Value Rising Like Smoke: BAT Puffs Value for Shareholders

Upon reading BAT’s Chairman’s report for the 2015 financial year, I could see how Porters 5 forces could impact a company in Zambia. In an attempt to “smoke out” value for shareholders, the cigarette industry in Zambia has been prone to price elasticity of demand of the product they sell. BAT’s product can be described as elastic which implies that it is sensitive to price movements. This is one of the forces of competition that that faced BAT which saw illicit cigarettes enter the Zambia market in a quest to compete for revenues with the extant player (long established). Micheal Mundashi – its Chairman reported that the illicit (non-tax paying) traders supply an estimated 25% to 30% of the national cigarette pie. This is a threat to value for legitimate businesses in this game albeit raises health concerns as they are uncontrolled products.

The year under review saw the company only manage to grow revenues by 1%. This is far from the performance of 2011-12 where it enjoyed an increase of 42% in the same industry. A critical time line would show how the culmination of macro forces and competition have impacted the company’s ability to increase revenues. However, signs of dynamic strategy to combat the effects of competition indicate the company chooses to compete in all segments (premium and low end) in order to protect profits.

EBITDA and Operating profit fell by 19% and 23% respectively on the back of a 32% increase in cost of doing business. Maintaining a great distribution network comes at a cost. Inventory only marginally dropped by 2%. Of note is the increase in non-current assets by 128% thanks to a deferred tax asset being record. As a result, the company paid less current income tax compared to the previous year. However, Property Plant and Equipment (PPE) saw marginal investment.

From an operations perspective, operating profit fell by 9% and a threefold reduction in its return on PPE. Reduction in sweating of its assets is not the only thing that can raise shareholders eyebrows. Its return on equity also fell by 13%. However, prudent management ensured a 59% increase in the usage of capital employed and that is great news for a company that has no debt on the books. In addition, efficiency improved as their working capital cycle saw a 62% increase from the previous year. Zambians are paying on time for those smokes making distributors and suppliers very happy.  

With excise duty being increased by more than 100%, BAT faces a tough 2016 balancing value creation and forces of competition. Macro players such as Government could ease that pressure if tax evading players in the market are curbed. Prudent strategy will be key in securing value for shareholders as the competitive environment has clearly shown its muscle when it comes to destroying BAT profits. Therefore, getting the cigarette maker back to growing revenues will be on shareholders minds going forward in this business that depends on economies of scale and diversity of product.      

Explosive Value from AEL Mining Services

Boom! That’s how I would like to imagine the 2015 annual report of AEL mining landing on the desk of shareholders laced with value. This formidable company traversed the turmoil of the 2015 macro environment in the mining sector that saw many of the mines in Zambia scaling back on production with some ease in the first three quarters of 2015. However, the forces in the final quarter were rather strong but the company did not relent as it had done just enough to give shareholders a good return on investment.

Although copper production saw a slump with a marginal increase of 1%, this explosives producing company was able to grow its revenues by 45%. Their annual report presents both dollar and kwacha denominated financial statements and even though the kwacha rate deteriorated, their earnings grow both in kwacha and dollar speak.

Key to the success of the company can be attributed to the company’s values. They place safety as a top priority and recorded ZERO injuries during their quest to generate value for shareholders in 2015. One would expect that due to the slowdown in the mining sector, the company would suffer however, the key to their great performance was what was happening in their operations. They were able to harness their resources and capabilities and produce an increase in operating cash flows of 147% with a bit of help from the movement in foreign currency translation (hedging) and improved change in trade and other payables. All this culminated in an operating performance (operating profit) improvement of 113% from 2014.

Shareholders must have been pleased when the announcement came for dividends in 2015 as they saw an increase of over 3000% from the 2014 payout. Further pleasure was derived from seeing equity and a plowback growth reinvestment of 122% from earnings. They also saw a 15% improvement in the return on equity which continues to range north of 300%.

What is striking about the balance sheet is how they have grown their cash over the period under review. This can be as a result of the negative effect of the slowdown in the mining sector and the company opting not to make cash heavy investments in technology (innovation). A company with no gearing and heavy on cash on the balance sheet can create anxiety on its ability to innovate in the short term. On the flipside however macro forces can also lead a company to take as safer position in case of any further headwinds. However, this signals great improvement the company has made in boosting its working capital cycle which saw a 78% increase. Furthermore, return on non-current assets saw a great improvement as the company made the most of its assets by sweating them to the maximum.

One can almost not fault this company with its impeccable performance. However, keeping an eye on the headwinds that affected the company in quarter 4 in 2015 will be vital for shareholders that seek to continue enjoying healthy returns on their investment.

