Wednesday 29 March 2017

Welcome to “The Financial Times of Zambia”!

www.thefinancialtimesofzambia.com
We are proud to bring our readers our latest portal that will make it easier for them get the news on how Zambian companies continue to create value in the Zambian economy. We believe the story is not about how much the company started with at inception or how much its founders exited with, no, our concern is how these companies continue to create value on a day to day basis. The story in between. We declare, from this day forth to be committed to this ideology. Thank you for your readership and we hope you enjoy this journey with us as much as we do.

Tuesday 7 March 2017

MPC - January 2017

Central Banks are at the heart of any economy. Their importance goes back a long time and their relevance today remains crucial in steering any economy forward. It is no wonder that on 20th and 21st of January, all eyes were on the bank of Zambia governor Denny Kalyalya and his team as they poured through critical economic data in order to announce to the country there position on how they saw the economy moving forward.

In their statement “The bank of Zamba will closely monitor domestic and external developments and stands ready to take appropriate monetary policy measures on price and financial system stability that support the diversification and growth of the economy”, TFHZPC notes that the committee understands its position in the Zambian economy jigsaw puzzle. Armed with economic data, their decision was to reduce the policy rate 150 basis points (1.5%) to 14%, the statutory reserve ratio by 250 basis points (2.5%) to 15.5%, and overnight lending by 400 basis points to 20%. These tri policy rates are the foundation of how the financial markets play the money markets in Zambia.
Banks will soon be signaling south ward movement on interest rates. The easing is quite substantial for OLF signaling the central banks continued easing of the liquidity in the market. The single digit inflation was a result of an appreciating Kwacha against the green back which has held steady in the K9.7 to K10 range for months.

For industry, premier companies will be looking keenly at the signals from the banks in terms of making decisions regarding their capital structures. For manufacturing, the allure of cheaper money for property, plant and equipment will hard to resist as they prop up production for 2017. Furthermore, with a stable exchange rate, sales projections will be easier to project as well as cost of doing business. Inadvertently, this will affect the decisions on working capital for the year. However, we advise caution as BOZ indicates that there is a current deficit which has persisted. This is where the bank keeps our dollar cover which at the moment stands at 3.3 months import worth. Therefore, premier companies are advised to hedge carefully.

A stable single digit inflation rate means premier companies in the fast consumable goods arena will be cautious not to over price their products. In a stable equilibrium, competitive forces thrive therefore, they must anticipate new entrants coming into their market. Furthermore, low inflation also has a impact on switching costs. What this means is that with new entrants on the market, there will be pressure on incumbents to hold on to customers who will see price friendly products.


For investors looking at premier companies on the stock exchange, BOZ indicates that risk free investments (T-Bills) weighted average yield rate is at 23.6%. Investors therefore will be looking at return on equity north of this region to justify as stake in a premier company. However, this is an optimistic outlook considering that emerging market growth is expected to be in the region of 4.5% (global stands at 3.1%). Therefore, the long game is the most desired approach when considering making an investment. 

The Anatomy of The Annual Report

It’s that time of the year again. It’s the season for company secretaries to prepare the documentation for the proverbial Annual General Meeting (AGM). Printers and scanners will be working overtime. Note to self..open shop that sells ink cartridges. Needless to say this is an important day on a premier company’s calendar. One worth notable mention.

TFHZPC pays close attention to what comes out of this event. Of note, is the annual report. This is a fully loaded document that is often self-styled by the authors but contains critical information about the previous year’s performance and what the company believes is the outlook for the coming year. 
The Chairman and Chief Executive Officer’s statements are what set the tone in understanding the sort of stewardship the premier company has. They will discuss the highs and lows of doing business in that fiscal year. They will mention what they are extremely proud of and what set them apart from competitors. Some might even paint a rosy picture amidst dismal performance. However, their comments are to be taken very seriously as this is an indicator of whether or not the management is astute enough grow value.

Reading along there will be details of the internal environment of company. Short of a brief internal analysis, some vital stats are provided such as the shareholding or any movements that may have occurred during the year. There will be mention of how the staff levels grew or shrunk. Furthermore, the various board committees may be listed and their mandate discussed. For a company that had positive earnings, a note on the amount dividend can also be mentioned here which certainly wets the appetite of any investor.

One aspect of the AR often ignore is the corporate governance section. We have discussed the importance of this in previous blogs and how it forms the foundation how the company conducts business. There will be bold statements such as fairness, accountability, integrity, transparency and independence. Whichever combination of words used to describe how they intend to conduct business must be taken seriously.

The AR follows up with a statement from the company’s chosen auditors who after months of reviewing the company’s internal and external transactions produce our most coveted financial statements. These exciting statements show the keen eye how and what money the company brought in during the year in review. In addition, it shows how money was spent and whether or not it finally ended up growing value (equity).


So we at TFHZPC will be paying close attention to the output that will come of these AGMs and it is our intention to bring you that most vital of information that is relevant to the discerning stakeholder.  

Wednesday 8 February 2017

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. 

Wednesday 18 January 2017

Aide Memoire of Industries Participating on LuSe.

The stock market is not for everyone. Our opinion is that it should be. However, we understand that ubiquitous information asymmetry render many potential would be investors ill equipped to make decisions of what stock can build up a value creating portfolio. TFHZPC seeks to provide some insight into the decision making process because we believe in the statement put forward by Drucker in his 1988 article that “To satisfy the customer is the mission and purpose of every business. The question ‘What is our business?’ can therefore be answered only by looking at the business from the outside from the point of view of customer and market”. As an interested stakeholder, the aforementioned statement makes the fundamental basis of why individuals or firms invest with confidence in particular stock. Knowing that those they entrust understand their business and are able to generate sustainable value.

