adminRadar Holdings plans to grow into a complete construction company as part of an ultimate aim to become a provider of housing solutions.
Chief executive Elias Hwenga told analysts last week that Radar Properties will be dominant in the future but the group would overall seek to become a significant player in the construction sector.
Clay bricks are the major cladding material for houses in Zimbabwe and therefore the brick manufacturing industry’s performance is highly influenced by trends in new housing development.
Within its traditional markets, there is intense pressure from substitutes like cement and competition from the many informal farm brick making operations dotted across the country’s low income areas.
We can safely conclude that business growth opportunities within the brick making industry are now limited and this is not taking cognisance of the fact that there is a slowdown in the local economy.
The many dynamics affecting the brick manufacturing industry make the company unattractive to investors. Faced with so many threats; companies like Radar should certainly evolve in order to survive the slump in business.
The trick is to create something that is meaningful and has the relevant scale to grow without adding too much costs and complexity.
The good thing about Radar it seems that after the demerger the company is now structuring itself into a more integrated construction and real estate business.
This means the company will not solely depend on revenues from the brick making and property operations going forward.
This requires that the group reinvents itself and diversify its operations into a more vertically structured organisation with units that feed into each other; taking advantage of growth opportunities up and down the property development value chain.
This presents a very good opportunity to improve its top line and create synergies within the group. In addition to brick making and properties the group could further expand into manufacturing other building materials like tiles, timber and maybe go further into property development and realtor.
The huge cost benefit of this and the resultant growth in revenues will definitely see an improvement in the company’s operating results. We all know that brick making is both labour and energy intensive. These are the major cost drivers, and key to improving profitability is using energy efficient technologies.
The company should therefore look at investing in such technologies so as to improve its cost structure. While Radar released improved results when we compare to last year’s, however, will this be sustainable if we were to forecast a five year period? We would like to think not. These results are more of a mirage than a concerted result of management effort. Firstly the company temporarily shut down one of its factories as a result of depressed demand, this obviously contributed to a reduction in costs.
Secondly there were two types of costs which were once off items last year. There was a fair value loss of $600,000 and non-recurring items of $1,8 million.
If we add all these three together we could possibly see that these items plus the factory shut down contributed hugely to the 62 percent decline in costs from last year; and not the result of operational efficiencies as alluded by management. What we know is that a cost efficient operation does not temporary shut down its factory.
Factory closure and a downward revision of selling prices were the major factors that caused a dip in revenues which were down by 9 percent.
However, the company saw an improvement in brick sales in three regions which include Midlands, Masvingo, and Mashonaland.
These target areas saw unprecedented double digit growth. If these sales could be sustained at such low prices then investors and analysts could possibly have something to smile about. In our opinion these are possibly once off due to a number of construction projects taking place in those regions, and next year’s results would be the test case on the sustainability of these sales numbers.
The property unit also seems to be besieged by the challenging environment within the property sector. A very low and irregular occupancy rate of 60 percent will definitely not see the unit contributing meaningfully to revenues any time soon.
We definitely wonder what the collection rate is; management has opted for investors and analysts to play the guessing game on this one.
It is good that the group is looking at a property development project in Bulawayo. We hope that they have a solid business model for the project, and have at least an indication of the funding and where it will come from. With a market cap of just above $2 million the reality is that the company will definitely face challenges raising capital given the tight shareholding, considering the bulk of Zimbabwean listed company shun dilution.
While the company has an okay quality of earnings ratio of 1, which is better in comparison to some ZSE peers, the ability to sustain and grow those earnings is of greater importance. We agree that calculating quality of earnings is an important piece of evaluating a company’s financial health as it encompasses the essential economic fundamentals of the business.
The closer the ratio is to zero the higher the company’s quality of earnings. So a ratio of 1 is okay in this market given the quality of earnings ratios we have seen in the last 12 months.
Management at Radar have a big challenge in the forecast period, and this is where we shall judge them. Short of diversifying vertically Radar will remain unattractive, as there is very limited revenue growth in brick making and properties. — Wires.
Online Reporter