Business Editor
Old Mutual Zimbabwe reported a 2 percent growth in adjusted operating profit in the half year to June.
The group was strong in cash generation and maintained a strong balance sheet despite the tough operating conditions.
Group chief executive Mr Jonas Mushosho told analysts on Tuesday that the economic environment is likely to continue in the troughs but the group is well positioned going forward due to its key strengths in governance and risk management, operational efficiency, capital base and wide distribution network.
“We will continue leveraging key competencies in pursuit of strategic goals. However, the subdued environment also means that growth opportunities are limited.”
Growth will be anchored on CABS. “We believe that our strategy of investing into the growth of CABS is very important as it is our distribution channel for the group.
“Secondly, we have decided that CABS is going to be our key for entering into the new clusters of economic growth, the informal sector and the SME space.
“Our activity going into the informal sector is going to cover funding, provision of shelter, loans and risk products. We are going to use CABS,” said Mr Mushosho.
The group reported a 9 percent increase in premium income to $81,9 million driven by single premium business, life sales were, however ,down 23 percent to $7,5 million. Revenue from operations grew 12 percent to $120,6 million.
The AOP grew 2 percent to $32,4 million. Finance director Isiah Mashinya said the group had managed to grow its business as the Net Client Cash Flow increased 50 percent to $62,2 million.
Operating expenses were, however, 25 percent up to $45,8 million.
Funds under management were 6 percent up to $1,7 billion and the group is targeting to grow this to $2 billion in the short term.
CABS reported a 6 percent increase in net interest income to $18,1 million from $17,1 million achieved in the comparative period last year. The group attributed the dip in profit, which fell by 33 percent to $7,2 million from $10,7 million last year, to the costs incurred to support growth as well as investment in the new IT system. Deposits increased by 23 percent to $529,5 million from $430 million.
Our thoughts on Old Mutual Zimbabwe
OMZL is one of Zimbabwe’s largest companies, and its key data tells the whole story. But we feel there is a huge mismatch between its size and its reported earnings. Surely the company is able to do better than this.
We have in the past stressed the need for OMZL to up its game when it comes to the diversity of its investments portfolio, investment strategy, and as well as its investment decision.
These are key contributors to its results of operation; and since investors and analysts expect a return, the onus is on the group to put their house in order. Given the group’s size, its assets and FUM, which are shy of 10 percent of our GDP, the investment income is still below expectations. This is a result of what we would call “questionable” investment decisions.
While the top line has grown by a decent 10 percent, the group is still lacking in a number of areas. The group needs to work on its costs efficiencies, which can be decomposed into technical efficiency and allocative efficiency.
Technical efficiency measures the firm’s success in using its inputs to produce outputs.
Allocative efficiency measures the firm’s success in choosing the cost minimising combination of inputs conditional on output quantities and input prices.
To be fully cost efficient, a firm must operate with full technical and allocative efficiency.
The increasing costs, in our opinion are a hindrance to the group’s results of operation going forward.
In the same period last year, the company made $1,92 in revenues for every $1 spent in costs; and in this period the company made $1,69 in revenues for every spent $1 in costs.
These are the expenses excluding net claims and benefits. This in our opinion means that OMZL is now making less money per dollar. Had the company maintained its operational efficiency, its revenues should have been $87million, a 20 percent increase compared to a 10 percent increase in revenues. Management should now focus more on cost realignment to improve its profitability in the forecast period.
The question we should ask then is: was it worth it to go for more revenue growth at such a huge cost for only a paltry 2 percent growth in the group’s Adjusted Operating Profit?
Unfortunately we do not think so; we believe there is a much better strategy than the one management pursued.
There is need to go back to the drawing board, as it is a given that its traditional markets are changing if not shrinking.
The company acknowledges the changing economic landscape in the country and has identified the opportunities that are being created by those changes. This should include product-line diversification and geographic diversification to suit this changing economy.
We believe that the only way is to come up with a solution for the ever growing informal sector and rural Zimbabwe.
With those bright minds we believe they can come up with a right- priced product at a reasonable cost.
While we appreciate the group’s results presentation we, however, feel more should be done about the level of disclosures of the financial statements which are not that informative. We are left guessing as to the asset and liability classes on the balance sheet. But otherwise not a bad show, a better improvement from the OM team this time around.