How to Fight a Price War in Zambia

Entering into a price war is usually a distant thought for the average Zambian entrepreneur. On the one hand, some often chose to ignore it and face certain doom over the long run (evidence from small businesses that have closed down due to failure to compete on price). Others on the other hand, chose to engage in a war without fully understanding the consequences and not know how they can compete.

The truth is, price wars are ugly. They have been the demise of many good businesses over the years. When we looked at the low cost airlines in the USA, we found that price wars were so ugly that management teams would forego profits for market share much to the dismay of shareholders. We have also seen evidence of price wars in the Zambian noodle market (Ezee Noodles taking on in store brands from major retailers and Chinese offerings).

However, it does not have to be ugly if the players in the game take steps to protect their earnings. This is how they can approach it from the perspective of Akshay R Rao’s Harvard Business Review (HBR) article with additions from the team at TFHZPC.

Non Price Responses

This includes revealing your strategic intentions and capabilities, competing on quality, co-opting contributors and lobbying for higher standards of products from regulators.

Evidence of Non Price Responses in Zambia

When the Bank of Zambia makes a policy statement on revision of interest rates, the banks fall over themselves to get as much information about the revision of their revised interest rates. By so doing, they are being open about their strategy. MTN, Zamtel and Airtel have all exposed their tariff plans (although required by law) subsequently revealing their cost advantages. A look at some of the participants at Zambia Bureau of Standards (ZBS) shows the intention of players who seek to protect their value. In Lafarge versus Dangote et al., the former increased their number of offerings in cement types (road cement, slab cement, plastering cement etc) as opposed to their competitor’s generic 32R and 42R flavors.

Price Responses

This involves using complex price actions, introducing new products, deploying simple price actions.

Evidence of Price Responses in Zambia

When purchasing data bundles from any of the 3 mobile players, customers have a choice from plethora of complex data packages to suit a customer’s needs (So che and Spaka). Pepsi Zambia with its arsenal of soft drinks that are in all segments of the drinks market with matching prices. Vodafone Zambia bundling modems with 2GB data bundles as it enters the game mobile internet data.

Epilogue

The Zambian market is very diverse. Consumers are constantly seeking for the best price for a good product. Every industry must understand these desires in order to fashion prices that are acceptable to customers whilst protecting value. Understanding price elasticity of their products is also an important factor that can lead to a better understanding of why the company found themselves in a price war. On the downside, we believe that quality of product is being compromised and will have huge ramifications in the future. Stopping the war all together is arguably the best but we don’t live in a rational society. Continued education on product quality and enforcement of standards by regulators may be the only thing that can save us destruction of value and substandard products. 

Lafarge 2016 Half Year Review

When we reviewed the 2015 annual performance of the only cement player on the LUSE, we indicated that they were in a price war with a player who had aggressive intentions of growing market share through using low prices and controlling or incorporating components of the vertical chain of cement distribution unlike incumbent competitors.

As at mid-year review, the story this year for Lafarge is that of 42% drop in revenue compared to its first half year performance in 2015 with investors high by a drop in dividend of 63%. Ironically, domestic volume are down 42% but exports are up by 22% for the same period.

With a 6% increase in its investment in property plant and equipment, the management note that there has been a margin decline despite cost reduction due to increased power costs and exceptional restructuring costs. Furthermore, the macro environment continued to be difficult for the manufacturer with tight liquidity (affecting working capital) and the proverbial price war. This inevitably led to the 89% fall in earnings despite efforts according to its Emmanuel Rigaux (CEO Lafarge Zambia) of continued cost base adjustment in order to remain competitive. However, exports are now their key value generator. Furthermore, are they are looking to key huge contracts with the construction of the Kenneth Kaunda International Airport, Kafue Gorge Lower project among others that will help to mitigate the difficult market.

