Axia Corp well positioned to grow margins despite inflation fears

Rising inflation in Zimbabwe will provide room for Axia Corporation to increase prices in some of its product lines and should be able outperform rate of growth in costs enabling the business to sustain margins, analysts say.

IH Securities says the group should continue witnessing its top line growth year-on-year relative to overheads growth.

“Rising inflation in Zimbabwe will provide room for the business to gradually increase prices in certain lines and run rate in top-line should outperform rate of growth in costs enabling the business to sustain margins. In FY18 revenue growth came in at 30.5% y/y relative to overheads growth of 9.3% y/y, a trend we believe will be sustained going forward,” IH said in a note to investors.

“We expect significant growth in TV Sales & Home in FY19 due to higher disposable income of civil servants stemming from the 17.5% pay rise in relation to inflation at approximately 5%. Originally designed to be driven by credit sales, TV Sales & Home has over time migrated from an 60/40 credit to cash mix (3yrs ago) towards a 30/70 credit to cash mix presently. We believe that whilst this was partly a symptom of the environment and worked to Axia’s advantage under current macro conditions.”

IH says management will need to rebalance its mix and maintain a quality book.

With 43 stores nationwide and at least 2 more stores by Year end, IH feels the business does have sizable footprint.

“Whilst DGA performance has remained resilient, we do see some downside risk in this business due to limited import licenses. We are however encouraged by the level of scale in this business and the scope to further diversify into the region, explore opportunities for vertical integration and de-risk the Zimbabwe business to some extent. Whilst Transerv similar to TV Sales & Home has a sizeable footprint, it does have a relatively higher appetite for forex, thus we cautiously forecast equity accounted earnings of $1.24mn to FY19 driven by Transerv. Overall, inventories of $47.75m at group level ensure stock cover of 5 months which is encouraging, debt has been restructured erasing long-term debt on the balance sheet whilst the capex burden going forward looks moderate,” said.

Yet despite its seemingly hot fundamentals, IH placed a hold recommendation on the counter.

Rising inflation in Zimbabwe will provide room for Axia Corporation to increase prices in some of its product lines and should be able outperform rate of growth in costs enabling the business to sustain margins, analysts say.

IH Securities says the group should continue witnessing its top line growth year-on-year relative to overheads growth.

“Rising inflation in Zimbabwe will provide room for the business to gradually increase prices in certain lines and run rate in top-line should outperform rate of growth in costs enabling the business to sustain margins. In FY18 revenue growth came in at 30.5% y/y relative to overheads growth of 9.3% y/y, a trend we believe will be sustained going forward,” IH said in a note to investors.

“We expect significant growth in TV Sales & Home in FY19 due to higher disposable income of civil servants stemming from the 17.5% pay rise in relation to inflation at approximately 5%. Originally designed to be driven by credit sales, TV Sales & Home has over time migrated from an 60/40 credit to cash mix (3yrs ago) towards a 30/70 credit to cash mix presently. We believe that whilst this was partly a symptom of the environment and worked to Axia’s advantage under current macro conditions.”

IH says management will need to rebalance its mix and maintain a quality book.

With 43 stores nationwide and at least 2 more stores by Year end, IH feels the business does have sizable footprint.

“Whilst DGA performance has remained resilient, we do see some downside risk in this business due to limited import licenses. We are however encouraged by the level of scale in this business and the scope to further diversify into the region, explore opportunities for vertical integration and de-risk the Zimbabwe business to some extent. Whilst Transerv similar to TV Sales & Home has a sizeable footprint, it does have a relatively higher appetite for forex, thus we cautiously forecast equity accounted earnings of $1.24mn to FY19 driven by Transerv. Overall, inventories of $47.75m at group level ensure stock cover of 5 months which is encouraging, debt has been restructured erasing long-term debt on the balance sheet whilst the capex burden going forward looks moderate,” said.

Yet despite its seemingly hot fundamentals, IH placed a hold recommendation on the counter.

“Considering the deconsolidation of Transerv in our forecast numbers, which partially offsets the consolidation of Hat On and Baobab and improved run rates in TV Sales and DGA, we forecast FY19 revenue of $367.87mn, EBITDA of $38.99mn and Attributable Net Income of $17.54mn. We estimate Axia to trade on a P/E (+1) of 8.3x to 2019E and 7.4x to 2020E, compared to peers at an average P/E (+1) of 10.8x to 2019E. We further estimate that Axia trades on EV/EBITDA (+1) of 4.1x to 2019E and 3.5x to 2020E vs peers at an average of 6.1x to 2019E. Using a blended DCF, SOTP and multiples-based valuation method we now arrive at a target price of $0.324 for Axia, implying upside of 19.9% at current levels. We therefore maintain our recommendation on Axia to HOLD.”