CHAIRMAN’S STATEMENT
OVERVIEW
The TA Group had a good year, recording a growth in headline earnings per share of 126% compared to the year ended 31 December 2012. However, this wa offset by a US$13.7 million impairment charge against the Group’s investment in its associate company, Sable Chemical Industries Limited (“Sable”).
In my report, I will talk about the performance of the businesses first and then share with you the Board’s views on Sable and the reason why an impairment charge was recorded against the investment.
Zimbabwe investments
The Zimbabwe investments showed a mixed performance during 2013, with the insurance cluster performing well, agro chemicals posting a significantly reduced operating loss when compared to last yearand the hotels cluster reporting a loss for the year.
a) Insurance
Despite the adverse macro-economic conditions,the Zimbabwe insurance companies recorded growth, with the exception of Grand Reinsurance.This growth was on the back of good underwriting performance and fair value gains achieved from the Zimnat Plaza (formerly the AMC Building). The strong underwriting performance was a result of good cost control and initiatives that have been undertaken in the areas of new product development and expansion of the distribution channels.
Grand Reinsurance did not perform to expectations during 2013. As such, the business model has been adapted to realign the operations to changes that took place in the reinsurance market during 2013. We are fairly confident that the company will post a profit in 2014.
Subsequent to 31 December 2013, the Group entered into an agreement for the purchase of an additional 20.75% stake in Minerva Risk Advisors (Private) Limited (formerly AON). The transaction will increase the Group’s interest in Minerva from 30.25% to 51%. According to the agreement, the discounted present value of the 20.75% stake is $747,000, to be paid over three annual instalments commencing in 2014. With Minerva under the Group’s control, profits are expected to grow rapidly.
b) Hotels
On the hotels side, performance was negatively affected by low business volumes due to the decline in economic activity. As a result, most city hotel operators engaged in a “price war” to attract customers. In addition, the hotel business was also affected by Government’s inability to pay timeously. However, I am glad that the hotel industry has now reached an agreement with Government which allows for a set-off of amounts due from Government against amounts payable for Value Added Tax (“VAT”) and Pay As You Earn (“PAYE”). As TA we are committed to this industry and we are confident the business will improve and that we will be able to make a return on the refurbishment work that has been undertaken to date at Cresta Lodge in Harare and Cresta Sprayview in Victoria Falls.
c) Agrochemicals
On agrochemicals, the loss incurred during the year was lower than that for the year ended 31 December 2012. This was due to increased production and lower finance costs at Sable. At Zimbabwe Fertiliser Company Limited (“ZFC”), the loss decreased as a result of higher fertiliser sales and improved cost and credit control. However, the key issue for this cluster is the finalisation of negotiations with Government and the Zimbabwe Electricity Supply Authority (ZESA) for a viable electricity tariff. TA believes in this industry and I will cover our views on this business later in my report.
d) Disposal of investments
The process to divest out of ZFC is still underway. The Group was unable to dispose of its stake in PG Industries Zimbabwe (“PG”) during 2013. During the year under review, PG entered into a scheme of arrangement with its bankers and creditors. The resultant effect of this scheme was to reduce TA’s stake in PG from 13% to below 1%.
Outside Zimbabwe investments
a) Insurance
Increased competition in the insurance market has seen Botswana Insurance Company’s (“BIC”) revenues dropping. However, BIC was able to maintain underwriting profitability despite this drop in revenues, primarily due to good underwriting discipline and tight cost control. A number of initiatives are being implemented which will see BIC regaining its market share.
I am pleased to advise that we have now turned a corner in Uganda. Lion Assurance Company Uganda (“LAC”) posted a good set of results both in underwriting profit and cash flows from operations. I believe we now have a good team in place that understands the market and is working hard to ensure that the turnaround is sustained.
b) Hotels
Cresta Marakanelo performed well mainly on the back of good results at Mowana Resort. Competition in Gaborone has intensified with the opening of new hotels in this market. This has caused the Group to look carefully at its offering in Gaborone with the intent of improving the product and service in every area. Cresta Marakanelo has continued to grow by opening new hotels outside Gaborone. During 2013 Cresta Marakanelo opened a new hotel in Jwaneng, which is 100 kilometres west of Gaborone. Plans are underway to lease a new hotel and conference centre outside the capital.
Sable Chemical Industries
In my statement to shareholders for the year ended 31 December 2004 I said: “Sable’s intrinsic value arises from two attributes:a) transporting urea into Zimbabwe - a land locked country at the Southern most tip of the second largest continent in the world – is both very expensive and more costly than importing ammonia into Zimbabwe, and b) the owners of Sable, if its assets are prudently maintained and profitably operated, have an option to incur the lowest capital costs of expanding Zimbabwe’s ammonium nitrate manufacturing capacity from its current level of 240,000 metric tons per annum to a capacity of 580,000 metric tons per annum through a simple expansion of the ammonia plant. Sable is pivotal to the mission of increasing fertiliser consumption at the lowest possible foreign exchange cost to Zimbabwe---
---If Sable did not exist, Zimbabwe would have to satisfy all its nitrogenous fertiliser needs by importing urea. Zimbabwe will have to import 195,131 tons of urea to replace 110,244 tons of ammonia necessary to produce Sable’s annual capacity of 240,000 tons of ammonium nitrate---
---Sable’s second advantage is that it provides its owners and Zimbabwe with the cheapest possible way of doubling Zimbabwe’s nitrogenous fertiliser production capacity. Ideally, Sable’s profits would be of a size to permit Sable to finance expansion of its annual capacity --- Realising that ideal depends on the electrolysis plant possessing a long life---”
Ten years from the time I wrote this statement, I still believe in what I said, which is that Sable is a strategic investment for Zimbabwe and a good business for TA to be in. However, the issue now is for Sable to have a viable electricity tariff for at least three years whilst we are implementing alternative technology to produce ammonia, the feedstock in the manufacture of ammonium nitrate. Sable is currently engaging
Government and ZESA to achieve this.
As at 31 December 2013, the Group’s financial year end, and to date, the tariff negotiations had not been completed and the future returns from Sable could therefore not be estimated with reasonable certainty. As a result we could not justify the value of Sable in TA’s books and consequently, in order to comply with the requirements of International Accounting Standard (IAS) 36: Impairment of Assets and IAS 39: Financial Instruments: Recognition and Measurement, the Group recorded an impairment charge of US$13.7 million against its investment in associate, Sable. This did not have an impact on Group cash flows.
I wish to assure the shareholders that this impairment will be reassessed once the tariff negotiations have been finalised and we are in a position to estimate the future returns from Sable with reasonable certainty.
Corporate Governance
There were no changes to the Board during the year.
Acknowledgement
On behalf of the Board, I wish to thank management and staff for their effort during the past year. I also wish to thank the various stakeholders and all authorities for their continued support.
Thank you.
Shingai Mutasa
Chairman
22 April 2014