Axia Corporation Limited (AXIA.zw) 2021 Annual Report

Chairman’s Statement and Review of Operations

CAUTIONARY STATEMENT – RELIANCE ON FINANCIAL STATEMENTS PREPARED IN ZIMBABWE FOR 2020/2021

The Directors would like to advise users to exercise caution on their use of these financial statements due to the material and pervasive impact of the technical difficulties brought about by the change in functional currency in February 2019 and its consequent effect on the usefulness of the financial statements for 2020/2021 financial periods and the adoption of reporting under International Accounting Standard (IAS) 29 “Financial Reporting in Hyperinflationary Economies” effective 1 July 2019. Whilst the Directors have exercised reasonable due care and applied judgements that were deemed to be appropriate in the preparation of these financial statements, certain distortions may arise due to the various economic factors that may affect the relevance and reliability of the financial information presented in economies that are experiencing hyperinflation.

COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD 29: FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

The Group adopted the Zimbabwe Consumer Price Index (CPI) as the general price index to restate transactions and balances as appropriate. Non-monetary assets and liabilities carried at historic cost have been restated to reflect the change in the general price index. Monetary assets and liabilities and non-monetary assets and liabilities carried at revalued amounts have not been restated as they are presented at the measuring unit current at the end of the reporting period. Items recognized in the statement of profit or loss have been restated by applying the change in the general price index from the dates when the transactions were initially earned or incurred. A net monetary adjustment was recognized in the statement of profit or loss. All items in the statement of cash flows are expressed in terms of the general price index at the end of the reporting period. Comparative amounts in the Group financial results have been adjusted to reflect the change in the general price index. Financial statements prepared under the historical cost convention have also been presented as supplementary information.

The CPI increased from 1,445.20 in June 2020 to 2,986.44 in June 2021, representing a 107% increase in the period under review compared to the Reserve Bank of Zimbabwe (RBZ) Auction rate which increased by 34% during the same period. Due to these and other disparities currently prevailing in the economy, significant distortions can occur in the preparation of inflation adjusted financial statements in accordance with the requirements of IAS 29. Of significance in the inflation-adjusted financial statements is a net monetary loss of ZWL$ 951.006 million in the current period.

According to IAS 29, monetary movements can be derived as the difference resulting from the restatement of non-monetary assets, owner’s equity and items in the statement of comprehensive income and the adjustment of index linked assets and liabilities. As a retail centered Group, restatement of prior period inventories contained older, slowmoving stocks which resulted in higher restated opening inventory values, against current period inventories with a much more current age profile owing to the efforts to clear these old and slow-moving lines. In inflation adjusted terms, this results in significantly reduced gross margin, which impacts profitability.

The Directors view these distortions as material and pervasive to these inflation-adjusted financial statements and advise users to exercise caution on their interpretation. Financial statements prepared under the historical cost convention are therefore also presented as supplementary information.

OPERATING ENVIRONMENT AND OVERVIEW

During the financial year ended 30 June 2021, the operating environment remained fragile but was underpinned by a relatively stable local currency, with inflation continuing to subside resulting in all Group businesses recording volume growth except for the Zambian operation. Zimbabwe witnessed some increase in consumer disposable income benefiting from increased economic activity driven by infrastructure spending, improved mining activity and better agriculture output.

Volume growth in Zimbabwe operations was witnessed despite the COVID-19 lockdown restrictions experienced during the second half of the financial year. The COVID-19 lockdown measures reduced economic activity as there were disruptions to normal business operations. During lockdown periods in the financial year, TV Sales & Home was particularly affected as it was not fully operational whilst Transerv and DGA were operating at reduced levels with minimal staff. The regional distribution businesses were not affected as there were no effective lockdowns in Zambia or Malawi. Post 30 June 2021, Zimbabwe experienced another COVID-19 lockdown in July and August 2021. During this renewed lockdown period, all our business units were operating albeit with restricted trading hours.

The introduction of the foreign currency auction system in June 2020 played a critical role in formalizing and improving the allocation of foreign currency to economic participants. The Group is hopeful that this auction system will continue to ensure that payments to foreign suppliers will be met, despite some delays being experienced in receiving the auction money. There is concern that the current trends are showing a significant gap between the official auction and market rates. The result of this growing level of arbitrage and market distortions have negative effects on the entire economy.

