, TA will be faced with the requirement to inject fresh capital into its Zimbabwean investee companies, however, I am pleased to say that TA does not expect to resort to its shareholders for a Rights Issue to raise capital.
TA’s Balance Sheet reflects our primary accomplishment over the past seven years to preserve shareholder value in real terms, notwithstanding Zimbabwe’s inflationary and hyperinflationary period. Our commitment 7 years ago was to protect our balance sheet in real terms, however, I did not think it would take so long for us to return to a low inflationary economy. It is useful to provide some comparative historical data to appreciate our present balance sheet:
TA’s shareholders equity on May 31, 1997, at a Zimbabwe Dollar/US Dollar exchange rate of Z$18.6/US$1, was US$34.58 million and the total debt was US$6.71 million. TA’s book value per share in US Dollars was US$0.21 and its share price was US$0.11. By December 31, 2002, based on a Zimbabwe Dollar/USD exchange rate of Z$800/US$1, TA’s shareholders’ equity had collapsed to USD5,619,593, the book value per share had declined to $0.04, and its share price was a modest $0.06. By December 2009 we reported a US dollar shareholders equity of $60 million, a book value per share of $0.37, and a share price of $0.58, which has declined in 2010 to $0.32. Unlike 1997, TA’s consolidated balance sheet has modest levels of debt, 8% in the form of cash, and 50% in the form of liquid assets. In essence we have a balance sheet of around USD170 million with debt of only USD3 million. Furthermore, we have approximately USD13million of cash on our balance sheet and approximately USD79 million of our balance sheet is fairly liquid.
It is vital to look beneath these accounting numbers to understand the ravages that TA and its investee companies have endured from Zimbabwe’s “lost decade”. Our Zimbabwean assets are in need of major investment over the next five years after a decade of decay and especially in the case of our fertilizer companies. Their mission over the next five years is to rediscover and grow their businesses for the benefit of shareholders, customers, employees, and other stakeholders and to realize a profitable return on the resources which are currently underutilised.
Our Botswana companies have grown and become more significant players in that market on the strength of very sound assets, we hold a positive outlook for our companies in this stable market.
We estimate that our Zimbabwean insurance group will require USD4 million in new capital; Cresta Zimbabwe USD10 million, and Sable USD45 million over four years in equal tranches. We do not intend to meet these capital calls by recourse to TA’s shareholders. In the case of Sable, most of its capitalisation requirement will be met from Sable’s own revenues whilst for other investees, 64% of the fresh capital will come from internal TA resources and the balance from third parties.
A question that I am often asked is ‘What are the challenges to unlocking the value of our Group in the next say 3 - 5 years?’ My response is that there are several challenges we face, the main ones being to retain and grow our human capital, to manage political opportunities and challenges in our region and plan ahead with strategic vision.
One of the challenges of Zimbabwe is that over the last 10 years we have developed a cadre of people who were adept at working in a hyper inflationary environment and who lost the touch of profiting in a low inflationary world. The reality is that Zimbabwe is now one of the few countries outside the United States that functions on the US dollar as its medium of exchange and our managers need to re-educate quickly, to work on what appear as very thin margins compared to those they had become accustomed to over the past decade.
Having said this, I believe we are fortunate in that we have been able to retain a strong stable of senior leaders, who serve as a base from which we can now expand and add core middle level skills, which have been decimated during this decade. We need to rebuild the capacity of our Zimbabwean investee companies to grow in a low inflationary environment over the next three years.
I remain optimistic about Zimbabwe’s political prospects. There are many real problems, the unfinished land issues, the recently promulgated indigenisation and empowerment laws, incessant conflict within the government of national unity and the inertia delaying the completion of a new constitution. All these issues are of great concern, however, not one of these deters me from my conviction that in the course of the next decade, Zimbabwe will enjoy one of the higher economic growth rates in Africa and the Continent itself will achieve one of the highest GDP growth rates globally.
The challenge of indigenisation and empowerment legislation has led to serious concern that there will be no investment by global funds, multi-lateral or foreign direct investors. I have been in too many countries to know that this is not unique to Zimbabwe and that once the constitution and laws are clearer, the ability for owners of financial capital to name their ‘risk-premium’ will inevitably allow them to access a risk-return reward that will be attractive. Furthermore, I have no doubts that the clarity lacking in the empowerment laws will become transparent and it will be sector specific, ultimately the key focus I believe will centre on mining. The needs of the financial sector will differ from those of the tourism sector and so forth.
At TA’s Board, we have sought to consider and answer the following strategic questions:
The first one is how to improve the profitability of Sable, its nitrogenous fertilizer manufacturing associate? The second is whether to focus on raising TA’s profits within its existing industries or by expanding into new industries? Finally, should TA expand within Zimbabwe or outside Zimbabwe?
Zimbabwe’s “lost decade” has been a painful period for Sable, culminating in last year’s losses. Capacity utilization at Sable by the end of December 2009 had collapsed to 20%. We considered whether TA Holding’s stake in Sable is a profitable allocation of its capital? To answer some of these questions, it is helpful to recapitulate some facts about Sable and agricultural productivity in Zimbabwe.