It is not the Lafarge management teams’ fault that they are currently engaged in a price war. However, the behavior of players that have entered their market is synonymous to entrants in a market whether they believe that there are huge profits to be made. In a case like this, it is best of understand how the company found itself in a price war in the first place. The next approach, as Lafarge has rightly done is to compete on economies of quality and product scope. At the moment, they offer a dynamic range of product compared to their competitor. However, with the end of rational economics at play, most consumers will look at price before quality as the product cement has price elasticity when it comes to demand. With this in mind, we believe that the game cement may be won through standards. When more players enter the market, the chances are that barriers to entry when issues of regulation and product standards are left unchecked, the dominant players may have to consider pushing of ubiquity in product standard in the market. The player with the largest investment in research, patents and development eventually wins.  

The Quest for the Ultimate Value Creating Machine

When the team at TFHZPC sat down to look at all the reviews of the 20+ companies on LUSE, the thing that stood out from most companies is the techniques they used in sustaining their operations. It is very clear that many of these companies have a clear focus on how they perceive their operations at the moment and in the future. Any company that has ambitions of being in existence for the long term must understand the role its operations component plays in the bigger picture of creating value. To understand this, Professors Hayes and Wheelwright of Harvard University, developed a four-stage model which can be used to evaluate the role and contribution of the operations function (every company has one, if it does not, disaster is eminent). Their model essentially evaluates a company’s intent regarding its internal and external outlook. On the lower end, the model views the company’s operations function as negative which tries to evolve into a positive force that has sustainable competitive advantage on the higher end. The former approach is what leads many companies to believe that the pricing of their products is the only thing that matters. Far from it!

Many Zambian startup companies are on the lower end of the Hayes and Wheelwright model. We infer this from the statistics from PACRA that show many companies continuously underperforming or seeking dissolution after a few years of existence. The thing about being on level 1 is the negative perception regarding competition and the persistent firefighting just to remain relevant. When the business idea is coined by the entrepreneur, very little thought is given to the sustainability of the operations. There is nothing wrong with perusing the idea as a primary focus however, once you are up and running, reality dawns in and the business soon realizes that it is unable to fend off new entrants into the attractive market they have entered. Furthermore, they also discover that their value preposition is one that can be easily replicated leading to many copy cats entering the market. Before we know it, the blood bath of competition ensues and the constant firefighting leads to destruction of value.  

However, adopting external neutrality (assessing the competitive forces and finding that blue ocean) is the first step of entering into level 2 of the Hayes and Wheelwright model. Questions that are answered when one is in this level include: Is my product better delivered compared to my competitor?, What differentiates my ubiquitous product from everyone else is?

For the premier companies we have reviewed, signals are ubiquitous in how they are able to achieve level 2 (external neutrality) and level 3 (Internally supportive). A recent example of this is in CDC’s recent investment in Zambeef. CDC is development finance institution from the UK which invests in promising businesses in Africa and South Asia with aim of supporting economic development to create jobs. The deal saw CDC gain a 17.5% stake in Zambeef. This was done by Zambeef offering ordinary shares and convertible redeemable preferential shares to CDC allowing it to raise $65M. 

This investment essentially now allows Zambeef to close off any outstanding deals from M&As (mergers and acquisitions. Notably RCL Foods), liquidate any long term debt and aid in the aggressive rollout of the companies micro outlet stores across the country (its latest value creating gem) and settle finance costs to partners that facilitated the transaction such as Pangaea Securities Limited. The deal clearly shows that Zambeef understands its operations and views the operations function as providing the foundation for its competitive success.

We believe that the key for the Zambian SME to breakthrough lies in understanding these four stages. At the heart of it is owning the operating activities of the firm. We are very sentimental about operating cash flow and debt because we understand that demise or success of many companies lies with these two figures. 

Madison Financial Company Limited - 2016 Half Year Review

The Management team at Madison Financial will be proud of their performance in 2016 thus far. At the halfway mark, they have achieved a 31% improvement in interest income compared to the halfway mark of last year. This inspired an increase in profit before tax of 1263% which was largely attributed to improvements made in its operations. However, the macro conditions (largely increased lending rates, higher exchange rates and inflation) continued to impact the business as its cost of sales rose by 49%.

