Value over Volume

The mining conglomerate Rio Tinto announced its 2016 full year results and while their chief executive J-S Jacques was quoted verbatim saying “Today’s results show we have kept our commitment to maximise cash and productivity from our world-class assets, delivering $3.6 billion in shareholder returns while maintaining a robust balance sheet. At the same time, we strengthened the portfolio and advanced our high-value growth projects as we look to the future”

TFHZPC has not lost focus and started lusting over the performance of NASDAQ, London Stock Exchange..among others. Decoding this CEO’s statement whilst we wait for the announcement of Zambia’s premier company’s annual reports for 2016, we are alive to the fact that 2016 was a challenging year for many of them. We anticipate that the 2016 annual reports will have, among other challenges, the macro environment dilemma. Although, post-election, there has been fair stability regarding interest rates, exchange rates and a return to single digit territory inflation rate, we predict that only astute management teams that will emerge successful when we commence our financial analysis of their results only those that adopted Rio Tinto’s strategy of value over volume will emerge with superior competitive advantage.

However, we further anticipate that free cash flow on the books may be low as many management teams grappled with out of control working capital demands. In addition, corporate finance antics will be present in some companies that would have chosen to adjust their capital structures as a means to evade expensive money in the financial markets.

With a myriad of product price changes, what will be interesting to see is how value was generated whilst trying to maintain market share. Price elasticity of demand will have been critical as this would mean either growing or maintaining or losing customers to alternatives and substitutes. The kings will have movement in their cost of doing business that will be south of what they scored in the previous financial year whilst the top line headed north.

One area we will be keeping an eye on is the labor component. Usually, when belts are tightened, we anticipate that astute companies that seek a quick fix will opt to let go of human resource. This is one of the way of reducing cost of business albeit non favorable in a country that seeks to grow jobs literally. However, companies with minimal or no movement in staff statistics may see a reduction in fringe benefits (bye bye over time allowance).

We will not be surprised if financial engineering is not employed to sure up the balance sheet. Investors may want to have a look at the value or impact that disposal of assets will have on the financials. Remember, these are usually once off. Year on year performance cannot be judged by this unique to a year phenomenon.