New measures to pile pressure on firms’ margins

Despite the efforts to tame economic challenges such as fiscal deficits, the recently introduced tax measures are likely to put pressure on margins for listed counters, according to analysts’ projections.

An already constrained economy with high inflation, currency depreciation, exchange rate volatility and high interest rates pose challenges on businesses and may push them into losses.

In his 2024 National Budget, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube announced a cocktail of measures to bolster revenue flows to mitigate fiscal risks in a year where fiscal revenues from exports will likely trend at best sideways, as commodity prices remain under pressure.

Brokerage firm, IH Securities opines the high levels of dollarisation have also driven transactions into the shadow economy, which is synonymous with lower tax compliance. Statistics from the Central Bank show that over three quarters of local transactions are in US dollars and the remainder in local currency.

As per the MoFED, forex revenue into the country’s coffers accounted for only 48 percent of collections versus an estimated 78 percent of forex transactions in the economy.

According to IH Securities, this is against growing government US dollar obligations and successful implementation of the new measures might have the intended effect of expanding revenue capacity.

However, this will not be all rosy across sectors as increased tax obligations may push operational costs to unsustainable levels.

“The downside to the sweeping reforms might be the Laffer curve effect, which could see revenues falling further,” said IH Securities.

“For corporates, the aggregate impact of the new taxes on operational costs is likely to result in thinning margins in 2024, thereby impacting earnings for listed companies.

“However, at current levels, multiples are likely to remain attractive and below historical averages emanating from prices trading at a steep discount, leaving select buying opportunities on both the ZSE and the VFEX.”

The Treasury boss reviewed corporate income tax to 25 percent, a percentage point increase from 24 percent.

Research firm Equity Axis maintains, while this is still within global averages, the proposed revision has a consequence of impacting on net profitability for companies operating in Zimbabwe.

“The revision upwards is also a reflection that the country will not be moving towards the UN proposed 15 percent global corporate tax rate anytime soon.

“Occurrences such as higher inflation, exchange rate depreciation, higher interest rates, collectively undercut’s profitability. Further revising the taxation levels higher, increases the risks of loss making. For companies providing elastic goods and services and in monopolistic sectors, passing on the cost to the consumer reserves current earnings and margins,” said Equity Axis.

With prospects of a bad agricultural season due to the projected bad weather conditions. The World Meteorological Organisation has warned of El Nino conditions for the 2023/2024 season, which could point to production downside for drought-prone countries in Sub-Saharan Africa like Zimbabwe, potentially impacting yields.

Some listed agriculture stocks in Zimbabwe are already feeling the strain of the effects of the hot weather conditions. Seed producer Seed Co Limited has indicated the group projects reduced margins and sales volume at year-end due to the drought forecast, which has significantly slowed sales.

Group chief executive Morgan Nzwere, told an analyst briefing last week that the environment remains uncertain due to the El Nino weather phenomenon that Zimbabwe as farmers have slowed down activity as they observe the weather.

“Our biggest catalyst is the beginning of rains,” said Nzwere.

“Farmers were buying in the early months and seed was moving, but now we see a lot of stickiness in sales as people wait to see if we are going to have the rains in the next few weeks or so,” he added.-ebusinessweekly