Madison has managed to increase its customer deposits by over 300% and has increased its loans to them by 13%. So far, they have reduced their debt by 14% signaling a restructuring of its corporate finance strategy (do we use borrowed funds, liquidate or finance organically?) as noticed by the sharp decrease in financing activities on their cash flow statement by 88%. This has also led to a sharp reduction in its comparable gearing from the previous year by 142%.

Although Shareholders will note that the return on their funds dropped from 93% to 76%, their funds still grew by 13% (positive equity growth). However, return on the firm’s capital employed remains stable at 14% when compared to the same time in the previous year. Furthermore, improvements in its non-current asset turnover signals that management is working hard to push their strategy of exploiting their fixed assets. Patience of investors is also being tested as no announcement of a dividend has been made in the first half of the year.

Rising operating costs attributed to a higher exchange rate and inflation will continue to plague the company. In addition, they will have to contend with quite a bit of impairment attributed by defaulting SMEs (business is tough these days). Their strategy will definitely be to reduce this impact in the coming 6 months while also managing the increased leading rates which it is currently in competition with the main stream banks and other micro leading companies. 

Why List on LUSE?

As the founder of TFHZPC sat down to have a pint at one of Lusaka’s finest pubs, the question of why the financial health of Zambian companies was so important was posed to him by a local. “Are not all companies good enough for this trending blog of yours?” To the contrary, small and medium companies are of concern to the team at TFHZPC. But to come full circle, we owe our readership an explanation as to why we believe that with promised stability as indicated by the President Elect Edgar Lungu, the route to IPO may just be a path worth taking for a Zambian company that seeks to move from one level to the next (as long as they are ready to embrace structure). Here is why.

Zambian Business Founder’s Dilemma

Initial Public Offering or IPO is essentially a path taken by the founders of a public limited company that seek recognition, financing, regulatory requirements (MNCs) or have ambitions that are beyond the current scope or scale of their businesses. Traditionally, native startups in Zambia have often used the following methods of seeking finance for their beautiful ventures: 1. Ask family for a soft loan, 2. convince a buddy for a “10 pin” which you would pay back after the second or third turnover of revenue, 3. take the bold step and get a personal loan from the bank with the business idea firmly in mind without due consideration of the interest rate repayments and hope to God that the deal does not fail, 4. Get an interest free advance from the office or take a chunk from the salary as you know that even if the deal goes bad, another salary is still coming to ‘replace’ it.

In short, the founding story of how financing was raised for the initial investment is always interesting. However, once the company is up and running with subtle structures being put in place, questions of why we are in business in the first place soon start to manifest (the beginning of marketing myopia). The proverbial question of how much risk should be taken or which markets we should target soon arise. Another is whether or not to vertically integrate or buy from the market meaning horning those negotiation skills and hoping your supplier does not mess you up as it messes with your margins. Time soon starts ticking, you discover the market is not as bullish (growth market evaporates) compared to when you started. The two year threshold soon arrives (at age 2 many SME’s die or are reborn into something else) and you wonder whether it was the right move to start up the company in the first place.  

Echoes of “adapt or die” sentiment soon arise. For the enlightened, they realize that 21^st century businesses cannot exist without collaboration and funding. We have seen evidence of the latter on LUSE through the signals coming from certain listed players on the stock exchange. They teach us that to go forward you have to have a strategy. To go further, you must collaborate and acquire financing.

“What is an IPO on LUSE”?

As your company grows, family and friends may not have the sort of financial muscle that will allow you to purchase that printing press that you desire to take your business to the next level. Indigenous Venture Capitalists are few and far between in Zambia (we have encountered only 2 that have had activities related to some of the companies listed on LUSE: Madison and Invest Trust Bank). Therefore, IPO becomes the next logical step in the quest for funds. But it’s not that simple. Before an entrepreneur seeks to take the plunge with LUSE, they must ensure that they overcome demon of ownership that has had them believing that they will always own 100% of their business. Letting go is part of the process of taking your company to the next level and we believe that this is part of the psychology of the Zambian entrepreneur that has held back many when it came to taking their businesses to the next level. The second one is structure. We will not spend too much time on this but we will be showing you through our future blogs on how this can be achieved. We already gave you one blog on corporate governance and you can read it here. That was just the start.  

