Padenga Holdings Limited (PHL.zw) 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Padenga Holdings Limited (PHL.zw), listed on the Zimbabwe Stock Exchange:

Financial

Consolidated Results

The Group, produced satisfactory results given the rising local input costs due to inflation. This was however, mitigated by a tightening skin market and an increased demand for quality with a consequent impact on skin prices achieved in the period.

The Group recorded an operating profit before depreciation, amortization, impairment and fair valuation adjustments of US$18,117,493 (US$13,944,006 – FY17) from revenue of US$42,479,689 in the twelve months to December 2018. Revenue for the prior period to December 2017 was US$30,276,051. Profit before tax increased by 9% over prior year to US$17,775,551 (US$16,368,831 – FY17). Cash generated from operations amounted to US$15,815,623. Of this amount, a total of US$5,253,399 was used for capital expenditure, being mainly invested into additional new crocodile grower pens to further reduce stocking densities at strategic periods in the growth cycle as well as a solar farm to reduce recurrent energy costs and minimize the Company’s carbon footprint.

Crocodile Operation

The Zimbabwe crocodile operation continued to be the Group’s dominant contributor to both revenue and profitability. The operation, in accounting for 92% of the Group’s revenue, produced a satisfactory set of financial results. Turnover increased by 38% to US$39,228,344 from US$28,515,119 recorded in the prior period. Volumes were up by 2%. We sold 44,253 skins in FY18, up from 43,313 sold in the previous period. We closed the year with an additional 1,679 skins in stock which were graded and sold subsequent to year-end. Included in turnover is revenue from local trading that contributed a further US$10,460,467. Operating profit and profit before tax increased by 28% and 20% to US$17,886,031 and US$20,409,158 respectively.

Alligator Operation

Although primarily focused on a strategy to produce predominantly medium sized skins, the business initiated the production of some large sized skins in response to prevailing market conditions. As a consequence, only those watchband sized skins which were not suitable for grow-out to either medium or large skins were harvested in 2018. Volumes were up 21% against prior period (13,500 skins vs. 11,190 skins). Buoyed by the increase in volumes, the operation recorded turnover of US$3,251,345, being an 85% increase over prior year (US$1,760,932 – FY17). Although the unit’s operating loss was reduced from US$868,385 (FY17) to US$80,454 in FY18, a loss before tax of US$2,621,109 was recorded. (FY17 – loss before tax of US$978,838). This increase in the loss before tax was mainly a consequence of a negative fair valuation on the carryover crop due to skin quality issues recorded in the period under review.

Operations

Crocodile Operation

In the crocodile operation 43,184 animals were harvested which was below budget by 6%, but in line with prior period. The quality grade of 89% Grade 1 skins achieved at Farm sales was consistent with that achieved in 2017. Notwithstanding this result, skin quality after tanning continued to be negatively impacted by legacy disease issues that arose as a consequence of poor water quality resultant from low Lake water levels in late 2016 and early 2017. Animals were held back in pens for as long as possible to maximize skin quality and consequently harvesting was delayed well into the final quarter of the year with 53% of the offtake occurring in that period. The intensity of scrutiny by the customer at sales grading increased materially in an effort to try and identify those miniscule defects that might potentially only appear on the finished skin.

We invested significant financial and human capital into revising and strengthening operational processes, systems and oversight in an effort to resolve the quality challenges. This is not a straight forward exercise as many of the micro-defects are neither visible on the live animal nor on the wet salted skin.

A stand-alone research trial facility was constructed towards year-end to allow for focused and applicable trials on disease transmission and skin quality. Construction of a research laboratory was initiated which is to be equipped to perform relevant scientific analyses. There is positive improvement evident from these efforts and we anticipate this to be reflected in the finished skin quality grades towards year end.

The average skin size at 34.4cms was consistent with the customer’s request for the production year and was a marginal improvement over prior period. (34.3cm – FY17). The size distribution produced varies slightly from year to year at the request of the customer to satisfy specific market dynamics.

We closed the period with a total of 162,672 grower crocodiles on the ground compared to 157,675 at the end of FY17. This number of crocodiles was consistent with our strategy to achieve a sustained annual production of 46,000 skins. A further eighty new grower pens were constructed in the period at Nyanyana Farm to facilitate the earlier movement of stock out of hatchling pens in spring each year. This is a key initiative in terms of further enhancing animal welfare and improving skin quality. Efforts on the northern farms to complete the 330kWp solar energy project that commenced in 2017 continued through 2018 with a change of scope approved to facilitate a connection and feed into the national grid. Simultaneously, construction work began in 2018 on an additional 470kwp solar array extension that will bring installed capacity to 800kWp. Both arrays will be commissioned simultaneously in early 2019 with all relevant regulatory approvals having been obtained including registration as an Independent Power Producer. This not only achieves a reduction in energy overheads but reinforces the Company’s commitment to sustainability through the application of alternative and renewable energy solutions.