The receding inflation has given rise to the correction of gross trading margins across the Group’s businesses in Zimbabwe. However, the indexed cost base and high interest rates had a significant impact on the Group’s financial results. Operating expenditure is expected to correct to reasonable levels as inflation continues to subside. Management will continue to adapt business units’ operating models to manage business growth and sustainability. The Group’s business units were resilient despite some adverse factors and this helped the Group to record a fair performance.

FINANCIAL OVERVIEW (BASED ON INFLATION ADJUSTED RESULTS)

The impact of a relatively stable auction exchange rate during the reporting period positively affected demand, thus turnover volumes were above those traded in the comparative period. The Group reported revenue of ZWL$21.214 billion during the year to achieve a 36% growth compared to the prior comparative period. The Group benefited from improved access to foreign currency through domestic nostro sales, although this was disrupted by the unintended consequences of SI127 of May 2021. The Group posted an operating profit of ZWL$2.118 billion, representing a 20% increase on the comparative period. Equity accounted earnings are mainly comprised of the results of Restapedic Bedding. Owing to the significant net monetary loss of ZWL$ 951.006 million, Basic Earnings Per Share and Headline Earnings Per Share declined by 45% and 44% respectively.

The Group continues to prepare a set of results using the United States dollar as a reporting base for internal measurement which reflect a headline earnings growth in real terms of 25%.

Net borrowings increased by ZWL$1.336 billion mainly to support strategic working capital investments. The increase however had an impact on the results through high finance charges. The Group generated cash of ZWL$429.079 million from operations which was 76% below the comparative period.

The Group’s capital expenditure for the year totalled ZWL$412.255 million and this was limited to critical maintenance and expansion projects as these were also affected by inflationary pressures.

SUSTAINABILITY REPORTING

The Group continues to apply the Global Reporting Initiatives (GRI’s) Sustainability Reporting Guidelines as part of its commitment to ensuring the sustainability of its businesses. The Group will continue to uphold these practices and values across its operations to ensure that long-term business success is achieved in a sustainable manner.

OPERATIONS

The main operating business units in the Axia Corporation Limited Group are TV Sales & Home (TVSH), Distribution Group Africa (DGA) and Transerv. TVSH is Zimbabwe’s leading furniture and electronic appliance retailer with sites located countrywide. DGA’s core areas of expertise lie in inbound clearing and bonded warehousing, ambient and chilled warehousing, logistics, marketing, sales, and merchandising services. Transerv retails automotive spares and accessories through retail stores and fitment centers to service the needs of its customers.

TV Sales & Home

TV Sales & Home recorded a decent set of results despite the major restrictions to social and economic activity implemented by authorities in response to the advent of the COVID-19 pandemic.

The business recorded turnover growth of 33% on prior year and this is attributed to volume growth of 35% against the comparative period. The volume growth was driven by an increase in the store network, increased promotional activity, improved product supplies and mix as well as the reintroduction of credit sales despite the offsetting effect of the lockdown induced reduction in trading hours to retail activity. The Black Friday, Workers Day Deal and Hisense Euro 2020 promotions were very successful, contributing significantly to the respective periods’ turnover. The debtors’ book grew by 306% in value and collections on the book have remained solid.

Inventory holding remains firm as our relationships with local suppliers continue to support the value chain. As reported in the interim results statement, TV Sales & Home will continue to focus on products from local suppliers as they have proved critical in the businesses operations. The manufacturing units continued to witness growth in both turnover and volumes despite the operating capacity limitations arising mainly from local raw material supply gaps as well as timely access to foreign currency for imported raw materials.

Restapedic’s turnover and volumes were 5% and 52% above prior year respectively. Growth in Legend Lounge was due to a low base as the business was established in 2020.

Growth and profitability remain the key thrust and to that end, the business will be aggressively growing the debtors’ book and investing in production facilities to increase production of lounge suites and beds so as to service the local and export markets. These plans to increase production facilities are underway with a factory build in progress. There are also plans to enhance the retail store network which include opening a new store in Bulawayo in the first quarter of the coming financial year coupled with upgrades to systems and outlooks of existing stores to enhance the customer experience.

Distribution Group Africa – Zimbabwe

The distribution business in Zimbabwe delivered a fair set of results despite the crippling impact of COVID-19. Turnover increased by 29% on the prior comparative period, with volumes growth of 3% year on year. The volumes growth was largely driven by locally sourced products which do not require sourcing of foreign currency. The business continues to grow the balance sheet in real terms and to find ways to grow market share thus improving volumes. Management expects this business to continue to grow in the foreseeable future.

Management has been improving the logistics and distribution model by distributing some products directly from source to the market, thus avoiding duplications and improving efficiencies. As reported in the interim results statement, the business concluded a major local distribution agency with effect from 26 April 2021 which will positively contribute to operating profit in the new financial year.

