Cassava results: EcoCash revenue drops by $5bn, Steward Bank’s by $1.4bn in tough year

Cassava SmarTech (trading as EcoCash Holdings) released the audited financial statements for the year ended 21 February 2021. These are the statements that were delayed resulting in the suspension of the trading of Cassava shares on the Zimbabwe Stock Exchange (ZSE) for a few weeks. The delay was because of technical accounting issues as we already discussed. 

As most of us know, Cassava Smartech’s main subsidiaries are EcoCash and Steward Bank. The group is also involved in; mobile and funeral insurance, short term insurance, medical aid service, e-commerce, on-demand services and others.

So when presenting the financial results for the many subsidiaries, they combine the results into a unified set of accounts. This is called consolidation where instead of releasing the accounts for the individual subsidiaries we combine them. For example, let’s say you have two tuckshops; one has a profit of $100 and the other a loss of $60, the consolidated profit would be $40.

As you can see, seeing a consolidated profit of $40 does not tell us how the individual units performed. So, one unit can mask the deficiencies in the other.

In Cassava’s case one of the subsidiaries, Steward Bank, has to release its own individual results and we looked at those earlier this month. We will keep those in mind as we look at the group’s accounts.

Cassava revenue contributions

Revenue was ZW$14.3 billion and this is how the main subsidiaries/activities contributed to that amount:

EcoCash (60%) – $8.58 billion. This was down from a contribution of 75% in the previous year. That is a huge drop and Cassava says it is because of their diversification strategy. Making it seem like the other business units’ revenues grew massively as to reduce reliance on EcoCash but nope. It is because of EcoCash’s drop in revenue which we will discuss later.

Steward Bank (14%-18%) – $2.7 billion (from Steward’s accounts) translates into around 18% of the group’s 14.3 billion. Cassava says Steward’s contribution remained stable and yet it was 14% in the previous year. The only reason for the stable (increased?) percentage contribution is because of EcoCash’s drop in revenue. Steward Bank’s own revenue fell 34% and yet the percentage contribution to the group increased/remained stable.

Insurtech (15%) – $2.15 billion. Up from 7% in the preceding year and Cassava says the growth was mainly thanks to the growth in non-motor insurance – EcoSure. We have reported multiple times on how the EcoSure platform signs users up without consent. Even today, try it, just search ‘EcoSure’ on Twitter and you’ll see multiple users complaining that they were signed up unknowingly. I maintain that being able to write the following is the reason for this:, 

“The year saw a growth in the Insurtech contribution from 9% in the financial year ended 29 February 2020 (FY20) to 15% in the financial year ended 28 February 2021 (FY21)….. a result of our revenue diversification strategy that saw growth in the Insurtech….”

From Cassava Smartech’s financial statements

This means take the growth of Insurtech with a healthy dose of skepticism. Besides, were it not for both the Fintech darlings above seeing decreases in revenue, the Insurtech contribution would not have grown so much.

Vaya Technologies (7%) – $1 billion. Up from a 2% contribution because of above stated reasons but there was growth for the business unit.

The above business units account for pretty much all of Cassava’s revenue and so the Edutech Healthtech and Agritech units are still only footnotes in the grand scheme of things. 

Fintech remains the core business with EcoCash and Steward contributing above 75% of the revenue. Therefore when those two stumble, like they did, the group suffers as the following illustrates.

26% drop in revenue and $1 bn loss

Revenue is down 26% from last year – from ZW$19.3 billion to ZW$14.3 billion, a $5 billion decrease. Insurtech and Vaya (Econet Services) grew but Steward Bank had a 34% ($1.4 billion) drop in revenue and EcoCash had a 40% ($5.9 billion) drop. 

That is a significant drop and the company attributes it to the impact of regulatory changes and Covid-19. This was to be expected because the government went after EcoCash in 2020. This resulted in EcoCash subscribers falling 22%. The mobile money agent network was decimated as agent lines were outlawed and other restrictions were placed. As a result activity on the platform fell leading to decreased revenue.

Considering that, performance was actually decent. It was only a 22% decrease in customers leading to a 40% drop in revenue. However, it is the quality of the customer they lost – the high volume transacting agents – that should have had a more significant effect. 

However, the following year is going to be tough as the government is promising to come down hard on EcoCash again. So there might be more regulations which curtail EcoCash’s recovery.

That said, losses eased up 17%, from a $1.2 bn loss last year to a $1 bn loss this time around. That is despite revenue falling and so it means costs were reduced even more significantly. That is mostly because foreign exchange losses dropped from $8.4 bn to $4.6 bn. Let’s talk about that.

Foreign exchange losses 

The term might not be as familiar but the concept is well understood by all Zimbabweans. If you owe someone in USD, whenever the ZWD depreciates, the amount of ZWD you owe increases. If you owed someone USD$1 when the rate was 1:84, you needed ZWD$84 to pay them back. When the rate fell to 1:87, you owed ZWD$87.