Why They Are Top of the Heap. Standard Chartered Bank Storms with Excellence

It is always refreshing to hear titans of the banking industry reassure stakeholders that “we are here for good”. This statement is attributed to Michael Mundashi, chairman of the global bank that has been resident in Zambia for the past 110 years – Standard Chartered Bank. Investing and innovating was their strategy going into 2015 in the hope of taking advantage of the improved business climate in Zambia ahead of the macro forces cited in our earlier blog found here. A new executive management team brought a fresh perspective to the bank and ensured that they traversed through the year with confidence. This can be seen from the many accolades the bank won during the year from Euromoney to African Banking Awards.

The economic outlook from Gross Domestic Product (GDP) to high inflation looked certain to be a thorn in the bank’s shoe. However, the numbers show a bank that was adaptable to the challenges that came its way.

Combined revenue from interest income, fees, commissions and other income rose 11% from 2014 to 2015. Interest income was the value generator as it celebrated a positive gain of 24% whereas the other streams of revenue dipped (those loans are creating value literally). EBITDA rose marginally by 2% on the back of a 74% increase in operating cash flows for the period under review. Signs of well managed fixed costs (Volatile EBITDA signals high fixed costs).

The bank experienced a slip in their loans to asset and return on asset ratios by 7% and 2% respectively. However, net interest margin gained by 2%. They declared a dividend that was 27% short of their 2014 payment which was reflective of the 27% reduction in earnings. This shows that the bank maintains a consistent dividend payout policy that is in tune with earnings.

Due to the economic climate, the bank’s cost of sales rose by 56%. The macro factors cited in our earlier blog on what impacts banks is real. However, there was also an increase of 60% on their spend on property, improvement of property and vehicles. Image in this industry is everything.

For the shareholder, the bank continues to make good use of its capital employed by the 11% improvement however, return on equity fell by 7%. With a 10% reduction in staff over the year, they were able to improve their Labour productivity by 24%.  

The signs of prudent leadership are evident at the bank and this breaths confidence in investors. Macro forces may be harsh but Standard Chartered bank are poised to rise above. A turn in the macro forces to the better will certainly ensure an improved return on investment for its shareholders. 

Maamba Collieries Limited Thermal Power Plant Goes Online: Good News For ZCCM-IH

The consortium's investment in Maamba shall bring in some much needed revenue. You can catch the story from ZCCM-IH as the company purses value for its shareholders. We covered their pursuit of value in our blog here. 

When Trust is Tested: InvestTrust Bank in Transition

In 2015, there was a change of leadership in the midst of a very difficult year for Investrust Bank Plc. Dr Jacob Mwanza (Chairman) said farewell to Friday Ndhlovu who retired as MD and was replaced by Dr. Chembe who unfortunately was taken ill on Christmas day 2015 leaving the board to appoint Mr Isaiah Chindumba to be acting MD. Three MDs in one year. Interesting. What was also interesting was the movement of shares between shareholders of substantial holding which lead to zero sum effect on share distribution that saw Mean wood Venture Capital Limited increase its stake to 25% in 2015.

As cited in our earlier blog on “Understanding How Bankingin Zambia Is Impacted by the 6th Force in Michael Porter's Model”, macro environment headwinds did not favor the bank in transition. The Chairman’s statement is indicative of a bank fighting on all fronts from restructuring to deposit mobilization, credit control and non-interest income.

Overall income from the amalgamation of net foreign exchange gains, other income, fees & commissions and interest income was down 4%. Net foreign exchange gains and other income were the biggest losers during this period. EBITDA and Operating dropped by 20% and 37% respectively.

Performance was mismatched. Although they recorded a 3% decrease in net interest margin and 4% increase in loan to asset ratio, shareholders continue to tighten their belts as equity was reduced by 64% largely due to the reduction in equity attributed to owners of the bank. Operating margin was down from 13% to 8%. Furthermore, this is the 3rd year in a row the bank has reported zero earnings in their annual report with the sharpest dip being recorded in 2015. How much more negative does it get? However, despite all this, they manage to record an increase of 4% in their loans to asset ratio. Something to smile about.

The road to positive earnings may be a long one. At the moment, like all other banks, they need to quickly adjust with a strategy for navigating through the new macro environment. Improvement in non-current assets is a must. Signs of this are visible from the 2% increase in return on capital employed and the 5% increase in labor productivity (smart guys behind the bank). However, they have intentions of accessing further financing through rights issue. That means further dilution of shares. This course is normally taken when a company wants to be careful on how it accesses further financing for expansion purposes (gearing jumped from 22% in 2014 to 97% in 2015, so they will be cooling in that area): capital structure management 101.

Consistency in stewardship will be vital to the bank going forward. However, tough times still remain. 

Understanding How Banking in Zambia Is Impacted by the 6th Force in Michael Porter’s Model

In his famous 1979 article for the Harvard Business Review (HBR), Michael Porter introduced the world to what was known then as the Five Forces Framework. Later on, in 2008, prior to global financial crisis (as if it was a premonition of things to come), he extended the 5 forces framework to 6. This 6^th force that would impact on the other 5 forces came from outside a corporation, or as we have been calling it on our numerous blogs on TFHZPC the Macro environment (macroeconomic indicators/issues).

