Engen Botswana Limited (ENGEN.bw) HY2019 Interim Report

WE have extracted the Chairman’s Statement from the 2019 half year report for Engen Botswana (ENGEN.bw), listed on the Botswana Stock Exchange:

Executive Comments

During the first half of 2019 Real GDP Growth was estimated at 4.2% year on year and this is expected to be sustained for the remainder of the year. Diamond production remained a key factor behind the economic growth although global demand in the diamond industry deteriorated as did the performance of other export industries. GDP was largely sustained by the buoyant performance of the non- mining sectors of the economy which registered a reasonable high level of economic growth. While there was an improvement in the performance of the mining sector of the economy compared to prior periods, we need to see higher levels of performance in this sector in order to achieve economic growth levels that will have a meaningful impact on the performance of the economy. Mining plays an important role in the performance of the economy and subdued activity in this sector has a negative impact on economic output and results in the inherent contagion effect on other sectors of the economy.

Headline inflation remained at low levels by comparative historical standards at 2.8% and was still below the lower level of the Bank of Botswana target band of 3-6%. Low inflation is a reflection of the lack of strong demand price influences. Inflation is however expected to increase in the second half of the year due to upward pressure on prices caused by the 18% increase in the minimum wage. During the second half of the year, the relatively strong external buffers will continue to shield the country from potential diamond sector volatility. It is expected the Government will continue to exercise fiscal prudence even with the upcoming elections, which are scheduled for 23 October 2019.

Crude oil prices remained volatile during the first half of 2019 moving from around 58  USD per barrel in January to over 71 USD per barrel in May and down to just over USD 60 per barrel at the end of June. The price instability was a result of a number of reasons including OPEC supply restrictions, USA/China trade wars, USA inventory holdings and the geo political tensions in the Middle East. Since Botswana imports most of its fuel products from South Africa, the acquisition cost from suppliers in South Africa would have been impacted by all these factors in addition to the South African Rand/ US Dollar rate of exchange. While fuel pump prices in Botswana have been constant throughout the first half of the year, this has been made possible by the slate pricing mechanism which has been used to stabilise the local prices. The equalisation of the slate still remained a subject of vigorous discussion between the petroleum companies and the Government at the end of June 2019.

The petroleum sector continued to expand very rapidly with a number of new retail facilities being constructed and reconstructed during the period under review. Notwithstanding an increase in the level of competition the company continued to deliver strong performance from its operations. It is expected that performance will continue to be robust for the remainder of the year.

While government made some payments to the industry towards the slate under-recovery during 2018, a substantial amount remained unpaid as at the end of June 2019 thereby affecting the liquidity of the oil marketing companies. We hope that the Government will take the hard decisions that are necessary in order to address this long outstanding issue.

Financial Performance

Net Profit Before Tax decreased by 14% during the period under review compared to the previous year. This was mainly as a result of inventory gains being lower than the comparative period in 2018 due to movements in international crude oil and finished product prices. In addition, there was no margin increase that was awarded by the Government during the period under review. The slate receivable from Government decreased from P298 million to P250 million from December 2018 to 30 June 2019 respectively. Although there was an improvement in the recovery of the slate under recovery balances, our cash flow and financing income was affected adversely. The slate under-recovery is being actively pursued by the industry.

The company adopted IFRS 16 Leases by applying the modified retrospective approach effective from 1 January 2019. This standard had the effect of recognising Right of Use Assets of P49.9 million and the Right of Use Liabilities of P42.6 million as at 30 June 2019. In addition, depreciation on the Right of Use of Assets balance was P1.9 million and finance charges on the Right of Use Liability were P1 million for the half year which had the impact of increasing operating expenses during the period. Earnings per share decreased from 45.9 thebe per share during the same period in 2018 to 38.3 thebe per share for the period under review.

Operating Review

The performance of the retail sales channel of the business improved by 8% compared to prior year as a result of some operational efficiencies gained in the base retail network and volume contributions made by new sites. Retail will continue to be the cornerstone of the business in Botswana in the years to come. Our strong brand and unique convenience offering continued to be a valuable differentiator in the market and contributed to the financial performance in the period under review.

The commercial side of the business continued to be a strong contributor to overall company performance. Although there was a shortage of LPG in the first few months of the year due to refinery shutdowns, we expect this situation to improve during the  second half of the year.

The lubricants sales channel continued to perform well and it is expected that this performance will be enhanced during the second half of the year through supply chain process improvements.

The company achieved an outstanding level of HSEQ performance with no injuries and no loss of primary containment or contaminations, which are critical KPI’s, recorded in the period under review.

Conclusion

The Directors of the company acknowledge the contribution of the management, staff, valued customers, shareholders and all other stakeholders for the support toward the success of Engen Botswana Limited during the first half of 2019.

By order of the Board
Dr. S Ndzinge (Chairman)