AICO Disposing of Scottco, Exhort

Reginald Sherekete

30 May 2011

AICO Africa is disposing of two of its subsidiaries, Scottco and Exhort, to concentrate on core business, according to CEO Pat Devenish. Devenish told the recently concluded Zimbabwe Investors Conference that the two businesses no longer suited the group’s business model going forward.

AICO, acquired Scottco, a cotton spinning company and Exhort, an exporter of frozen vegetables, during the Zimbabwe dollar era for value addition.

“These are profitable businesses but as the group positions itself for the future, they do not suit the business model” said Devenish in an exclusive interview. The CEO indicated that the company had already identified takers for the subsidiaries and negotiations were ongoing.

After the disposals, the integrated agro-industrial conglomerate will retain in its portfolio wholly owned Cottco, which has nine cotton ginneries strategically located around the country, a 51% stake in seed breeder Seedco, and a 49% shareholding in fast moving consumer goods manufacturer Olivine Industries.

The group’s financial position has been heavily weighed down by finance costs as the company sits on a debt of US$98 million. The company’s first half results to September 30 2010 saw revenue almost static at US$53 million, which is 3% lower than the previous period. Financing costs of US$8,2 million hammered the bottom line and the company posted a loss for the period of US$10,9 million. Short term debt amounting to US$50 million is making it difficult for the company to turn around its fortunes.

Cottco, which is the flagship of the conglomerate, is currently operating at 50% of its ginning capacity. It has installed capacity of 260 000 tonnes a year. The company has a market share of 45% but many players, particularly Chinese companies, have joined the cotton industry, thus creating intense competition.

Cottco estimates the national crop size for this season to be 268 000 tonnes, with its intake at 111 000 tonnes. The company has above 100 000 small scale farmers under contract around the country.

“But with improved discipline in the sector through adherence to Statutory Instrument 142 which regulates market players, the company seeks to increase its market share to above 50%, given how costly it is for new players to install new plants in remote areas” he said.

Cottco has been directly affected by international price movements. Cotton experts have signalled that the slide in cotton prices might prove steeper than had been thought, as they highlighted slowing demand for the lint from mills in the face of depressed margins.

The International Cotton Advisory Committee, an intergovernmental group, forecast that prices of the fibre will decline significantly in the 2011-12 season, while probably staying above a 10-year average of 60 US cents per pound.

“The main reason explaining the recent drop of cotton prices seems to be a significant slowing in demand,” the committee, indicated on their website. This definitely has a negative impact on Cottco in its turnaround initiatives.

“Lint prices have gone down from an average of US$2,40 to $1,30 a kg on the international market, definitely putting pressure on Cottco’s margins, given that the market is paying around 87 US cents locally. In other countries the producer price is around 45 to 50 US cents,” Devenish said.

Olivine Industries has been heavily affected by working capital constraints. The company is currently operating at 30% capacity.

“Significant capital injection is needed to rejuvenate this business as working capital was depleted during the price control era,” he said. The company has carried out refurbishments to their plant worth US$4,6 million in the past three years but this only helped increase capacity from 8% to 30%.

Devenish was very optimistic on this business unit as Olivine produces superior export products as compared to imported substitutes in their product range such as margarine and cooking oils.

“That is why we can charge premiums on our products; Olivine has a strong reputation for quality. The company exports to Botswana, Zambia, Malawi and Mozambique and has good prospects in East Africa and DRC” he explained.

Olivine Industries need about US $25 million for rehabilitation of old plant equipment and the company expects capacity utilisation to increase by 70 – 80% then, a range they feel is close to 2001 levels.

“An increase in volumes will definitely improve margins and return the business to profitability” said Devenish.

An analyst in the market indicated that AICO should also dispose of Olivine as there is a long way before the business starts adding value to the group, given the low demand locally for their products as imports are cheaper and affordable in the current levels of disposable incomes.

However, AICO’s seed business has turned around its fortune as Seedco has strong presence in the region and is now venturing into East and West Africa, setting up research stations. Group seed production is estimated to grow by 42% to 61 583 tonnes, with hybrid maize production up by 83%. Seedco has a 70% market share in Zimbabwe and around 50% market in Zambia, Tanzania and Malawi. Revenue for the company in the 2009/10 financial year was at US$77 million and estimated to grow by 25%.

AICO is working on a capital raising initiative for the cotton and FMCG units. An estimated US$50 million is required to expunge debt and necessitate the restructuring of the group’s loans. Management had indicated a rights issue but major shareholders dismissed the move. The company will have to raise the funds through their operations said the CEO.

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