There are several actors in the macro environment that any firm, listed on LUSE or not, must be aware of in order to protect shareholder value. Sometimes, these forces may weigh so heavily that the very existence of a firm is put under threat.

We have deliberately included this blog as a kind of a pre-cursor to the double whammy of Banks we are about to assess. We gave you a blog on Zanaco, one of the other players in the banking industry and listed on LUSE. Echoes of some of these forces were cited in it.

All financial institutions are governed by the Central Bank of Zambia. Therefore, keeping an eye on their monitory briefings is high on the agenda of executives that running our local and international banks. Bear in mind, that these announcements, are critical to how banks create value for shareholders. Furthermore, they also impact on how banks deliver service to customers.

2015 was marked by numerous international 6^th forces such as the slowdown in the global economy and fall in commodity prices which impacted our exported minerals. Conversely, the central bank also added its own 6^th force in terms of new regulatory and statutory requirements that banks needed to meet. Of note,

·        Increase in Statutory Reserve Ratios from 14% to 18%

·        BOZ Policy Rate from 12.5% to 15.5% combined with waiver on upper limit restriction on margins (open season)

·        Overnight Lending Facility up to 25.5% with revised restrictions on frequency of access

The aforementioned changed the landscape of banking in Zambia. We will not offer an opinion on these measures. However, we will show you how Porters 6^th force can impact a banking business. You see it in the movement of the numbers in the annual report and the demeanor of the stewardship delivering the chairman or CEO’s statement. 

The 5 forces Porter mentioned in his HBR article include, when aligned to the banking industry include: Threat of new entrants in the banking industry, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and rivalry among banks. Banks that seek to enter the Zambian banking market may answer the make or buy question by seeking an M&A (merger - acquisition) as opposed to launching a new bank. Increase in interest rates may give rise to substitutes such as micro financing companies that are not required to adhere to stringent regulation. Competition in service offerings may intensify between banks there by increasing cost of sales. These are among the few dynamics that may arise due to the 6th force. Therefore, the force itself dictates how banks compete in the banking as game arena. 

Stay tuned for the double whammy.  

Naira Becoming More Elusive

We brought you the CEC blog (CEC's quest for Naira destroying value in the medium term) and cautioned on the 2016 outlook for doing business in Nigeria. This is an example of the macro environment playing its part as one of the forces that companies that purse EBITDA need to be aware of. This is an extract from 23 July 2016's Daily Nation.

PUMA: Realizing Value From Retail

As I poured through the Puma 2015 Annual Report whilst the petrol attendant put gas in my car, I could not help but feel proud of the strides that J.J. Sikazwe (its chairman) and his management team had placed in ensuring that their company took pride in the safety of its customers and employees. Their Health and Safety Program, aptly named HSSE, stands out in their report and rightly so. The spate of accidents they experienced during the 2015 annual showed a marked increase that would have any management team concerned. Furthermore, the number of thefts at its retail shops also signaled the need for improved security services (note to self, open a security company to provide…).

Puma’s fortunes were very interesting. Although sales were down by 3%, they experienced what I would term a positive zero sum. Their business-to-business (B2B) sales suffered at the decision by the mines to cut back on production. In addition, because of the sensitivity of the industry they are in, pressure to ensure continuity in supply was paramount hence the decision import Jet A1 fuel when Indeni could not cope. However, at the same time, with a growing retail offering and increase in cars on our roads, they actually enjoyed 9.35% increase in volume sales (Zambians are “gassing” up, literally).

Its management yielded impressive operating results. Operating profit and EBITDA were up 50% and 31% respectively. A 5% decrease in cost of sales versus a 3% decrease in revenue soothed what could have been a disappointing financial year. Being a margins business, net margins remained flat at 2% from the previous year. Shareholder and debt funds saw an increase in return on capital employed from 15% in 2014 to 22% in 2015 while return on equity rose to 13% from 11%. Business risk was also lowered with gearing down by 8% and it maintaining a 3 times multiple on its quick ratio.

The growth in non-current assets (the retail outlets) by 26% will definitely be a subject of discussion as value seekers demand for more sweating of the newer assets. The astute investor will also be demanding, come the next AGM, for improved efficiency as they assess working capital performance albeit cooled by the 10% in shareholder equity. Therefore, more fuel will need to be sold out of its outlets to better manage the 38% increase in inventory that has come as a result of more outlets. Conversely, the key may also depend on what happens in the mining industry. Either way, we shall be watching. Ok! Tanks full. Gotta go!

