We have extracted the Chairman’s Statement from the 2019 abridged report for Axia Corporation Limited (AXIA.zw), listed on the Zimbabwe Stock Exchange:
The Directors of Axia Corporation Limited are responsible for the preparation and fair presentation of the Group’s consolidated financial statements, of which this press release represents an extract. The audited financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and in the manner required by the Companies’ Act (Chapter 24:03) and the Zimbabwe Stock Exchange listing requirements, except for adherence to International Accounting Standard (IAS) 21 “The Effects of Changes in Foreign Exchange Rates”. As explained in the Compliance with IFRSs paragraph below, adherence to IAS 21 was not possible this year. The principal accounting policies of the Group are consistent with those applied in the previous annual financial statements except for the effects of the adoption of IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from contracts with customers” both with an effective date of 1 January 2018. The Group made a reassessment of the adequacy of the allowance for credit losses as at 30 June 2018 and made adjustments to the opening retained earnings. No adjustments were made to revenue by the Group as a result of adopting IFRS 15.
The abridged audited financial results should be read in conjunction with the complete set of financial statements for the Group for the year ended 30 June 2019, audited by Deloitte & Touche, Chartered Accountants (Zimbabwe), in accordance with International Standards on Auditing. An adverse opinion has been issued thereon for non-compliance with IAS 21 “The Effects of Changes in Foreign Exchange Rates”. The auditor’s report incorporates a section detailing key audit matters. The key audit matter relates to revenue recognition. The auditor’s report on the financial statements, which forms the basis of these abridged financial results, is available for inspection at the Company’s registered office.
The re-introduction of a local currency as the sole legal tender for domestic transactions resulted in a change in functional and presentation currency from US Dollars presented for the prior year to Zimbabwe Dollars (ZWL$) for the current year. The financial statements for 2019 are therefore presented in ZWL$ while comparative numbers for 2018 were converted to ZWL$ at a rate of 1:1 in compliance with SI33 of 2019. All references to the Zimbabwe Dollar in this Commentary will be shown as ZWL$ unless specifically mentioned.
COMPLIANCE WITH IFRSs
The financial statements are prepared with the objective of complying fully with IFRSs. Complying with IFRSs achieves consistency with the financial reporting framework adopted by the Group since 2016. Using a globally recognized reporting framework also facilitates understandability and comparability with similar businesses and allows consistency in the interpretation of the financial statements.
Whilst full compliance with IFRSs has been possible in previous reporting periods, only partial compliance has been achieved in 2019. Based on International Financial Reporting Standards, IAS 21 “The Effects of Changes in Foreign Exchange Rates”, “If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made”. In addition, paragraph 2.12 of the Conceptual Framework for Financial Reporting prescribes that for financial information to be useful, it “must not only represent relevant phenomena that it purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same, providing information only about the legal form would not faithfully represent the economic phenomenon.”
In our opinion, because of the significance of the matter highlighted above, the consolidated financial statements have not in all material respects, been properly prepared in compliance with the disclosure requirements of IAS 21. The requirement to comply with Government legislation (SI 33 of 2019) presented challenges in terms of compliance with IFRSs due to inconsistencies with IAS 21 and this was alluded to by PAAB in their guidance issued on the 21st of March 2019. This has resulted in accounting treatment being adopted in 2019 financial statements, which is different from that which would have been adopted if the Group had been able to fully comply with IFRSs.
The year under review was dominated by the significant changes in the economic environment such as the introduction and floating of the ZWL$ against a basket of foreign currencies and the reintroduction of the sole legal tender for all domestic transactions, the Zimbabwean Dollar, amongst other changes. The operating environment was volatile and trading conditions remained extremely challenging during the year, characterised by shortage of foreign currency, liquidity constraints, increased finance costs, as well as inflationary pressures on operating costs which at times hampered both the Group’s working capital and operating expenditure levels. Inflationary pressures continued across the board with respect to both stock inputs and operating expenditure, particularly in the latter part of the financial year. The increase in prices of goods and services was largely driven by the adverse movement in foreign exchange rates which affected cost of doing business as pricing by most suppliers of goods and services was indexed to the US$. The Group’s business units were however resilient and proactive despite these factors and this helped the Group to record a fair performance.
