BATU: A cash cow or a pig waiting to be slaughtered?

It’s any investor’s dream to buy into a stock that will maximize his wealth. This is made possible by the dividends paid out by the company overtime and obviously the appreciation of its stock price. The dividends paid out depend entirely with the company’s dividend policy. As such, the company’s management determines on its own volition whether shareholders deserve a payout or not. On the other hand, the company’s quoted price on the stock market is normally dependent on a whole lot of factors one of them being the dividends paid out year on year. We could therefore argue that a company’s management can possibly massage a depressed stock by manipulating the dividends payout to possibly attract the ‘greedy’ investors on board who will in the end cause an upsurge of the price. Well, the only way to determine that there is no manipulation behind the curtains is to simply do a review of the books. The question is, ‘Is the payout fair vis-à-vis what the company can actually afford?’ 

Affordability

BATU’s (British American Tobacco Uganda) shareholders took home a remarkable dividend payout amounting to Shs. 228 (Us$0.09) per share held for the financial year 2010, which effectively translates to 100% dividends paid out of profits. Superficially, it is such a generous token to shareholders. Fundamentally, even the smallest business owner is careful not to reward himself out of profits extravagantly as the business is bound to require capital input in future for expansion purposes. These retained earnings of a business are obviously the best means of expansion as they do not attract interest payments. BATU’s retained earnings in the financial year 2009 stood at a worrying Nil, however in 2010 the figure was reported to be a meager Shs.170 million. We could presume that BATU is not in dire need of expansion in future given the fact that it’s no longer internally manufacturing the leaf and has instead turned to exporting it. The move has since then turned out to be ingenious with a weakening shilling against the major currencies. It also meant that BATU had to sell off its surplus assets that were rendered idle after the decision. On this basis, we could probably okay the extravagant dividend payout.

On the flip side however are some quite disturbing facts. BATU reported a negative Shs. 38 billion as the cash flows for the financial year 2010, partly attributed to a Shs. 7.8 billion generous payout to shareholders. Attributing to the cash flow downside is also the reliance on bank borrowing and overdrafts to the tune of Shs. 40 to 50 billion year on year. It’s no rocket science to figure out that BATU is indeed incurring hefty interest charges and worst of all during a period when we are experiencing an upsurge in interest rates. Does such a disappointing performance guarantee the handsome dividend payout? Your guess should be as good as mine.

Well, history has it that tobacco and beer companies are always generous to their shareholders. Actually their pompous annual general meetings (AGM) tell it all. Most investors therefore have a natural liking for these stocks definitely due to the maximized return availed by them. However, in the event of a downside in performance these companies are bound to come hurtling like a rock down a cliff due to the weak fundamentals in place. In my view actually, BATU is not a cash cow but a pig waiting to be slaughtered.    

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Markets 101: What are ‘Blue chip companies’?

The term ‘Blue Chip’ comes from poker where the highest and most valuable playing chip is colored blue. It therefore goes without saying that a company dubbed such a name will exemplify; high profitability year on year, probably the market leader in its sector, lucrative dividends yearly and will be mostly regarded by investors as a ‘safe haven’. Blue chips however have reputations of being outdated (have been in the market for a long time) and boring, they will therefore feature on portfolios of retirees, non-profit foundations and conservative investors.

Based on the above understanding; this stock counter at Uganda Securities Exchange (USE) can or should be regarded as a ‘blue chip’.

Stanbic Bank Uganda (SBU) – It is the largest company at USE by market capitalization (market value of total shares issued). A close comparison to other listed financial institutions, i.e. Bank of Baroda and DFCU, SBU enjoys a lion share of the market evidenced by its annual revenues. SBU’s dividend payout history can also give a semblance that it’s indeed a blue chip. In 2008 the dividend per share stood at Shs.5.86, in 2009 this increased by more than 100% to Shs. 13.08. In 2010 however when it reported lower distributable profits compared to those in 2009, SBU went ahead and paid out Shs. 7.03 per share held.