Pamodzi Hotel: Opulence Meets Value

When a guest wakes up from a smooth soft bed and soothing pillows, one of the first things that comes to mind is the bang for buck he or she got from paying the daily rate of sleeping in a luxurious hotel room. Pamodzi Hotel, a house hold name in Zambia has opulence that has had many craving to host everything from a wedding to conference over the years.

It’s no wonder this hotel enjoyed a fantastic year in 2015-2016. Revenues were up 46% and earnings increased by 126% from the previous financial year. But how is it possible that despite many of the premier companies we have covered so far have loathed of excruciating macro conditions and unwavering financial crisis from faraway lands? Shouldn’t Pamodzi be suffering the same fate as many? On the contrary, the macro conditions actually worked in their favor. In addition, they occupy a segment that is in oligopoly (5 or less players in a market segment). You see for the hotel industry that is positioned on the luxury end, macro decisions such as flexibility in room rate charges based on daily exchange rates, means that these type of businesses can protect themselves from foreign currency haircuts when “Katondo street” decides to change their rates. Therefore, employing hedging has been the secret of protecting value for Pamodzi shareholders.

What is also impressive about this hotel was that management signals improvement in performance. Their operating profit increased from 8% in 2015 to 20% in 2016. They made better use of their capital employed by 35% which gave shareholders an increase in return on equity by 10%. This is what promoted an increase of 50% in dividends from the previous financial year. Music to shareholders no doubt.

However, there are concerns in the hotel’s efficiency. Although a hotel room can hardly be considered as inventory, it’s everything else that makes it up that shows the hotel carrying more inventory for the same number of rooms (check your stores). Receivable, payable and inventory days (how quickly they collect cash from customers) were therefore inflated in the period under review leading to a negative working capital cycle. In addition, this may also signal the need for more aggression in debt collection as a hotel of such standing must maintain a lot of corporate accounts who on the back of the “global” may have had problems in footing their bills with the hotel.    

In tough economic times, having a strategy such as exchange rate fluctuation is only one of the few ways companies can protect themselves from value destruction. Pamodzi has passed the test on this one and as a result has made shareholders happy. With improved efficiency, the hotel will continue to bring value to those that invest in it. This stock is worth being in one’s portfolio.  

Madison Rated King of LUSE - Daily Mail

The Daily Mail in its July 20 Business News reports Madison being the titan of LUSE with over 70% of revenue being generated from share transactions of the company's stock. This blog covered their 2015 performance in "Madison Financial Services - A Class Act in Diversification" which you can read about here. Headlines like this make us proud of the work we are doing at TFHZPC in bringing awareness to our own Zambian Stock Exchange.

Bata By Choice: Value becomes Elusive for the Shoe Maker

I recall the time when I was a young lad and my parents would get me the black Batas that would last me an entire school year. The company’s product back then and now have been known for being robust, durable and quite trendy.

Bata has been the choice footwear for many middle and low income households in Zambia. Its formidable supply chain and geographical reach throughout Zambia places it as a prime store for sourcing footwear. In fact, in recent times, they have also expanded their options to attract premier clients by introducing international brands into its plethora of footwear.

Like many of the companies we have covered thus far, the last 2 financial years have been difficult. Hernan Vizcaya, its chairman, admits that sales targets for 2015 were very difficult to meet. Disappointing sales in the Copperbelt which has been the its prime destination for fantastic sales fall short due to the fall in employment figures and evaporation of purchasing power due to currency pressures. Seasonal sales were also disappointing due to the impact of the drought (less gumboots being purchased due to less rain). However, back to school sales continue to be there current prime source of value. The chairman sees a lot of potential that still remains to be exploited in this area.

Shareholders must be twiddling their thumbs at what the prospects of their investments are. In the years under review, their equity remained stagnant as no earnings were plowed back (zero value growth). Their net margin was down from 10% in 2014 to a dismal 4% in 2015. The problems get worse. Return on capital employed and Return on equity also fell by 13% and 9% respectively. EBITDA being volatile implied its management of fixed costs is also an area of concern hence why the Chairman rightly notes that need to start living with their means. Austerity coming to Bata!! However, to achieve this, keeping an eye on administrative costs (General expenses, exchange losses, and security expenses) will be key as these inflated the costs in 2015.

What is interesting is that although there no major investments in beefing up their factories, their return on current assets fell from 32% to 16%. What is going on here? However, there are some signs of efficiency on the working capital front. Inventory holding days, although still high, fell by 70 days. In addition, the stores held less inventory in 2015 compared to 2014.

A turnaround is inevitable for sure up prospective shareholder confidence. Keeping an eye on management’s strategy will be key in decision making. They are currently hoping the Bata Loyalty Program (BLP) may inspire a lot more return sales. At the moment, this stock is uninspired.  

Are Oligopolies the Answer to Zambian Companies Being Innovative?