In 2017, potential investors on the Lusaka Stock Exchange (LuSe) will need to know what industries companies belong to in order to make astute and informed decisions on which companies to target for their portfolios. We will have you know that the following are the industries participating on the LuSe include mining, farming, financial services, insurance, construction, real estate, and retail. Each of the companies in these industries have answered the quintessential question “What is our business”. To survive from one financial year to the next, this question must be constant in the minds of management teams running these listed firms. Shareholders bound by corporate governance rules depend on them to constantly remind themselves of this question to ensure they continue to deliver value for the firm. That is the reason it’s called a “Going Concern”.


However, we are not oblivious of the challenges that current macro environment pose to these businesses. Whether it’s the threat of environmental factors such as storms or army worms that can affect the 2017 harvest of maize in the farming industry to tightened liquidity in the financial industry, the fundamentals of satisfying customers must remain the purpose of every business. Therefore, prudent management of the company’s resources must be a concern of potential shareholders of these companies. In addition, they must also understand that different industries respond differently to the macro environment. Some may be winners others losers. Conversely, company strategies will need to be decoded to ensure a substantial return on investment. For that you have TFHZPC.

Wednesday 11 January 2017

Hello 2017! But Wait. Why a Stoppage of Trade on Lafarge Security?

After enjoying a brief hiatus over the festive season that was laden of copulas amounts of all manner of hedonistic treats, we clicked on the Lusaka Stock Exchange’s lead story of a trade suspension ergo “SUSPENSION OF TRADING IN LAFARGE, ISINZM0000000011”. Now before all the Christmas pudding you eat starts to dissolve quickly due to panic, we at TFHZPC felt it necessary to tell you the tale of information symmetry.

You see, when the Security and Exchange Commission (SEC) suspends a trade, it’s not all doom and gloom. Their purpose is to ensure that stakeholders such as shareholders are kept informed of all that is happening with the company. According to regulations, all listed companies are expected to provide information regarding their activities (that annual report the folks at TFHZPC love to decode) and interim reports that show how the companies are performing. Hence why in verbatim LuSe stated “..inform the market and shareholders that in keeping with the functioning of fair and transparent and orderly securities trading environment in this stock, the LuSe has suspended with immediate effect trading in LAFARGE security… The suspension in this stock will be lifted after seven days”

Normally, such stoppages are usually as a result of lack of material information on the traded security therefore in order to maintain information symmetry, trade is suspended until such a time that all obligations are meet by the trading company. The amount of time for a typical suspension is often judged on a case by case basis. This guards against information asymmetry and ensures that traders of shares are able to make informed decision about whether to buy, hold or sell stock on LuSe.

So before you consider dumping your stock, make an informed decision. This is why agencies such as the SEC exist: To serve and protect the interest of investors. As we prepare to review the 2016 annual performance of the premier companies on LuSE, we pledge to ensure that all information bring to you, as always, will be as numerically accurate, concise and astute. That’s our new year’s resolution. But you already knew we would keep the promise. Didn’t you? Happy new year!

Thursday 29 December 2016

Superior Competitive Advantage: The key to survival in 2017

At the close of every year, we all have that moment when we think about the past year and what we would have done better. We also consider what we learned from the past year that will enable us make positive strides in the coming New Year. Resolutions, many would call them. For premier companies and others, the resolutions of the management team is to achieve more growth in the bottom line. But can they achieve this when growth forecasts look so bleak? How can they remain formidable when the macro environment is so hostile on a global level? The answers lie in the numbers. The numbers are what allow these companies to develop a strategy that can allow them to navigate the business environment of 2017. Here is how.  

Durable Competitive Advantage

Taking a leaf from Warren Buffet’s ideology of what makes a company attractive, there are lessons that premier companies in Zambia can learn from on how to remain relevant in 2017. The investment maestro seeks out companies that have durable competitive advantage. Now, TFHZPC understands that the New Year Stock Exchange (NYSE) is light years ahead of LUSE in terms of transaction volume, however, the fundamentals of business remain the same.

Over the course of the year, through our corporate intelligence investigations of companies on LUSE, we have observed there are companies that exhibit “Buffetology alignment”. These are companies that sell a unique product, service or are a low cost buyer. These 3 approaches to business fundamentals for many companies in Zambia will be key to ensure they survive the coming times.

As liquidity tightens, financial institutions will need to develop product offerings that are both unique and give customers an opportunity to differentiate the products they are offered in order to get the best value for money deal. For the food industry, economies of scale as demand for lower costing food sources will be key in ensuring growth in revenue and profits. This will be made possible through further integration of the value chain that will enable companies within that industry to be low cost buyers. For the real estate industry, product bundling may be the means of selling a unique service by players in that industry. With consumers becoming shrewder with their investments, product offerings that allow them to get the most out of the transaction will be key.

In order to achieve superior value, an inventory of resources and capabilities will have to be conducted. An assessment of the company’s assets and their time to expiry will be important when making strategic decisions that may require pursing an economies of scale approach. It is impossible to grow your production level when your equipment or animals are getting old.


Another concern is the turnover of inventory. Carrying stock will be expensive in 2017. Therefore, being able to move the goods off the shelf will be key in growing bottom line. As consumers scale back on spending, price elasticity of demand will be crucial in deciding what price movements to have in place for the products in stock.  Some companies will be tempted to drop prices in order to boost revenue growth however it will be pointless if they do not consider the low cost buyer of raw materials or component services that make the final deliverable. This is how they will be able to protect competitive advantage and increase value.