Love Marks – The Future of Brands

Kevin Roberts, CEO of advertising company Saatchi & Saatchi, describes “Love Marks”, as a  growing phenomenon of advertising, which are destined to take over from the concept of brands. Evidently, love marks, as a brand, create loyalty beyond reason by allowing consumers to build an emotional connection that uses mystery, sensuality and intimacy. In Zambia, we have witnessed an emerging trend that points to the evolution of local brands becoming love marks. Here is some of the evidence we have observed from some of the premier companies listed on LUSE.

Zambeef has built a brand that is a house hold name. You will note that this firm deals with both sides of the consumer spectrum: cheap and premium. Through their micro outlets, such as the ones in some of the densely populated townships, they have brought food closer to the consumers. When the company faced the wrath of consumers over their importation of products that had questionable preservatives, they were quick to stop the practice and re-established the customer loyalty they had. This was evident from their performance in the following financial periods which was indicative of a bond that was strong and intimate: Love mark.

Zamefa has had customers swearing by their cables as being the most reliable. Although we had reported in an earlier blog of the 2015 financial performance that exports were the main value creator, we noted from the mid-year review that local purchases were on the increase as more and more customers trusted their quality products. What was interesting was that their brand was not ubiquitously visible, however, through an emotional connection that customers made by trusting the product over others, a strong bond was created: Love mark.

Zambia Breweries has been producing its flagship product Mosi for generations. Although the company has undergone takers and changed its face over the years, you cannot deny that consumers have remained loyal to their product Mosi. Some may recall when echoes of castle beer over taking Mosi were high, many consumers begged to continue enjoying their premier beer. There is no pub in Zambia that does not stock this beer. This is a beer that many consider as the identity of our country Zambia. A national icon perhaps but the sensual relationship that exits between Mosi and its consumers can only lead us to believe that a love mark exits.

All the companies mentioned have spent a considerable amount of money to grow their brands. In order to stay competitive, marketing campaigns for their products may be seen to become more personal. It is at this point that the firms realize that in order to sustain the sales of their products, their consumers must be faced with a loyalty dilemma before they consider buying a competitor’s product.

Evidence from financial statements suggests that goodwill is important in achieving the development of love marks. Although it is an amount that can be easily impaired when issues of reputation are raised, this is one component that must be protected by the company in order to ensure it remains relevant with its customers. Furthermore, we at TFHZPC believe that love marks are the driving force behind production drives demand. The economics of our argument is that if your product is so loved, it will have price inelasticity and sales will be driven by your production levels.     

MPC – How the 5th Force Continues to Reign

On 16^th November 2016, the central bank governor Denny Kalyalya announced the decisions of the monetary policy committee (MPC). This quarterly announcement sets the tone of how the money in the country will “behave” over the coming months. With the budget recently announced by the finance minister, financial institutions listened with intent on how they will navigate the macro forces that would be presented. On this occasion, we can only imagine the relief that came when the announcement was made that the policy rate would be maintained at 15.5%. One of the reasons for this was an improved inflation rate of 12.5% (down from the early 20s).

With inflation heading south for Christmas (towards single digit), it’s understandable why the governor is bullish on the economic outlook. This is seen through the signal of reducing restrictions on money flow by removing restrictions on banks’ access to the Overnight Lending Facility (OLF). Furthermore, the central bank will allow the banks’ automatic conversion of intra-day credit to overnight loans on the OLF and extend the banks’ compliance to statutory reserve requirements from daily to the weekly average (according to the policy statement).

This move echoes the finance minister’s statement in the budget speech where he indicated support for the financial system to get more cash into circulation. This is good news for premier banks such as Standard Chartered, Invest Trust and Cavmont (all listed on LUSE) as this will certainly influence their competitive strategies for the coming year. With the consumer in mind, these banks will certainly be looking for ways to bring products to market at a good price. We will not speculate that interest rates will fall as the reserve rate and OLF (both influence loan interest rates) have been maintained at 15.5% and 25% respectively. However, with more liquidity available, this may get the banks thinking of how to extract more value from the surplus cash available.