Competition in any economy is the driving force for innovation. Much has been written about its importance however, competition in Zambia has not been fully been embraced by those that chose to play the competitive game. Much of what lacks in Zambian competition is knowledge of what type of players are in a game.

What is interesting is when you drive around the city of Lusaka which has been a bustling with an increase in the number of motor vehicles making it a prime location for setting up car washes at each and every available piece of side road that the council can allocate a prospective local investor. Note that the barriers for entering the car wash game are very minimal. What this implies is that anyone with a bucket and hoover can enter this game, making it prime for competitive forces. However, many investors believe or would like to believe that it is a game of scale. For revenue generation it is.

Although this may be true to a certain extent, this is a business that can easily have its value preposition destroyed by the stroke of a pen. Council and city planning regulation is inconsistent. Environmental aspects of this business are also murky. The moment these forces are in alignment that is the moment value evaporates.

What does this all have to do with competition you must be thinking? Well, the moment you have more than 5 players in a game, value becomes threatened through player saturation in the market. Furthermore, an increase in competition in the market as a game of car wash becomes an area of interest from numerous macro environment stakeholders. By their mere presence in numbers signals to the environment that if there is a source of value in this game, it must be ripe for tithing.

Innovation therefore, demands that the safety net that is provided by copying other businesses without considering how your company will compete in the market as a game becomes your only recourse for survival in the game.  What will make survival possible when the eminent macro headwinds hit will be whether your company joined the game based on competing on price or product differentiation. 

Growing Sweet Value in Zambia the ZamSugar Way

As I swift through the sweet Managing Director’s statement in ZamSugar’s 2016 Annual Report, I cannot help but feel excited for newly appointed Rebecca Katowa. She takes over a sweet company that is literally sweetening value from Mazabuka…much to the delight of shareholders.

The last two financial years faced the wrath of falling commodity prices in the European Union which hurt the Zambian Illovo Sugar branch. However, in the midst of falling EU prices, the regional and yes Zambian sales were up 60% and 6% respectively. This came on the back of the company refocusing its energy on its resources and capabilities (this is key for a company that seeks product differentiation over pricing). They have invested in product alignment that is set to encourage local cane growers take advantage of the company’s resources. This is set to grow the company’s output in the medium to long term.

Despite marco enviroment difficulties, the company was able to sweeten its revenue by 7% and earnings were up by 14%. What is fantastic for investors is that their plowback ratio is over 40% (the company choses to retain part of its profits to reinvest in the company) leading to a growth in equity. Literally sweetening value. Cost management has also been reflected by a marginal increase in cost of sale by only 4%. The return on capital employed is 17% whilst return on equity is 15% for 2015. This may be a source of concern as their gearing is over 90%. This is on the back of reinvestments that are being made to sure up their factory. Worrying for the short term but shows that they mean business by investing in their core business. Long term, this will pay off.

Although Rebecca has noted improvements in cost reduction and continuous improvement programs, the efficiency of the sugar company should be on her top 10 list of items to tackle. Their working capital cycle went up from 44 to 61 days between 2014 and 2015. Taking longer to realized cash can become problematic for any business. However, she knows that she is getting the best out of her workforce in terms of labour productivities which is up by 40%.

For the investor, this company is perfectly poised in a high risk high return.  

Why Everyone Loves Using ZAMEFA Cables for Wiring Construction Projects

The ubiquitous preposition by many that are currently or have built is that ZAMEFA provides the best copper cable for doing the electrical wiring for all construction projects. Some even argue that City Center is the best place to get original “ZAMEFA”. Little did I know that this company based in Luanshya is actually owned by General Cable Corporation, a company incorporated in the United States of America and listed on the New York Stock exchange. The principal owner of the company is Phelps Dodge Africa Cable Corporation (PDACC), a wholly owned subsidiary of General Cable Corporation (General Cable) and boasts of a 74% stake in it.

What is interesting from their annual report is that their value is mostly generated through exports (71%) of the copper cable, primarily to South Africa. Small wonder, they also report suffering a huge haircut due to the wrath of the plummeted Kwacha in 2015.  Despite the macro issues that plagued many companies, ZAMEFA can boast of an impressive order book going into 2016 with substantial orders for Zesco Limited – a zero sum effect as they had lost some business from the placing of some mines under care and maintenance.

Sales of the company may have flattened, but it’s the operating activities that make interesting reading. Like any subsidiary that borrows money from its parent, General Cable came to collect a substantial amount of the debt it was owed by the subsidiary. The completed payoff wiped out all its debt leading to 0% leverage in 2015. Furthermore, currency write downs led to negative earnings in 2014 and 2015 masking what could have been reported as fantastic financial years.

Its return on capital employed improved by 33%. This can be attributed to improvement on its working capital management by collecting revenue quicker in 2015 compared to 2014. Its Labour productivity improved slightly despite a 2% drop in staff numbers. However, return on equity employed was hurt during the period which does not make good news for investors keen on value growth in the short term. Equity reduced by 54% in the period under review with less earnings being retained in 2015 (less profit reinvested back in the business).