Remember there is no clear cut definition that will pin point a ‘blue chip’ it’s a combination of several cues characteristic of a stock that will do so.

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Why you should be investing at Uganda Securities Exchange (USE) now

The Uganda Securities Exchange (USE) is currently a quite enviable ‘buyers’ market. A snapshot of the market reveals a free fall on the major stock counters. Precisely, 5 out of the 7 local listings have been trading south over this last quarter of the year. This situation is a result of various factors that have converged to push stock prices to levels that are out of whack with the fundamentals on the ground. These factors include a stringent economic environment that has been perpetuated by a weakening shilling (which has finally begun to stabilize), escalating food and fuel prices and a regional political uncertainty due to the fourth coming general elections in Kenya. The situation has been further aggravated by the fact that almost 50% of investors at USE are Kenyans. The big question to the average Ugandan investor is, ‘Could the time be right to go shopping for shares?’

Warren Buffet once said,‘Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down’ Warren meant that in buying a stock, it’s quite important to determine the stock’s intrinsic value and compare to its market price. The concept is therefore to buy an undervalued stock which will appreciate in value overtime, one commonly renowned as ‘value investing’. Most of these companies at USE, especially those in the banking sector, reported above average half year 2011 financial results. Well, not to forget, the Bank of Uganda (BOU) legislation early in the year which required all banks to increase their reserves by a massive 400%. We could therefore argue that listed banks at USE are more valuable than before. Below are recommended ‘buy’ counters basing on several cues.

Bank of Baroda (BOBU)
Top on the list is Bank of Baroda Uganda (BOBU) which reported an impressive 48% in net profit growth during the half year results. Despite such an admirable performance, the company’s share price which stood at Shs. 700 after a 1.5:1 bonus issue early during the year has steadily been falling (mainly due to the bonus which culminates into a cheaper share) to the current Shs. 200. This implies the share is selling at PE ratio in the regions of 9.5, which is slightly higher than the sector average. Impressive though is the bank’s huge retained earnings. In fact, it easily responded to BOU’s requirement by capitalising some of these earnings through the bonus issue. The bank’s growth prospects are also quite high given the fact it enjoys a sizeable share of the Indian business community in Uganda. With such strong fundamentals and an expected average annual net profit growth north of 20%, we could consider BOBU undervalued and hence a perfect buy that will lead to sizeable future gains on its price.

Uganda Clays Limited (UCL)
The infamous brick maker has been loss making for the last three consecutive years. 2011 half year financial results however saw it edge into profitability with a meager profit of Ushs. 1.2 Billion. Could this have meant the dawn of a new day for UCL? Well, quite worrying is its huge loan book which resulted into huge interest payments that led to negative 3Billion half year operating cash flows. Thanks to NSSF (major shareholder) for extending a cheap loan to the brick maker, the company would otherwise be a bed time story now. With cheap cost of capital at hand, UCL presents one of the best opportunities for gains on its stock price which currently stands at Shs. 45. Notably, the company substantially upgraded its manufacturing front last year (2010) which led to significant cost savings in 2011. Basing on the current turn of events it’s a must buy evidenced by the fact that it’s currently selling at an impressive PE ratio of 35.2(Based on half year results).

British American Tobacco Uganda (BATU)
The leaf business has overtime been a ‘must invest’ for most seasoned investors. Actually, Warren Buffet was once quoted to have said, ‘I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.’ A snap shot at BATU relative to other listed companies at USE should tell you it’s the cash cow to scramble for. This fact alone has made BATU a bullish counter unlike all the others. Notably, for the year ended 2010 shareholders bagged an impressive Shs. 228 dividend per share. Tell you what... no other company at USE can match this. What makes the difference? I suppose the dividend policy at BATU. Notably, during the financial year 2009 when BATU’s retained earnings stood at NIL, the company went ahead and paid out Shs. 2.8 B to shareholders. With such a generous dividend policy you can only expect loyal shareholders, hence at the current price of Shs. 1840 there is still room for appreciation.

