Fi­nance Leases and As­tute Man­age­ment the Dif­fer­ence for Air­tel in 2017- con­tin­ued

Zambian Business Times - - BUSINESS REVIEW -

The big­gest loser in rev­enue re­duc­tion was hand sets and ac­ces­sories divi­sion that saw rev­enue plum­met from K44.7 mil­lion in 2016 to 15.8mil­lion in 2017. How­ever, Peter Cor­reia’s team re­mark­ably re­duced cost of sales by 38.5% partly achieved through a no­table 12% re­duc­tion in SGA (ad­min­is­tra­tion costs). They went lean. The end re­sult was a 78.1% in­crease in op­er­at­ing profit. How­ever, net cur­rency ex­change losses would have the fi­nal say on what earn­ings the com­pany would de­clare. Net earn­ings came in 59% stronger in 2017 com­pared to 2016 at K363.978 mil­lion.

The rea­son be­hind this im­proved per­for­mance was the com­pany’s abil­ity to sweat the as­sets that they pos­sess. In com­par­i­son to 2016, 2017 showed an in­crease of 7% in re­turn on sales, 11% in­crease on re­turn on non-cur­rent as­sets (their Tel­com equip­ment). In ad­di­tion, there was an im­prove­ment in the man­age­ment of work­ing cap­i­tal as their work­ing cap­i­tal cy­cle moved from 129 days to 48 days. This was largely pushed by the re­duc­tion in in­ven­tory days. Fur­ther­more, their bal­ance sheet showed that they had re­duc­tion in store in­ven­tory by over 94%.

For in­vestors and cap­i­tal con­trib­u­tors to the firm, the re­turn on cap­i­tal em­ployed (ROCE) in­creased to 49% from 25% in the pre­vi­ous year. Although this was not as high as their 2015 ROCE of 63%, this is in­dica­tive of a com­pany find­ing its way home ( its old equi­lib­rium). Eq­uity share­hold­ers en­joyed a re­turn of 78% com­pared to 25%.

With a staff com­pli­ment that has re­duced by 22% since 2015, labour to rev­enue pro­duc­tively in­creased by 22%. An oxy­moron con­sid­er­ing rev­enue in­crease is ta­per­ing. Con­versely, their liq­uid­ity po­si­tion has seen them not cover their cur­rent li­a­bil­i­ties through cur­rent as­sets. With cur­rent as­sets be­ing less than li­a­bil­i­ties for 3 years in a row, trade payables (non in­ter­est­ing bear­ing short debt i.e. money owed to sup­pli­ers) are the ele­phant on bal­ance sheet un­der li­a­bil­i­ties. Us­ing the work­ing cap­i­tal for­mu­lae of cur­rent as­sets less cur­rent li­a­bil­i­ties, this yields a neg­a­tive work­ing cap­i­tal po­si­tion. Hence it is no sur­prise that in in July 2017 the firm ob­tained a short term credit fa­cil­ity from CITI Bank for US$ 50 mil­lion at an in­ter­est rate of 1 month Li­bor + 1.25 % per an­num (an un­se­cured loan fa­cil­ity is re­payable within 12 months) as part of cap­i­tal struc­ture strat­egy. Short term bor­row­ings come in handy for work­ing cap­i­tal man­age­ment. For fi­nanc­ing CAPEX, they are em­ploy­ing a fla­vor of fi­nance leases whose av­er­age age is 10 years. Part of these fi­nance leases go to the fa­cil­i­ta­tion of the use of the tow­ers which they sold 2 years ago to IHS. This is be­com­ing an in­dus­try stan­dard strat­egy (their near ri­val has done the same) as they clearly want to fo­cus on their core busi­ness. Fur­ther­more, go­ing this route will en­sure they do not suf­fer the drudgery of car­ry­ing de­pre­ci­at­ing as­sets that have po­ten­tial of not only spoil­ing the bal­ance sheet but can be heavy on OPEX as well.

As rev­enue from data re­mains one of their strong­est cost cen­tres, with the in­tro­duc­tion of 4G LTE we be­lieve the firm will in­no­vate around this tech­nol­ogy. SMS and voice have def­i­nitely suf­fered from the con­sumer’s abil­ity to use data for all things com­mu­ni­ca­tion. The an­nual re­port confirms this po­si­tion as Peter and his team have de­clared that their fo­cus in 2018 will be de­vel­op­ing their data strat­egy as there are ev­i­dent growth op­por­tu­ni­ties in that space. Fur­ther­more, they will con­tinue with net­work up­grade with par­tic­u­lar fo­cus on in­creas­ing their mo­bile money dis­tri­bu­tion points.

In the in­terim, we en­vis­age that there will be zero sum in terms of rev­enue in­creases once the 4th player comes on the mar­ket. We ex­pect that the player in the game mo­bile in Zam­bia will be won by the com­pany that has a strong first mover ad­van­tage or en­ters the game as sec­ond mover with an out­stand­ing of­fer­ing that will at­tract the more that 12 mil­lion cus­tomers cur­rently shared by in­cum­bent play­ers.

“Busi­ness pulse is gain­ing mo­men­tum af­ter ef­fects of cholera out­break have flushed out com­pletely and we fore­cast a bullish re­cov­ery in the next month.” ZBT Lead An­a­lyst

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