Investors will need to keep an eye on commodity prices as copper is a key ingredient in the manufacture of the cables. As global demand improves, an exported focused company such as ZAMEFA with currency protection mechanisms in place could yield great value. This stock is worth holding.

Data and So Che Generating Value at Airtel? Really??

The proverbial macro-economic challenges that have faced many of the premier companies in Zambia that we are looking at also extended to Bhati Airtel Zambia. This is company that is currently in an oligopoly (5 or less companies competing) fighting for a place in the soul of your mobile device.

In 2015, Airtel recorded an increase in subscribers from 3.6million (2014) to 4.6million at the end of 2015. Revenue increased by 19% which was impressive considering the competitive and macro forces against it. Brand is key for the company, however, they embarked on innovation drive agenda that saw an improvement in the quality of service of their offer and introduction of “So che”.

In terms of strategy, fiscal discipline was key in aligning the numbers. Therefore, their self-professed “War of Waste” was used to reign in their costs. However, there is another side to the story of the 195% increase in EPS from 2014 to 2015. Fixed asset sales of their masts (where they hang their wireless equipment) injected a substantial amount of cash into their operations that help mask what could have been a dismal year for the company. This further helped to ease of the haircut suffered on the back of exchange losses when the kwacha took a turn for the worse.

Furthermore, in light of increased competition on the smartphone market, the company opted to increase its inventory of (smart) phones. Smart move? Not sure, but the argument could be that ZICTA indicates an increased appetite by Zambians for data services. Speculatively the reason why one of their data competitors entered the market with a data only offer (the story of Vodacom will not be covered until they get listed on LUSEL).

What is impressive is that disposal of assets has actually yielded an improved return on non-current assets for the company. They are sweating what they are remaining with. From no debt in 2014, in 2015 they went into the debt market with gearing now at over 100%. Technology companies are synonymous with such gearing especially when they have a spell of innovation happening. This can seen from their over 90% return on capital employed (this will make any lender happy).

Full exposure will be known in 2016 and how they weather out the competitive and macro forces. At present investors looking at equity growth, Airtel is a stock to consider. However, note that in the medium term, dividends may have to be ignored as there may be fluctuations until the 4G reception settles. 

Economies of Scale key to Shoprite’s Success

As Zambians, we all love Shoprite. From its wide assortment of groceries, this chain of stores offers a dynamic yet consistent family shopping experience for many of its customers. Originating from South Africa, the group has been embarking on an aggressive campaign of expanding its network of stores across Africa. Stability in the economies they venture in, is key to scale expansion. Therefore, it is no surprise that Chairman Wiese lauds the success the group has had in Zambia.

Shoprite’s stock on the LUSE ranks top above all others. Important to this success is how they have gradually grown the number of local Zambian suppliers of vegetables to 80% of what goes through their stores. Imagine, if this was extended to other locally manufactured products? However, a threat to this success is the rising inflation and deterioration of the Kwacha against the dollar.

Now why is this stock so strong? Well, efficiency has been key to their success. Working capital is positive and they have a cycle that ensures they collect within 30 days. An acid test on their current assets (less inventory) vs. current liabilities signals a company that may have interesting discussions with its suppliers as the amount of inventory they hold impacts on their ability clear immediate debts. So if you are doing business with then, read the fine print of the terms and conditions on when they will pay you. However, its return on non-current assets is in the mid 30% implying that they need to do more work in sweating their assets. This is expected as value generation through scale entails massive investments in stores and other fixed assets.  

The groups gearing is in the low 20% giving them enough room to employ more capital for expansion in Africa. Notably, although they indicate reaching maturity in terms of growing their network in Zambia, they are pursing interests in Nigeria and Angola. However, caution is necessary in pursing growth in economies that have macro environmental head winds such as the plummeting of commodity prices, ill infrastructure and devaluation of currencies.

The groups return on equity and capital employed are at 22% and 25% respectively. This is good news for investors and makes the stock worth holding because at the end of the day, we all got to eat something from Shoprite J.

Reawakening The Beast - ZANACO's Bold Move To Reinvent Itself

Following GRZ's 2007 sale of 49% share sale to Rabo Development Bank, Zanaco has fraught to shake off the ghosts of old that have pulled it back from being a considered front runner in the modern competitive banking industry. Small wonder that Charity Lumpa and her team have embarked on a bold move that is targeting the overhaul of the banks strategy.

In the 2014 to 2015 period, the bank, like many others face the tri-challenges of governments adjustment in the statutory reserve ratio, monitory policy rate changes and tightened liquidity from the central bank. However, we can't forget that banking system change that caused mayhem for many of its customers which the Managing Director acknowledges was a minor set back which was eventually over come. The chair lady also acknowledges the macro environment was a vicious one albeit happening in tandem with the bank's transformation through strategy change, embracing of technology and introduction of Fit2serve (The bank's master plan of building on old success for the future).