As advised in the interim report, the Group, through its subsidiary TV Sales & Home, successfully concluded the acquisition of a 49% shareholding in Maton (Private) Limited t/a Restapedic, a bedding manufacturing business. An amount of ZWL$2.468 million was paid for the investment. Restapedic is a synergistic business to the Group’s portfolio which, together with other suppliers, will help in securing the supply chain of bedding units for TV Sales & Home. Competitions and Tariffs Commission approval for this transaction was obtained in January 2019. Also, during the fourth quarter of the financial year TV Sales & Home together with a strategic partner established a lounge suite manufacturing business, Legend Lounge (Private) Limited, and it owns 70% of the business. This acquisition and establishment are part of the Group’s objectives to achieve organic and acquisitive growth as well as backward integration into manufacturing.
The Group reported revenue of ZWL$557.414 million during the year to achieve a 102% growth on the comparative year. This was driven by a mixed volume performance across operations. An improved performance was noted in the last quarter of the year, where revenue grew 132% on the comparative period, a result driven by increased volumes across most categories and increase in prices.
The Group sustained growth in profitability by recording an operating profit of ZWL$72.679 million, representing a 182% growth on the comparative year, despite the inflationary pressures on costs. The financial income line is mainly comprised of income earned on the derivative option, unrealised exchange gains on foreign denominated cash and cash equivalents and this was adjusted by unrealized exchange losses arising out of the valuation of foreign creditors. Equity accounted earnings are mainly comprised of the results of Transerv and Restapedic Bedding. All business units with equity accounted results have performed well and Restapedic has contributed a reasonable amount. Overall, profit before tax at ZWL$85.738 million for the year was 250% above the comparative period. Basic and Headline earnings per share for the year improved by 250% to 7.07 ZWL cents.
Due to the change in functional currency from US Dollars to Zimbabwe dollars, the Group recorded ZWL$21.973 million in Other Comprehensive Income (OCI) for the year ended 30 June 2019 as a result of converting regional results from their local currencies to ZWL$. This OCI is not included in determining Basic and Headline earnings as it does not arise from normal operations. The Group contributed ZWL$5.818 million to the fiscus through the Intermediated Money Transfer Tax (IMTT) since it was increased, in October 2018, from 5 cents per transaction to 2%, per dollar value from ZWL$10 to a limit of ZWL$500,000. The IMTT limit was further increased to 2%, per dollar value from ZWL$ 20 to a limit of ZWL$750,000 post 30 June 2019.
Net borrowings have decreased by ZWL$3.906 million mainly as a result of increased cash sales and collection of trade receivables which improved cash and cash equivalents balances resulting in lower gearing.
The Group generated cash of ZWL$48.602 million from operations against ZWL$10.136 million in the comparative year. The Group’s capital expenditure for the year totalled ZWL$4.801 million and this was limited to critical maintenance and expansion projects as these were also affected by inflationary pressures.
The Group continues to apply the Global Reporting Initiatives (GRI’s) Sustainability Reporting Guidelines as part of its commitment to ensuring the sustainability of its businesses. The Group will continue to uphold these practices and values across its operations to ensure that long-term business success is achieved in a sustainable manner.
The main operating business units in the Axia Corporation Limited Group are TV Sales & Home (TVSH), Distribution Group Africa (DGA) and Transerv. TVSH is Zimbabwe’s leading furniture and electronic appliance retailer with sites located countrywide. DGA’s core areas of expertise lie in inbound clearing and bonded warehousing, ambient and chilled warehousing, logistics, marketing, sales and merchandising services. Transerv retails automotive spares, by utilising multiple channels to service the needs of its customers.
TV Sales & Home
TV Sales & Home had a strong start to the financial year which was offset by a subdued last quarter in terms of volumes which saw them end the year at the same level as prior year. Turnover growth was 88% above prior year driven by growth in both cash and credit sales. Due to operating efficiency, the business recorded better growth on operating profit than that achieved on turnover. Credit business was good until the last quarter of the financial year when affordability became a deterrent which saw volumes dip. This however was compensated by increased cash business. The instalment debtors’ book increased by 77% over the comparative year and this has been consistent with increased credit sales. The quality of the book remained good throughout the year.
Inventory levels remain good and support for local suppliers has continued to ensure uninterrupted supply of all key furniture lines. The bed manufacturing unit, Restapedic, witnessed growth in volumes during the year and is looking to increase production in the forthcoming financial year after installation of the new bed manufacturing equipment. Legend Lounge (Private) Limited, a subsidiary of TV Sales & Home, has now produced a range of lounge furniture which has significantly improved the product selection and quality across all stores. The partnerships to promote local production are key in ensuring that supplies remain high.
The business has continued to grow its store network by opening four new stores, one each in Masvingo, Gwanda, Banket and Harare which have all performed well. During the last quarter of the financial year, the increasing operating costs lead to closure of one store in Harare. Two new stores are scheduled to open before the end of the first half of the new financial year in Victoria Falls and Rusape. The business will also focus on growing a market for its manufactured products both locally and regionally.