However, there are disadvantages with listing. You have to be prepared to be transparent. It means giving up that slash fund that enables you to consume your earnings as and when you like. It means being answerable to shareholders, just like the annual reports from listed companies, we analyze the Chairman or Managing Directors statement in a particular financial year to decode the signals of whether the company is worth it or not. It also means the paperwork in terms of filing reports increases 10 fold. Small price to pay to take your company to the next level :-). These are just a few however, we believe that with a stable economy and positive GDP, IPO will be the next stage for your business.   

ZAMBEEF - 2016 Half Year Review

As the 2016 Zambian presidential election results strolled in, many of our readers were busy tucking into Zambeef’s products. The quality of their products resonates with their 2016 half year performance. What stood out from the interim report is how well the vertically integrated company performed operationally. They continue to focus on their core business albeit now seek to dominate every aspect of the food value chain with their aggressive opening of micro outlets to get more of their product to the masses (Zambeef in your face). No doubt a lot of their current success can also be attributed to stable kwacha during the period under review (reduction in exchange losses).

Stock feed was their biggest value creator with sales of $9.2m representing a 133.4% increase from the previous year. Operating profit increased by 72% with earnings celebrating a 366% bounce back from negative territory in 2015.  EBITDA was up 32.7% confirming management’s intention to pursue a cost control strategy (volatile EBITDA signals out of control costs). Furthermore, there was a 21% downward movement in their gearing signaling a move away from long term debt. Interesting is 24% reduction in non-current assets which inadvertently improved the company’s return on fixed assets.

The company envisions a stronger operating performance in the second half of 2016. Critical to this will be a stable currency and controlled inflation. Post-election sentiments indicate that the will be stability in the financial sector making it prime season for Zambeef to continue to create value as they focus on being a regional food supplier. However, keeping an eye on the IMF program on agriculture will be important. Internationally, Zambeef is set to make more strides as its partner Shoprite opens up more stores in West Africa further expanding their footprint. All things considered and remaining constant, year-end will be very rewarding for shareholders.   

ZAMEFA - 2016 Half Year Review

 In part 3 of our project to bring you insights into value creation by some of the elite companies in Zambia, we had the opportunity to interview the CEO of ZAMEFA in July 2016. Coincidentally, Rosetta Chabala was celebrating a fantastic half year performance by the company. The exclusive of the interview will published soon. For now let’s look at their numbers for 2016 thus far.

Revenue was up 7% as at June 2016 compared to the same time last year. Domestic sales were stronger than exports by 30% which is indicative of a thriving economy in Zambia (development drives demand). You will recall in our earlier blog on ZAMEFA, value was being created mostly through exports. Change in tide. Operating profit was also up by 102% compared to last year’s score with net margin up to 9%. A sales mix and depreciation of the Kwacha was partly attributed to that. 

However, we also note that there was improvement in their operations as return on non-current assets improved by 10%. Furthermore, return on capital employed increased from 18% last year to 23% showing good capital budgeting and a fantastic relationship with lenders at the company increased its current liability debt to help with working capital.

Shareholders will have confidence in 2016 as equity rose by 61%. In addition, eps is in positive territory compared to the negative from last year. With return on equity currently at 41%, they half way to a bullish 2016. However, they are cautious and aware of the gradual rise in competition and they hope to use their reserve capacity to effectively compete on the market. According to the CEO, price wars when competitive gets tough is not an option. Extant players like ZAMEFA have memory that can allow them to adapt when competitive pressure increases. 

ZANACO – 2016 Half Year Review

In their summarized and unaudited results published for the period ended 30 June 2016, Zanaco faced a challenging first half of the year with net profit margin down from 19% a year ago to 14%. A positive though was the bank being well capitalized above the minimum ratio of 10% requirement.