Their current financials also tell an interesting story. In a bid to sure up its profile to investors, although earnings by 18%, their EPS actually improved by over 400% from 0.016 to 0.081. How did they achieve this? Share consolidation. That's financial speak for, "we value in x number of shares however, we want to reduce that number so that we can appear more attractive". Very clever. This would make any investor pleased.

The impact by macro factors was felt however, in a slight reduction in the bank's net interest margin (9%), loans to asset ratio (4%) and return on assets (1%). Furthermore, its 19% increase in total assets is not matched by the bank's return on non current assets ergo its branches need to make more money. The banks gearing, although increased during the period under review is still within acceptable limits.

Weathering the macro environmental waves will be critical in the months to come. Perhaps, the timing could not be better for a strategy overhaul. Looking at what they did well and how that can help them in the future is a good move although caution would call for innovation being at the center of their strategic plans. With steady stewardship, the prospects of the bank look very bright.

This stock is a good buy and worth holding.    

Madison Financial Services - A class act in the art of diversification

The Madison Financial Services Group has come a long way from the hey days of the ambitious Greek supremo Andrew Sardanis (Founder of Madison). They were the first to market with an insurance offering post 1992. With shareholder interests being managed by Lawrence Sikutwa & Associates, the 2004 increase in shareholding to 100% in Madison Insurance set the group of companies on a trip with destiny that eventually lead to the IPO of 2012.

At present, MFSG can boast of a plethora of companies that seek value in various financial sectors. Their bet on property has had a huge impact on the bottom line as macro economic turbulence ranging from exchange losses, rising inflation and rising monetary policy rates from the central bank. According to its Chairman in the 2015 Annual Report, these had a huge bearing on the groups performance. However, technology seems to be the key to unlocking value going forward. Furthermore, there remains a huge untapped micro-insurance market that remains untapped. 

Now the numbers are quite interesting. Investors may not be pleased by the fall in EPS. This was largely due to the negative bottom in 2015. Furthermore, the groups gearing has leapfrog from 66% (2014) to 122% (2015). This can be a source of concern in the near term however, the numbers also show that the company is restructuring its capital structure. They are now looking at long term debt as opposed to short term (due within a year type debt). This will provide for some easing. Furthermore, they are very stable when it comes to covering their current obligations and have positive working capital.   

The company may need to be more aggressive is sweating its non current assets. The chairman indicates that their property outfit enjoyed the most growth between 2014 and 2015. There remains a lot of potential there. 

Overall, the group's prospects are tied to how well the macro economic environment performance. The Chairman is bullish on ensuring they can minimize the impact it causes. In addition, they will be looking internally to help improve operating performance. 

This stock is a hold for the long term. But I would keep an eye on that debt. Gearing north of 100% can bad for a services company if not managed well.

 

When did debt become a bad thing?

When an Zambian entrepreneur decides to take his big idea to the next level, he/she is often faced with the challenge of finding finance. Usually this is coupled with having a belief system that is in two dimensions: First being, do you believe in the idea? The second being are you able to convince other people to buy into the idea (relatives, angel investors, financial institutions). Sadly, as the story goes, many brilliant ideas have died either in the pub or in sitting rooms across the country.

Its no secret, the sources of debt are very expensive and with that comes the small challenge of deciding whether or not go into debt to start up the company or not. Few industries actually ensure that using debt not only gives a good return on investment as well as allowing you to service your debt obligations. 

Now, to the age old question. Must Zambian startups seek debt to start the beautiful journey? This is a tricky question. However, let me pose another one. Why is there so little confidence in investors by those with the resources to make a difference? Fear of the unknown I presume, or we have money sitting with risk averse potential investors who quite frankly, even I would not be confident in. You can tell who they are from the interest rates they charge business deal (be it servicing an order, or winning a tender).

In my opinion, many an entrepreneur do not have the right know how of when or at what point debt becomes an important ingredient in taking their companies from one level to the next or getting them off the ground in the beginning. However, I am aware that in our society, although debt is frowned upon, it also has to be respected. PAY YOUR OBLIGATIONS. And how do you do that? Well, simple. Remember why you set up the company in the first place. Know that the company has a life of its own. Respect working capital when its available. Its all in the numbers. 

For details on timing for when debt is necessary, watch the blog as we unravel the other companies on the Lusaka Stock Exchange. 

Property continues to be a sure bet for REIZ Plc

Real Estate Investments Zambia PLC (REIZ, of the Farmers House fame) has a plethora of properties that has ensured a bottom-line that is impressive amidst numerous headwinds in the macro environment that range from a devaluing currency, an inflation jump from 7% to 21.1%, and depreciated growth in the economy. Kenny Makula its Chairman, remains bullish over the prospects of the group company.

