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Tawanda Musarurwa
There is a general expectation that pharmaceutical firms could benefit from the coronavirus (Covid-19) pandemic.
This is, however, very assumptive. For one thing, the key assumption here is that the company’s fundamentals have been right all along.
The case of Medtech Limited highlights this point.
Medtech operates in three market segments: fast-moving consumer goods, medical supplies and manufacturing of light industrial products. But critically (in this context), its FMCG division manufactures and markets personal care products, and the medical division produces pharmaceutical products for the wholesale distribution to retail pharmacies.
The group also supplies products for laboratories and services education and healthcare institutions it’s basically the right company, at the right time, with the wrong fundamentals.
The group’s FY2019 numbers highlight this point.
The group recorded a sharp 70 percent slump in sales volumes over the year on the back of reduced demand.
“Decreased consumer spending as income levels have not kept up with rising general price levels and this has caused aggregate demand to remain subdued,” said the group’s chairman Rosemary Mazula in a statement accompanying the results.
Revenues were down 31 percent to $70, 4 million over the period under review, from $101 million in the previous year.
And of particular concern are the group’s legacy debts that pose a threat to the sustainability of the business.
Medtech’s liabilities to foreign creditors amounted to R27, 8 million at the close of its 2019 financial year.
“At this stage, the group is unsure when payments will be made for the debts validated and when a response will be received for appeals lodged. Delays in the payment of legacy debt have resulted in cuts in supply and stock-outs which is one of the contributing factors to the decreased sales volumes,” said the chairman.
“For prudence, these foreign creditors have been restated to the interbank rate of 16, 77 at the end of the reporting period. The extent of liabilities owing to the foreign creditors leaves the group in a precarious position,” Mazula said.
To improve its long-term prospects, Medtech needs to find a way to overcome its foreign currency debts in a business operating environment that is typified by foreign currency shortages.
Added to that, the forex shortages also have an impact on its manufacturing side, which impacts the topline.
And then there is the issue of weakening demand due to poor disposable incomes.
Analysts don’t see a silver lining for the group in the short-to-medium term.
“Despite the group’s exposure in the resilient FMCG sector amid the pandemic, Medtech’s business modeł extensively relies on imports and this has significantly affected its ability to maintain adequate stock levels,” said analysts at research firm Morgan & Co.
“The business’ fall from grace with foreign creditors over the overhanging foreign liabilities (which were equivalent to 57 percent of FY2019 revenues) also presents additional solvency concerns that could threaten the going concern outlook of the business. We estimate continuous losses throughout 2020.”
Online Reporter