Earnings and EBIT were down 15% and 13% respectively. However, comprehensive income for the same period rose by 11%. Accounts show the bank was able to grow its total assets by 14% while its cash stockpile at Bank of Zambia grew by 20%. Furthermore, deposits also grew by 12% signaling confidence by consumers in the bank.

A lower EPS may be a concern for shareholders at this point as it means reduced value, however, shareholder equity actually grew by 9% in this period (and we are only in the middle of the year). Operating cash flow is one area the bank may be focusing on as it tries to retain competitive advantage as the bank adjusts to the macro environment. Interest income can also help fuel value as loans to customers have increased by 17.4%. Other areas to look at will be the loans to assets ratio which only improved by 1% and return on total assets which marginally fell by 0.3%.

The bank remains steadfast on its transformation program. They indicate that they will be staying the course despite all the challenges. Tight liquidity remains the critical threat to the bank but they hope through their transformation they will be able to realize efficiency that will see the bank through this period. 

The Bill of Rights Meets Business: What are We Voting for?

Over the course of the election cycle the Zambian people have been informed of the option to vote ‘yes’ or ‘no’ to a proposed Bill of Rights referendum. This process has been a political blind spot as many Zambians don't know or understand what changes we are voting for. Therefore, the TFHZPC team has decided to do an evaluation of the proposed changes. Although some of the new and amended clause may not impact businesses directly, it is important to take note of them as some may have indirect consequences to businesses in certain industries (A sort of six force in Micheal Porter's model).

The amendments are being made to the Bill of Rights, this is defined as the “The basis of Zambia’s social, political, legal, economic, and cultural policies and state action”. The referendum proposes 6 main amendments (changes) to the Bill of Rights. Two laws are being added and four laws are being changed. Here is our evaluation:

1.    (New) The government has proposed a provision which provides access information on behalf of the people. This also includes complete freedom of press (meaning the media will be allowed to print freely without being monitored by the government). New provision will have an adverse effect on business news distribution. We envisage more freedom in financial publications that will give deeper insight into how our economy functions.

2.    (New) The referendum introduces a provision which prevents asylum seekers and refugees     being returned to their country of origin or any other which is proven to have the risk of persecution on the asylum seeker/ refugee. For companies that have businesses supplying goods and services to affected settlements, this provides structure in terms of planning as procedure gives substance when entering into contracts.

3.    (Amendment) The referendum proposes the right of people to gather unarmed and peacefully to petition changes to the State/ Government. This enhances the existing law which states a person is allowed the freedom of association. This prevents persecution of rival parties by the state.

4.    (Amendment) The referendum proposes a change to the right of legal action against the State/ Government. Whilst previous legal action against the State was limited due to other laws this amendments gives all individuals the right to take the state to court a year after said incident.

5.    (Amendment) This amendment insinuates that the state does not have the right to detain an individual without a charge being brought to said individual, this includes the right to a trial within 48 hours of detention. This corrects the states right to in-prison a person on an non-bailable offence with no set timelines for trial. This also pressurises the court to provide a strong in less time restricting the withholding of innocent bystanders. (!!)

6.    (Amendment) There is a law proposing an extension on the rights of ownership within the country. In Zambia only citizens are allowed to own property. This amendment gives non-Zambians or foreigners the right to own land in the country. (!!)

Amendment number 6 has the potential to reduce the cost of doing business for Multinational Corporations (MNC). MNC confidence will be boasted by this as it underscores the importance and value of protection of land and property rights.

(Disclaimer: This is simply our summary of the proposed Bill of rights. We aim not to pass judgment however due to the lack of transparency we have been unable to give direct quotations. All important amendments have been marked!!)

For the proposed bill to be passed 50% of the available eligible voters must vote yes (3.5 million yes votes). To vote ‘yes’ or ‘no” you must bring your national registration card (proving you are a citizen). We hope this article has been helpful in your decision and hope you share it among your pears to give all Zambians an educated decisions. We wish you all a peaceful election.