Although the recent increase in fuel may impact the inflation rate in the medium term, there is confidence from the central bank that single digit inflation is attainable by year end. Premier companies will be keen to see how this plays out as they look to closing out the year with less inventory on their balance sheets. With the year almost at a close, surges in pricing may have a negative effect on revenue growth as more consumer products become elastic.  

Whatever the case, we see a change in tide for monetary policy going forward. The New Year should be meet with capital budgeting strategies that can take advantage of this change. We all need cheaper money to survive in the game. 

Industrial Development Corporation – The Road to IPO

Tucked away in Lusaka South Multi-Facility Economic Zone is an entity that is poised to set the Lusaka Stock Exchange alight. When President E. Lungu made the statement to parliament on the significance of the IDC and its mandate to take companies to Initial Public Offering (IPO) or listing, TFHZPC got really excited about the prospects of analyzing future premier companies on LUSE.

But the question is, “How do we get these State Owned Enterprises (SOEs)” to IPO. We will not speculate on the timeline of such an endeavor but we will provide some pointers on some of the signals future investors need to look out for if they intend to further diversify their portfolios. 

The Turn Around

Before any company can consider going to IPO it must look at the health status of its books. The numbers on the present and previous years have to be assessed whether or not the company has had good earnings. If the earnings have been negative, a turnaround will have to be put in place. This can come in many forms (some unpopular) but the most common include a review of the management team, staff levels, leverage, customer relations, supply chain management, working capital management and cost management.  Strengths and weakness in the aforementioned give the turnaround team an idea what it will take to make the company profitable again. More often than not, it’s always expected that a time frame to profitability will be put in place and the aim is to get an income statement that has positive earnings three years in row.

Valuation

With steady cash flows, an unquoted SOE can easily be valued using net present value or discounted cash flow. What these methods basically do is they look at the revenue potential of the prospective company over a specified period of time and allow for the determination (calculation) of the company’s theoretical value. Comes in handy for stock brokers to determine what share price the company will list at.

Underwriting

The process of taking an SOE to IPO is an expensive and meticulous one. The banks with investment divisions will be keen to land the contracts to help with the process of taking these companies to IPO. The banks will be responsible to handling the intricacies of the process with regulatory departments such as the Securities and Exchange Commission (SEC) and also engaging with possible investors. Eventually, a document known as the final prospectus is produced which is the go to document for all that want to know about the company and why it’s listing. In addition, details of the share price would have also be determined by the underwriter.

What Value is there in Listing?

Once the SOEs are listed on the stock exchange, this will offer government an opportunity to either exit or retain a minimal stake whilst at the same time allowing Zambians to now participate in the ownership of these newly promoted premier companies through their ownership of shares. Although the share certificates may not be enough for the owner to have a seat on the board, there is eligibility to dividends as well as value growth as these companies become more profitable. We envisage pension funds and high net worth individuals will take this opportunity to invest in the newly promoted premier companies. These will certainly open up new avenues of value creation that many investors will be longing for. 

The 2017 Budget in a Nut Shell

Every time a Finance Minister takes to the stand and presents the coming year’s budget, CEOs, entrepreneurs and Finance Managers alike listen with keen interest on what the macroeconomic environment will be like for their businesses in the coming year. Hon.  Felix Mutati last week Friday 11^th November 2016, presented Zambia’s budget to the house of parliament. This was the most anticipated budget as many stakeholders were keen on understanding how in the era of deficit and courting IMF, Zambia would navigate the coming year.

We at TFHZPC will not go into the details of the entire speech but we shall provide some highlights that may need to be taken note of by premier companies listed on LUSE. With the financial statements in mind, here is our perspective of what industry should expect.

Taxes

With the upward increase in PAYE’s upper band from 35% to 37.5%, there will be movement on SGA on the income statement as admin costs rise marginally. Increases in tax on airtime, beer and cigarettes will impact Airtel, Zambrew, National Breweries and BAT respectively earnings are reduced in tune with the increase in tax. Economies of scale will be the strategy to employ as these companies will seek to grow their revenues from increased units of sale of offset the tax jab.