Why not just say you owe USD$1? You ask. The financial statements have to be in the ZWD and so you have to translate the USD to local currency. In the above example, although you still owe USD$1, if you were reporting in ZWD you would have seen the amount you owe increase by ZWD$3. That is a foreign exchange loss. Obviously, the higher the USD debt, the higher the exchange losses.

On the other hand, if the rate of decline for the exchange rate slows a little, the exchange rate losses will reduce, as was the case for Cassava for the year ended 21 February 2021. Meaning in a year when the rate falls from 1:84 to 1:87, the losses will be less than in a year when the rate falls from 1:87 to 1:97. That is because the underlying USD debt remains the same.

Cassava has some obligations that are denominated in USD and it is these that cause the foreign exchange losses. Their obligations are in the form of debentures.

Debentures

A company can issue shares to raise funds or they can issue debentures. Debentures are for those investors who do not want to be shareholders in the company but want to loan it money. So debentures are debts with a set date of repayment as well as set interest. Unlike shares which have no such guarantees.

Econet Wireless issued debentures (about USD$73m)  prior to Cassava being listed separately on the ZSE. So, when Cassava demerged from Econet, they adopted 50% of the debentures. Meaning they assumed a USD debt obligation . The debt is payable in April 2023. 

After the close of the financial year in question, Econet offered to pay back debentureholders earlier than that 2023 deadline. Cassava was therefore obligated to pay back their share of the debt too. 

24% of debentureholders accepted the offer and so the debt obligation is almost 75% of what it was last year. This means with less USD obligations the effect of exchange rate losses will be reduced in the Feb 2022 financial statements.

Why did Cassava pay back loan whilst in the process of raising funds for Steward?

At first sight, it seems odd but as we saw, foreign exchange losses affect the financial position of a company. Leading to losses and an unflattering balance sheet position. Which is especially so as the ZWD is depreciating even faster now than in the financial year ending Feb 2021.

There are other benefits for Econet and Cassava. By starting the redemption early, they won’t have to meet the obligation all at once in 2023. This is beneficial in managing their cash outflows.

Besides, the Reserve Bank of Zimbabwe has insisted that the redemption be extended so that the effect on liquidity in the economy that the US$73 million will have is managed. The Zimbabwean economy has shrunk to the point that US$73 million would have a significant effect on liquidity.

Yet another reason Econet and Cassava have in early redemption is that they can take advantage of the artificially low auction rate. Their USD debt will be paid back in ZWD at the prevailing auction rate on the date of payment.

The same auction rate that we, the taxpayers, are funding allowing for the discounting that those who can access forex there can enjoy. So in some sense we are helping Econet and Cassava with about ZWD$100 for every USD they owe. Don’t you wish you could also pay your USD debts in ZWD using the auction rate?

Waiting until 2023 is risky as the auction rate could be more accurate and market driven by then. Or it may even be abolished before then. It is prudent to take advantage of the forex auction now. After all, what if the economy re-dollarised before 2023, something the government swears will never happen but is already happening. The debt would be paid in USD and not ZWD like today.

Most of the debentureholders who get the ZWD are the ones able to convert it to USD at the auction rate most probably. That is why 24% of them, probably all of whom can access the forex auction, accepted the offer. They are getting their USD at actual value despite getting it at 1:eighty something. These entities all looking for USD on the forex auction is the reason the RBZ wants the redemption to be extended.

In closing

A tough year for EcoCash and Steward Bank was obviously going to lead to losses and that is what happened for Cassava. However, the largest cost of the preceding year, foreign exchange losses, reduced by 45% and so losses were reduced despite revenue decreases. 

Considering the challenging Zimbabwean environment and the impact of Covid-19, the group performed well enough. However, questions remain on just how EcoCash can rebound as the government is still looking to cripple it further. EcoCash is still the most important subsidiary in the group and so its future is pretty much the future of Cassava, for the next few years at the very least.

There also remains the question of Steward Bank having to meet the USD$30 million capital requirement deadline by 31 Dec 2021. Cassava, the parent, has committed to provide the USD$10 million balance required to meet the new capital requirement. However, we don’t have any updates on how talks are going with the regulator who has to approve such an arrangement.

So it is unfortunate that Cassava had to contend with the debenture redemption at a time when they were trying to raise capital for their bank. However, it is a shrewd decision in the medium to long term.

In my humble opinion, the year ending February 2022 will be tough as well but for the foreseeable future Cassava will be standing. The other non-Fintech business units, though still contributing less than 25% to the group, are at least on a growth trajectory.

You can read more on the whole debenture fiasco which actually delayed the listing of Cassava:

ZSE Tried To Block Cassava Listing As They Did With Econet 20 Years Ago Says Strive Masiyiwa

Cassava Smartech To Be Listed On The Zimbabwe Stock Exchange Tomorrow (18 December)