If you want more information (or our sources) here’s a list of useful sites:

Bill of Rights: https://www.elections.org.zm/media/the-referendum-question-mobileversion.pdf

Government Cartoon: https://www.elections.org.zm/media/understanding_the_2016_referendum_comic_book_10_06_16.pdf

Articles: https://www.daily-mail.co.zm/?p=68721

FQM Focused on Shareholder Value and the Balance Sheet

“OUR FOCUS IS CLEAR” screamed the First Quantum Mining (FQM) 2015 Annual Report. From the onset, with the paradox of tumbling commodity prices from the New York stock exchange to the London metal exchange, it’s very clear that the management team want to convey a message of focus and strength at the mining conglomerate. They further declare that their guiding fundamentals of business are: safety and balance sheet strengthening. Hence their decision to take decisive measures in protecting the mining company in prevailing market volatility whilst preserving its growth in the midst of a China slowdown and the impact of financial speculators. Some of these measures included the reduction in operating cash outflow, downsizing and renegotiating on timing of receivables. On a higher note, Kansashi saw the completion and ramping up of a new copper smelter that would boost capacity.

Turning to the audited numbers, revenue in 2015 was down 24% while operating cash flow was up by 60%. The latter was indicative of their strategy in motion. A fall in revenue however, lead to negative operating profit and EBITDA. EBITDA volatility is indicative of high fixed costs which the company is hoping to reduce in its quest to strengthen the balance sheet. Gearing was down 12% indicating a push to restructure the company’s capital structure. This is evident as the company sort more current liability debt (up over 600%) over long term debt (down 18%).

In transition, shareholders in 2015 saw a drop in return on equity and capital employed (both in negative territory). This was reflected in the diminished dividend that was paid in 2015 (down 98% from 2014). Patience and watchful eye on metal prices will be necessary. In addition, management’s efforts should be centered at getting more return off their assets. Improving non-current asset turnover and working capital management will be critical areas of focus on the back of newly commissioned smelters. 

Opaque beer is the Clearest Way to See Value: National Breweries Brews on.

It always pays to have a highly liquid big brother. Such is the case with National Breweries (NB) that has enjoyed outstanding performance in the last 5 years. A subsidiary to SABMiller, NB had the same concerns as its parent company which we covered here. But most threatening was the deterioration of the exchange rate which its Chairman Valentine Chitalu stated in the 2016 annual report was a source of concern as the company had a significant import bill for Shake Shake cartons in particular (note to self, open a company that supplies cartons to…). In addition, reluctance by Local Councils to enforce Statutory Instrument No. 72 of 2012 – the Liquor Licensing Regulation, which bans the production, transport and sale of alcohol in bulk containers made it very difficult in the competitive environment. However, the chairman is confident that their $30million modern Lusaka plant (the largest Chibuku investment in Africa) with bring good value for shareholders.

Although GDP growth in Zambia was also cited as a source of concern, the product the company makes appeals to mass market. Excise duty which has ranged from 8% to 10% over the last 5 years has had minimal impact on the company’s ability to generate increasing revenues. However, the rate of revenue increase has diminished from the high of the 2012-13 period which saw a 36% increase to a low 14% in the 2015-16 period. This is still impressive for a company faced with competition from homegrown products whose main ingredient is the ubiquitously grown crop – maize.

Operating profit slumped from 2016 on the back of increase administrative and distribution costs to 6%. However, on the one hand EBITDA was stronger at 15% whereas earnings margin on the other hand struggled to cross over the 10% barrier from past glory of >10% prior to 2015. Conversely, their commitment to capex saw a 40.5% increase in non-current assets which grew their total assets by the same percentage. This is indicative of investment in the company’s ability to continue generating revenue for some time to come.  

Shareholders were pleased to receive a dividend in 2016 after a quiet 2015. They will also be pleased with the 5% improvement in their return on equity. However, they may need to be a bit more patient with their return on capital employed which fell from 32% in 2015 to 18% the following year. The company has no debt and however it’s pursing an aggressive current liability strategy that has impacted on its acid and quick ratios (ability to clear current obligations: inventory considered). Furthermore, they have improved their working capital by collecting receivables quicker although there has been a slight increase in their inventory and payable days. A larger latter is preferable though may raise supplier eyebrowsJ.