The Top Line

With K5.7 billion allocated to the medical industry, we envisage insurance firms may consider tapping into this opportunity of increasing their revenue in terms of premiums. We noted in earlier blogs that part of Madison and Prima Reassurance’s strategy was to grow their subscriber base. When money enters the medical industry, it presents a unique opportunity for players in that game. This could be translated into more affordable options for their clients in terms of where they access medical services inadvertently leading to less pay outs from insurance companies for subsidized services.

In addition, government’s plan of diversification to cash crops such as cotton, cashew nuts, soya beans, cassava and rice will have Zambeef thinking seriously about these products. Revenue grow is from scale therefore, looking at their present strategy of growth through acquisition, if the numbers are right, the board may consider a trade buy of an established player as they company consolidates its foothold in the agriculture industry.  

Liquidation of Local Debt

Standard Chartered, Cavmont and Invest Trust will be keenly looking at government’s decision to liquidate local debt. This implies more local currency in circulation. This may stimulate banks to offer new services that will seek to increase their interest income on the income statement. When this happens, their balance sheets will see growth in assets that will boast their positions with the central bank. A possible benefit to consumers may be reduction in interest rates as the liquidity crunch would have been lifted. This will be as a result of intense competition as banks try to figure out what to do with all that money.

Zambeef and ZamSugar: Chronicles of Financing Deals

In today’s challenging and diverse Marco environment, the modern Chief Financial Officer (CFO) or Finance Manager (FM) of a company must be knowledgeable in some of the most complex instruments at his his/her disposal in order to meet the demands of his/her company’s financing and investment needs. Corporate finance is a key activity in the management and success of a commercial enterprise and the CFO / FM is its custodian. Their task is twofold: look after their company’s investment story and ensure that it’s adequately financed. How difficult can that be? They are only long term decisions, by which we mean that the cash flow implications of the decisions last for at least a year, right? It is more complex than you know.

When a company looks at growing its revenue stream, it is faced with two choices: either to grow organically or go to market and purchase a company that already has a revenue stream it can add on to its own. The former and latter preposition is what Zambeef and ZamSugar (respectively) ventured into when you look at their significant transactions for 2016.

Rule Number 1: Accept All Projects with a Positive NPV

In ZamSugar’s case, using a combination of its own liquid assets ($20m) and funds from a syndicated financing agreement ($60m) they were able to raise the $80m they needed to invest in the Product Alignment and Refinery Project (PAAR) which was officially commissioned by His Excellency, the President of the Republic of Zambia, Mr Edgar Chagwa Lungu, at the Mazabuka-based Nakambala factory on 6^th July 2016. At the onset, the CFO is given the mandate to justify such an investment. There are many methods that are available to his team that may include Net Present Value (NPV), Internal Rate of Return (IRR), Hurdle Rate or Payback. NPV and IRR are the two most popular among CFOs. But what is quintessential about these methods is the consideration of the time value of money (A kwacha today is worth more than a kwacha tomorrow). This underpins their justification to the board that the investment the company makes will not only grow the company’s revenues but also increase the firm’s value in the long run. In short, the investment is a strategic decision with long term consequences.

Rule Number 2: Always have the shareholders’ interests in mind

In Zambeef’s case, they used a fantastic instrument called put options granted to Rainbow Farms Investments Proprietary Limited in 2013 as part of the Zam Chick Limited and Zamhatch Limited joint ventures entered into with RCL Foods. A put option (or simply put) is an option to sell assets at an agreed price on or before a particular date. What makes this deal even more exciting for a CFO is that he/she now has to present a case to the board where issues of how financing of this “put” shall be made. In their case, Zambeef had the option of dilution of shares by raising money through share offers which would have upset shareholders. In this particular case, the put was financed using cash from part of the proceeds from the US$65 million investment from CDC Group PLC. Not only does this deal preserve shareholder value, it ensures that that the company is able to continue financing its operations without being heavily dented by a large outlay of cash. Prudence is a virtual possessed by the most talented of CFOs.