Distribution Group Africa – Zimbabwe
The Zimbabwean distribution business houses a number of leading brands such as Colgate, Kellogg’s, Tiger Brands, Unilever, Johnson & Johnson, Rhodes, Pioneer, Irvine’s and Probrands. The business posted a good set of results during the year under review despite the economic challenges which prevailed. Turnover grew by 114% over the comparative year as a result of growth in existing local business as well as general price increases. The swing towards more local sales has helped especially in this environment where foreign currency has become scarce. Operating profit was 353% up from prior year due to margin growth while costs went up by a lesser percentage.
Management will continue focusing on driving volumes growth and ensuring visibility of their principals’ products. As reported in the interim report, there is improvement in the control environment and governance structures of the business thus improving monitoring and control. Management is looking at restructuring this group to improve on efficiencies in business operations. Distribution Group Africa – Region The regional operations reported a mixed set of results. The trading environment in the region has been quite challenging. The regional operations remain a key component of the group’s distribution footprint to represent agencies held in Zimbabwe. In US$ terms, turnover for the consolidated distribution regional business declined by 2%. However, profit before tax grew by 5% from prior year due to financial income earned from hedging activities. The depreciation of local currencies, of the countries in which the business operates in, to the US$ is negatively affecting the net assets of the consolidated business.
Malawi recorded a marginal growth in revenue over the comparative year as it struggled to trade with defaulting large customers who were put on stop supply, for the greater part of the first half of the financial year. The business’ operating profit marginally increased over the comparative year as costs were well managed.
In Zambia, revenue dropped by 3% compared to prior year in US Dollar terms. The decline in turnover filtered to the gross margin and the results were worsened by significant stock write offs on the back of over stocks and customer returns, resulting in the business making an operating loss for the year.
The business recorded an overall revenue growth of 37% against prior year despite the onerous trading environment. Given the current economic environment, the business will continue focusing on ensuring product availability and at the right pricing. The business managed to maintain its footprint across the country, and has ensured that its customers have access to products as and when required. The support of Transerv’s existing and new customers will be key to its growth. As reported in the interim report, Transerv celebrated its 10-year anniversary in May 2019. The 10-year journey has seen the business grow to a network of 24 (21 Transerv and 3 Midas) trading outlets, 15 Fitment Centers, an Auto Cycle Centre, Zimbabwe Spares Wholesalers, a diesel pump room (ADCO) and Clutch and Break Specialists (CBS).
Its staff complement has also grown to 350 employees. After reaching this milestone, Transerv will be profiling the “refreshed” Transerv look in the forthcoming financial year.
The economic environment will remain dampened by inflation and currency volatility in the short to medium term. This environment creates various challenges which at the same time also brings opportunities to the Group. Despite these current economic challenges, the Group is optimistic about the country’s prospects and growth potential. Therefore, the Group is looking into expansion projects, which will enable sustainable growth thus creating and preserving value for all stakeholders, even when the macro-economic environment is full of pitfalls.
Given the current economic environment, the sourcing of local funding as well as foreign currency to procure inventory and settle foreign suppliers remains a priority for the Group as a way to manage foreign currency exposure. Therefore, as previously mentioned in the interim report, it is imperative for the Group to evaluate investment opportunities with export potential even if they are outside the Group’s speciality retail and distribution space. On the statement of financial position, the Group’s key focus areas will be on managing foreign creditor positions, securing additional inventory as well as managing gearing levels and this will be done in tandem with environmental changes.
The Board has declared a final dividend of 1.75 ZWL cents per share in respect of all ordinary shares of the Company. This brings the total dividend paid for the year to 2.35 ZWL cents. The final dividend is payable in respect of the financial year ended 30 June 2019 and will be paid in full to all shareholders of the Company registered at close of business on the 11th of October 2019. The payment of this dividend will take place on or around the 22nd of October 2019. The shares of the Company will be traded cum-dividend on the Zimbabwe Stock Exchange up to the 8th of October 2019 and ex-dividend as from the 9th of October 2019.
The Board has also declared a final dividend totaling ZWL$43.800 to the Axia Employee Share Trust (Private) Limited which will be paid on the same date.
I express my sincere gratitude to the Board of Directors, executives, management and staff for their ongoing efforts during the year under review. I also take this opportunity to thank the Group’s valued customers, suppliers and other stakeholders for their continued support and trust.
L E M NGWERUME