With new equipment being installed, they have built on their ability to meet the demand of the market. We anticipate the coming year will show signals of increased return on non-current assets as the company realizes optimum production. With regulation on their side, NB is poised for continued success in the opaque beer market production drives demand. 

Blood on the Insurance Dance Floor - Prima Reinsurance sets the stage

In KPMG’s 2013 sector report on insurance, Zambia was poised to experience explosive growth in the insurance industry. The stars were aligned, GDP was on the up and business prospects for the 23 business registered as at October that same year looked set for a bloodbath for clients. Fast forward 2015, the macro environment evolved. Currency depreciated. Inflation rose. Not good ingredients for cooking up a storm in the insurance industry.

Prima Reinsurance being one of the few insurance companies to offer reinsurance, set itself up for a highly competitive battle for the souls of clients. However, light at the close of the year, saw the Minister of Finance sign a Statutory Instrument (SI 171 of 2015), revising the minimum capital requirements for the industry. Mergers anyone? Prime time for them. With the increase in the minimum capital requirements, this would increase the barrier of entry into this market leading some companies to seek alliances to remain competitive.   

On the frontend, business for Prima was being driven by protection against fire whereas on the tail end was capped off by aviation. This saw the company grow its gross premium income by 9% from 2014 to 2015. Operating cash flows also improved by 20% in the same period indicting the company’s aggression in the “bloody” market. EBITDA also improved by 21%.

Shareholders are smiling at the numbers in terms of how the management team sweats the company’s assets by a factor of 5. However, the macro head winds did shave off 10% on return on capital employed and equity. This lead to an 8% reduction in overall earnings for the company with management indicting a decision/discussion on dividend for 2015 to be conducted in 2016. Patience pays we guess.

In order to achieve competitive advantage in a bloody market, management of working capital is key. So far, in 2015, Prima has manage to steadily improve its working capital and has maintained it in positive territory over the last 2 financial years. This is indicative of a management team that wants to be prepared when they go and do battle in the insurance playing field. Although, note to self: key an eye on that quick ratio. Maintaining strong current assets to meet those current obligations boosts investor confidence in how you run the business.  

Dynamite Comes in Small Packages: Cavmont Bank Poised to Explode

It’s tough for the smaller players in the banking industry in Zambia. Cavmont Bank has bared the brunt of competitive forces in the industry. In the 2014 to 2015 period, the customer lost 15% of its customers in a zero sum that saw its competitors scoop them up. However, at the same time, it was able to grow its loan book by over 55%. This is indicative of a strategy that saw the bank looking to create value through its loan book. And it worked. Net interest income was up by 43% in the same period.

In terms of the banks performance, operating profit and EBITDA were up 19% and 17% respectively. Their return on assets was also up 1% taking it into positive territory for 2015. Loans to assets impressively increased by 11% to 56% signaling good strides by the lending team in a bearish market. However, net interest margin was down 3% due in part by the 68% increase in cost of sales for the bank.

Investors will be pleased by the numbers from the banks return on capital employed and equity. 2015 saw a 4% improvement in use of capital employed and equity which were both on par at 24%. However, due to the timing of the publication of the annual report (mid 2015), we anticipate that the 2015 to 2016 period was more difficult for the due to the macro measures that were put in place by the central bank. Tighter liquidity on the market means not enough resources available to pursue a loan book growth strategy. Furthermore, despite posting positive earnings in 2015, they still did not declare a dividend albeit is plowback of 1%. This is testing of shareholders patience.   

Going forward, management will need to look into the operations performance. Operating cash flows nosedived by 130% leading it into negative territory. This was attributed to sharp increases in its payment to employees, suppliers and interest payments to customers. Furthermore, a little dividend never hurt anybody especially when it could mean continued financial attraction of shareholders.