Distribution Group Africa – Region

The trading environments for the regional operations continue to be volatile and challenging. Zambia experienced resurgent inflation and currency depreciation during the financial year whilst in Malawi access to foreign currency was a challenge. The consolidated turnover for Zambia and Malawi, in US$ terms, declined by 7% year on year owing to a distributorship agency business which was discontinued in Zambia. There has been improvement in revenue generation during the fourth quarter and the momentum is expected to continue in the new financial year. Gross margin was up 16%, despite decline in revenue while operating costs were 13% below the prior comparative period resulting in a decent operating profit. The growth in operating profit at 53% ahead of the comparative year was however diluted by significant exchange losses in Zambia as the local currency depreciated by 52% and 25% to the South African Rand and US$ respectively. The seamless transfer of power after the elections in Zambia ushered in hope that the currency volatility will be dealt with. Malawi recently concluded a major distributorship agency with Unilever which is expected to significantly boost turnover and profitability in FY2022.

Transerv

While the e ffects of the COVID-19 pandemic were felt in the supply chain, the business managed to achieve revenue growth of 30% which was underpinned by volumes growth of 67%. Transerv will continue focusing on fast moving product lines and maintain its grip on cost control. The business completed its rebranding program where its three former MIDAS franchised retail stores have been rebranded to Transerv. Renovations were completed on 4 retail outlets and 1 fitment center, giving a muchimproved customer experience. As reported in the third quarter trading update, an additional retail and fitment centre was opened in Kariba in March 2021. The branch has some additional lines which have been offered to service the local needs. In FY2022, management is focused on improving revenue generation as well as aggressively expanding the store network.

IMPACT OF COVID-19

The Group remains focused on ensuring the safety and health of its employees, customers and other stakeholders and thus, will continue to implement and observe COVID-19 guidelines approved by the World Health Organisation and the Ministry of Health and Child Welfare, throughout its operations. The Group applauds the Government on the commencement of the nationwide vaccination program for COVID-19 and has been encouraging its employees to make use of this opportunity to get vaccinated.

The impact of COVID-19 on businesses globally is and will continue to be significant. The Group remains resilient and determined to withstand the risks associated with COVID-19. At present, the financial status of the Group remains healthy, and the impact of the COVID-19 has not created any issues from a solvency or liquidity perspective.

PROSPECTS

The ongoing COVID-19 related cost and inefficiencies continue to periodically affect global supply chains. Management will continue to assess all supply chain constraints for imported and local goods and will thus be working closely with suppliers to ensure adequate product supply.

The manner in which Zimbabwe will manage and contain COVID-19 will have an impact on the short to medium term prospects of the economy and this will have an impact on the business community. The roll out of vaccines provides hope that countries will attain herd immunity that will allow a return to normal levels of social and economic activity. The Group has been prudent in its cashflow management to the extent that its credit facilities with foreign suppliers were not fully utilised and the growth in trade payables did not exceed growth in turnover.

The Group’s management teams will continue to optimally manage the Group’s gearing levels, that is to align the quantum and cost of debt deployed across the Group, focus on improving free cash flows, invest free funds into assets with attractive returns, manage foreign currency exposure and ensuring the balance sheet value remains protected in real terms.

The Group is looking forward to the execution and completion of the following exciting opportunities in the new financial year:

• Investing in production facilities to boost lounge suite and bed manufacturing at TV Sales & Home. We are also planning to invest in working capital to aggressively grow the debtors’ book.
• Aggressively expanding the store network at Transerv.
• Optimising and increasing the newly acquired major distribution agencies in Zimbabwe and Malawi at Distribution Group Africa.
• The Group ventured into the hardware business through opening a hardware store in the last quarter of the financial year ended 30 June 2021 as a joint venture. We are looking forward to opening additional stores.

Such projects will require the Group to channel free cash generated towards them.

DIVIDEND

Due to the aforementioned expansion projects where the Group is reinvesting most of its free funds into new business opportunities, the Board has decided not to pay a final dividend. The Board is confident that in the next 6 months, dividend payments will resume.

APPRECIATION

I express my sincere gratitude to the Board of Directors, executives, management and staff for their ongoing efforts during the year under review. Their commitment, despite the challenging operating environment, is greatly appreciated. I also take this opportunity to thank the Group’s valued customers, suppliers and other stakeholders for their continued support and trust.

L E M NGWERUME
Chairman

30 September 2021

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