Sable comprises five business units. They are: (a) the electrolysis plant (b) the air separation plant; (c) the ammonia synthesis plant; (d) the nitric acid plants; and (e) the ammonium nitrate manufacturing plant Sable’s electrolysis plant is one of the largest consumers of the base electricity capacity crucial to the daily operation of the Kariba dam. All of Sable’s losses arise from its electrolysis plant. They arise because of its high electricity demand, which is best met when that unit is operating with high capacity utilization and a low electricity tariff.
The swiftest way of controlling Sable’s losses would be to close the electrolysis plant and import ammonia feedstock. Unfortunately, for Zimbabwe, there are not enough railway tank cars to permit Sable to import all the ammonia necessary to dispense with the electrolysis plant. Furthermore, the permanent cessation of Sable’s electrolysis facilities would lead to Zisco Steel Limited (ZISCO), the largest steel manufacturing plant in Zimbabwe, ceasing to obtain the oxygen crucial in the manufacturing of its steel as well as the oxygen used by ferrochrome producer ZIMASCO. It is fair to say, however, that Sable’s electrolysis plant is an inefficient energy consumer.
Plants that use natural gas or coal as front-end feedstock for their ammonia synthesis consume much less electricity than Sable’s electrolysis plant. However, Sable has one advantage for Zimbabwe – it lowers the cost of landed fertilizer in Zimbabwe because Zimbabwe is geographically far from the lowest cost global producers of nitrogenous fertilizer. In addition, it is a fact that all countries which have experienced rapid agricultural productivity rises have possessed domestic ammonium nitrate manufacturing capacity. Thus, retaining Sable’s ammonium nitrate manufacturing capacity is crucial to Zimbabwe’s long-term agricultural plans.
What does the foregoing imply for Sable? In the medium to long term, Sable has to switch from electrolysis of water to natural gas or coal-to-gas within the next five to 10 years to reduce its electricity consumption. Failure to do so would result in a write-down of the electrolysis plant in both Sable and TA’s books. Thus, any analysis of TA’s balance sheet must incorporate sensitivity to the uncertainties surrounding Sable’s electrolysis plant (Refer to note 57 on page 77 of the report for the Sable asset valuation sensitivity analysis).
Sable’s capacity to use imported ammonia in place of locally synthesized ammonia confronts the bleak reality that Zimbabwe does not have enough tank cars, an operating rail infrastructure and delivery platforms for importing all that ammonia. Consequently, until Sable replaces its electrolysis plant, Sable will only be able to produce profitable ammonium nitrate if it is offered an electricity tariff commensurate with its status as a base load consumer of Zimbabwean electricity.
Since it is clear that Zimbabwe is far from the technological boundaries of high agricultural productivity, it seems clear that Zimbabwe needs a profitable nitrogenous fertilizer manufacturing capacity for its farmers to raise their productivity. Sable has an important role to play in Zimbabwe’s agricultural sector and we believe that, despite the current uncertainties and recent losses of Sable, short and medium term solutions beneficial to both TA’s shareholders and Zimbabwe’s farmers and government can be found. In summary, there is a great deal of work to be done by TA to maximize its investment in Sable.
Turning to the question of whether to expand beyond TA’s existing industries, its board has decided to focus on its current core industries i.e. short term/general insurance, life assurance, reinsurance, insurance broking, asset management, healthcare administration, hotel management, and nitrogenous fertilizer manufacturing and distribution. Finally, the board concluded that it was best for TA to maintain its Africa-wide investment approach. Demands for fresh capital by TA’s Zimbabwean investee companies should compete against non-Zimbabwean demands. We anticipate the benefits of injecting capital into Zimbabwe to enhance TA’s ability to profit handsomely while allowing for the recovery in the markets. To provide one example, it turns out that Zimbabwe’s gross insurance premia have dropped by 90% from $600 million to $60 million while Zimbabwe’s overall economy declined by 50% during its lost decade. If Zimbabwe’s gross insurance premia recovered to $300 million over the next 5 years, the revenues of that industry would experience an annual growth rate exceeding 35%, in US Dollars. Excellent profits should follow in the wake of such explosive revenue growth.
My one major disappointment has been that TA’s Zimbabwean assets have failed to be generators of free cash flow. To some degree, Zimbabwe’s recent difficulties made it hard to generate free cash flow and currently it will remain difficult to do so over the next three years, as fresh capital is injected into Zimbabwe.
During the course of the year we lost the services of Don McDevitt. As you are all aware Don was the Chief Operating Officer of TA for the last 5 years. He was very instrumental in the re-rating of TA within the market. I want to personally thank him for his successful tenure within the organization and we truly wish him all the best in his future endeavours.
Finally, may I draw on one of the investors I enjoy reflecting upon always, Mr Warren Buffett. He has a simple philosophy that when you believe in the long term value potential of an asset and you think you have found it at an undervalued price, buy as much of it as you can. I believe TA is such an asset and I will therefore be increasing my holding in TA during the course of this year.
I want to thank all the teams of our investee companies and my executives at TA for having supported me for the past 12 years at the helm of this wonderful group. Likewise may I thank our investors for their loyalty and support and my Board for their guidance. I truly believe the strength of this Group is in the committed people that give their all to this business, day in and day out.
On a personal note, I also believe we are at the dawn of a very exciting period in the journey of TA, long may that continue and may all of its stakeholders benefit from what should be a rewarding future.
Shingai Mutasa
Executive Chairman
TA Holdings Limited
16 March 2010