‘Lack of cheap long-term capital choking operations’

24 Nov, 2023 - 00:11 0 Views
‘Lack of cheap long-term capital choking operations’ Unifreight Africa has been on a recapitalisation drive since 2020

eBusiness Weekly

Michael Tome

Business Writer

TRANSPORT and Logistics firm, Unifreight Africa says lack of affordable and long-term finance is presenting challenges to the company’s growth endeavours and continuity.

Lack of cheap and long-term capital from local financiers has been choking operations sustenance for many companies as they require lengthy periods to realise returns.

Long-term financing provides businesses with a more stable debt management instrument than short-term loans. They also allow borrowers to have more security when budgeting for costs and expenses as the time period of financing is fairly long.

Recently the Reserve Bank of Zimbabwe (RBZ) reduced its bank policy rate from 150 percent to 130 percent per annum while currency retentions were standardised to 75 percent across all sectors of the economy.

Local banks have been offering short to medium-term loan facilities at a range of between 12-18 percent, however, many productive sectors require long-term loans for sustenance of operations.

The high cost of finance from local banks has become a deterrent to borrowing working capital for many local companies.

The transport and logistics sector is capital intensive, and thus the need for constant support from local financiers for guaranteed continuity.

In its third quarter trading update to September 2023, Unifreight’s chief executive officer, Richard Clarke said the group’s line of business requires high capital expenditure but the current macroeconomic position is not allowing the transport and logistics concern to have easy access to funding for working capital and retooling.

“While the exchange rate has remained largely stable during the third quarter, the major issue within the market has been the lack of affordable finance.

“Loans in USD (while better priced than Zimbabwe dollar) were available only on short tenure owing to the expiry of the dual currency law in 2025, however the multicurrency system has been extended to 2030 which will mean banks are now able to lend on longer tenure,” said Clarke.

The funding restraints have predominantly been due to a finance sector that does not have flexible conditions when granting loans, let alone long-term finance schemes.

Unifreight however commended authorities for the recent Monetary Policy Committee (MPC) outcome which sought to address arbitrage while promoting the use of bank cards through exemption from Intermediated Money Transfer Tax (IMTT).

According to Unifreight, this intervention will support the performance of the formal retail industry which Unifreight transports goods for countrywide notwithstanding the rampant traits of arbitrage.

“Another challenge is the forced arbitrage in formal retail where goods were required to be priced in both USD and Zimbabwean dollar, but the exchange rate used was controlled by the RBZ, resulting in goods being priced cheaper through the informal market.”

According to economist Teddy Gwerende, responsible authorities should work on coming up with policy frameworks or structures that enhance companies’ access to long-term funding if the country is to realise tangible growth from the industry.

“Some of these sectors are of high capex area and the current macroeconomic position is not allowing firms to have easy access to working capital for retooling.

“Some local financiers are not able to meet their capital requirements given that the money is expensive, and short term, sometimes one’s vision will be looking at 10 years and someone is giving you a two-year tenure,” he said.

Operationally, in the course of the period under review, Unifreight Africa said its investment in capacity earlier this year has started paying dividends, as third quarter volumes surged 135 percent ahead of the comparative period last year. Its third-quarter volumes grew to 120 000 tonnes from 50 000 tonnes realised in 2022.

The firm has been on a recapitalisation drive since 2020, pursuing new revenue streams, investing in new vehicles, and setting a firm foundation for its business sustainability.

As such it managed to secure 100 brand-new trucks and trailers towards the end of last year and the beginning of 2023.

According to the transport and logistics company, the new investments will go a long way in enhancing the company’s earnings and upsetting business outlays into profitability.

The newly acquired fleet of 100 FAWs has mainly been servicing the local Zimbabwean market albeit at depressed rates per kilometre which has prompted the company to change the fleet purpose to service lucrative cross-border contracts. Clarke highlighted that volumes growth come at a time when the company continues to craft more growth measures into 2024 financial year.

“This increase is driven mainly through an investment in capacity during the first quarter of 2023 where Unifreight procured 100 X FAW28-380FT which were paired with AFRIT Taut-liners. The combination of a 135 percent increase to top line growth and marginal two percent increase in expenditure has resulted in a fantastic year on year turnaround,” said Clarke.

Unifreight realised an EBITDA profit of $3,4 billion for the third quarter of 2023 from a loss making position in 2022.

However Unifreight expenditure remained flat year on year with a marginal two percent increase between 2022 and 2023.

“This was remarkable cost containment in an inflationary environment considering the addition of assets to our fleet.”

Unifreight says it expects the recently enhanced fleet size to generate healthier turnover in the 2023 financial year and mitigate sizeable fixed overheads the business carries.

Given the conversion of the use of some trucks to serve the cross-border routes, the company is focusing on investing in smaller FAW28 290hp and FAW8 140hp trucks with volumetric configurations to better serve the local market at lower running costs per kilometre.

This strategy is aligned with Unifreight’s cost containment and cross-border strategy and is proving to be an effective model.

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