A deeper look at their 2014 and 2015 results shows a company that has an impressive management of its working capital. Furthermore, they have grow value organically from their lineup of properties. As indicated by the Chairman, continued management of milking their assets remains key to the group company's performance and shedding off those assets that don't give it a good return.

At present financial risk is not an issue has they manage their debt well with gearing between 15 and 17%. This implies that they are able to maintain a good return on capital employed at around 14% in 2014 albeit followed by the super normal growth to well over 50% in 2015.  Furthermore, the group has a positive liquidity profile that sees it covering it current liabilities 7 times over.

Stricter management will be required on its operating cash flow as volatility would be lead to problematic EBITDA in the near term. However, with ROCE north of 10% over the last 2 financial years, this stock makes for a good buy for any looking for long term growth.

Corporate Governance could be the key in boasting confidence in Zambia's Stock Exchange

Ignore Corporate Governance at your companies peril

After assessing 5 of the most admired companies on the Lusaka Stock Exchange (LSE), I believe it is prudent to provide a few enlightening comments regarding Corporate Governance. Firm value is of utmost importance when investors are looking at placing a bet on a company. However, one of the issues that is seldom considered is the importance of the governing fundamentals that ensure that value generation is protected. Stewardship and the character of a company do matter when it comes to decisions of investment. Furthermore, for companies that are small and medium size, embracing and understanding the importance of corporate governance can make the difference between a company that lasts for a long time or one that goes bust after its first successful cycle of value creation.

Why Stewardship Matters

Stewardship theory is an organization centered perspective of how managers of a company focus their energies on serving the firm by forfeiting their own agency based desires of self-interest. With that in mind, combined with stakeholder management, the two offer a potent combination in achieving a good corporation. However, the tenure of most boards can impeded by the desires of growth and high returns in the short term therefore impacting negatively on stakeholders who influence opinion about the firm.

Internal and External Characteristics of a Good Corporation

The endogenous characteristics of a good corporation steam from the stakeholder groups that include employees, managers and shareholders. This group, according to Kay (2015) of the Financial Times, view a good corporation as one that pays workers a living wage and develops their skills and capabilities. In addition, its managers spend more time supervising officers and attending to the factory or shop floor rather than being in meeting rooms of fund and investment banks (Kay, 2015). Conversely, the firm is expected to pay a dividend to its investors and reinvest some of its profits in the company’s growth.
The exogenous characteristics on the other hand according to Kay (2015) and Clarke (1998)   relate to how it manages its relationships with the customers, suppliers, general public, bankers, environment and regulators. The expectations of these relationships is that they are not exploitative in terms of how the firm structures its pricing of goods and services. Suppliers to the firm have expectations of a stable and enduring relationship. Its bankers would expect the company to remain solvent and liquid in order for it to honor its obligations. The firm is expected to contribute to the formation progressive policies without engaging in corruptive lobbying practices. The general public expect its operations to not endanger or harm the community in any way. In addition, it is also expected to pay its fair share of taxes to the government in the geography of its operations. Failure to honor these obligations would sentence the firm to a label of a bad corporation.

CEC's quest for Naira destroying value in the medium term

Copperbelt Energy Group's 2014 and 2015 results show a company gradually making strides to create more shareholder value by seeking foreign markets. According to its CEO, the exportation of energy to the DRC was key in ensuring a consistently improved revenue stream. However, liquidity shortages on the back on the global financial crisis and below cost tariffs had an impact on the company coupled with environmental factors impacting hydro electric generation in the region .  

The group's pursuits in Nigeria however, have come at a cost of destruction of value for the group from its investment in AED Plc. Its clear that group's weak EBITDA was highly attributed to challenges in a macro environment experienced in the Nigerien market. However, the CEO has indicated that there have been energy policy improvements signaling improved stakeholder management that could potentially unleash the groups desired value creation. The groups other investments in internet services are coming into maturity although one of them continues to recapitalize its operations in a highly competitive market segment.   

The group's cocktail of companies has seen it not fully exploit its non current fixed assets over the last 2 financial years. The group has been aggressive in the debt market with gearing jumping from 47% in 2014 to 76% in 2015. This is a signal of a company intent on boasting its fixed asset portfolio as required by the industry they operate in. However, its internet subsidiaries face a highly competitive environment as new players enter their markets.  

In the interim, investors in the group will see a low return on capital employed with return on investments in the range of  4 to 5%. Exploitation of fixed assets, stakeholder management in foreign  markets, beating competitive rivalry remain key in the overall groups strategy for success. Furthermore, investors may want to keep a close eye on Nigeria's current economic transformation. The currency devaluation on the back of falling oil prices could be problematic for the groups investments in the region in the FY 2016.