Amendments to the conditions pertaining to meat exports into the EU necessitated the renegotiation of health certificates with receiving countries. Delays occasioned by the definition of new meat testing protocols and the identification of accredited laboratories to facilitate this, resulted in the volume of meat produced qualifying for export decreasing from 147 tonnes prior year to 65 tonnes in 2018.

Alligator Operation

The operation had a total of 43,770 alligators in pens at the end of the period under review. The 2018 harvest crop was severely impacted by double scale which was an industry wide problem that affected some farms more than others.

This is a relatively common skin abnormality that normally occurs at a low incidence. However, a variety of unrelated but simultaneous reasons can result in much higher occurrences. Growth rates were reduced and skin grades realised on the harvested crop were not consistent with expectations. Several aggressive interventions were implemented, at both a strategic and operational level, to address this.

Harvesting was deferred on the worst affected stock and carried over into 2019 in an effort to improve the skins before harvest. We now have a more comprehensive knowledge, of the causes and management strategies, to reduce and prevent a recurrence of double scale in the future.

Hatchling procurement was completed in October with a total of 13,193 hatchlings received, this being in line with expectations. An additional total of 10,163 yearling animals were procured for grow-out into both medium and large sized skins to optimize TCR’s future revenue earnings. The demand for good quality medium and large sized alligator skins at competitive prices has remained steady throughout the period.

Sustainability and Good Husbandry Practices

Padenga is a founder member of the International Crocodilian Farmer’s Association, being a grouping of 12 full producer members that has jointly participated in the development of Good Operating Practices governing the intensive production of crocodilians. From these a set of standards has been developed covering all aspects of production including husbandry, animal welfare, best practice, environment, sustainability and social considerations. The Association has appointed a third-party independent entity to develop an audit and certification scheme which members have committed themselves to in order to demonstrate full compliance with the norms expected of first world livestock production systems. The standards for crocodilian production have been developed on evidence-based outcomes and follow the latest approach towards assessing animal welfare, good husbandry and compliance with ethical production systems. Significant investment has been made by Padenga across all its business units to implement the changes necessary to achieve these compliance standards and the business is anticipating being audited and certified under the auspices of this initiative during the course of 2019.

Prospects

The Group is optimistic about further growth prospects within both its business units. The Zimbabwe operation is projecting to sell 46,000 premium quality skins in 2019. The concerted initiatives to address the historical micro-defect issues impacting negatively on skin quality are showing positive results at farm level and are expected to flow through to finished skin grade. Demand for defect free skins remains steady and prices are anticipated to hold as long as the quality expectations of the premium market are satisfied.

We forecast this operation will record steady growth in 2019. In the Alligator operation, the 2019 harvest crop is less afflicted by double scale and targeted quality grades are achievable.

In addition to the sale of watchband sized skins that were unsuitable for grow-out, we will have a mix of medium and large sized skins for sale in 2019. We anticipate that this operation will continue its progress towards meaningful profitability in FY19. The Group is considering an investment into an export orientated business. The objective is to enhance and diversify the Group’s foreign currency earning capacity and thereby significantly improving profitability. Advisors have been appointed and are currently investigating this prospective transaction. Details of the investment will be announced to shareholders in due course.

Dividend

The Board has declared a final dividend of 1.22 RTGS cents per share, payable in respect of all the ordinary shares of the Company. This dividend is in respect of the financial year ending 31st December 2018 and will be payable in full to all the shareholders of the Company registered at the close of business on Friday 10 May 2019. The payment of this dividend will take place on or about Friday the 17th of May 2019. The shares of the Company will be traded cum – dividend on the Zimbabwe Stock Exchange up to the market day of Tuesday 7 May 2019 and ex – dividend as from Wednesday 8th May 2019. This dividend represents a cash dividend cover of 2 times.

Appreciation

I wish to extend my sincere appreciation and that of the Board, to the executive directors, management and staff across the entire Group for their invaluable service and contribution, which has once again, produced a satisfactory set of financial results. I congratulate them on this and commend them for their commitment, passion and foresight in moving the Group forward. My thanks again to the non-executive directors for their guidance, oversight and counsel during this financial year.

T N Sibanda
Chairman