Ultimately, it’s worth noting that we are likely to experience a reversal of the current trend (plummeting stock prices) at USE in the near future as the effect of different economic and non-economic factors on share prices evens out. The average Ugandan investor will therefore moan at the complete change of events but I guess it will be too late.

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Markets 101: What is an IPO?

Initial public offering (IPO) is an offering of stock or shares to the general public by a company which wants to raise capital for the first time. Following an IPO, the company gets listed and its shares are traded on stock exchanges. Most financially savvy investors will often refer to an IPO as the primary market of a share, which implies that on listing it begins trading on the secondary market. In the East African region, the year 2011 has seen through several successful IPO’s namely; Bralirwa and Bank of Kigali (Rwandese), British – American Investments (Kenyan) and the Tanzanian airline Precision Air.

An IPO is bound to occur where the major shareholder sells a substantial percentage of his/her stake to the general public for the first time in the company’s history and subsequently leading to listing of the company on the stock market. This major shareholder could be the government which in its divestment policy sells a part or its entire holding in a public sector company. For instance, the recent Bank of Kigali IPO saw the Rwandese government offload 20% of its stake in the bank. In such a case proceeds of the sale of shares go to the government. In other cases however, proceeds are injected back into the company to improve probably the operating cash position or for purchase of equipment.

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An analysis of Corporate Governance: A Uganda Clays Typical Scenario

This year’s Uganda Clays AGM (Annual General Meeting) was rocked by an outrage of shareholders with their deep concerns being the directors’ failure to apply corporate governance principles in the running of the infamous brick maker. Well, though the debate was centered on poor corporate governance, the question is whether there is indeed a lack of corporate governance or the shareholders claims were simply unfounded and inclined to punish the directors for the company’s continued loss making year on year.  

What is corporate governance?  

Corporate Governance is the system through which companies are directed and controlled by senior officials (directors) on behalf of the shareholders and other relevant stakeholders. The burden of good corporate governance without any doubt therefore falls on directors. Good corporate governance will entail;

• The institution of an effective board of directors.

• A balance of directors involved in actively running the company and those who do not have a day-to-day operational responsibility.

• An Annual re-election of directors subject to continued satisfactory perforance.

• The institution of a formal, transparent policy on executive remuneration.

• The achievement of a satisfactory dialogue between management and shareholders .

These and many more corporate governance principles are generally referred to as ‘best practices’ hence implying their applicability globally.

Uganda clays typical scenario

Uganda Clays may seem to have adopted corporate governance principles but a closer look should tell that the adoption is actually on a patchwork basis. The annual report does not for instance include a statement of compliance or non – compliance to corporate governance principles. The statement is a vital one given the fact that it gives a detail of significant aspects to the user’s understanding of financial statements. They include; directors’ remuneration, composition of the board (executive and non - executive), a list of directors and their corresponding age, skills and competences, directors’ attendance of board meetings, the roles of the different sub committees of the board and many more. So what good corporate governance practices can be handpicked from our dear brick maker?  

At the helm of the 61 years old brick maker is Mr. Charles Rubaijaniza, a man who has been on the role of the chief executive officer since 1^st of January 2011. His appointment to the post was following a competitive interview process and we could therefore assume good corporate governance regarding his appointment. On the other hand, the chairman of the board is Prof. Eng. John Senfuma (an independent non – executive director), hence implying a clear division of responsibilities between running of the board and the company’s business. 

The board of directors comprises of a majority non – executive directors most of whom were reappointed during the 2010 AGM. As such reappointments should be based on individual directors’ performance and their contribution to the board, we can again assume good corporate governance. 

My take

Uganda Clays has been trading on the Uganda Securities Exchange (USE) since the year 2000. To the best of my knowledge, compliance to corporate governance principles should be a pre – requisite to such a listing. The big question is, ‘should we therefore pass the back of inadequate governance principles at Uganda Clays to USE?’ Well, to some extent, in my view, ‘YES’. In addition, I believe the onus to good corporate governance at Clays lies on the shoulders of Prof. Eng. John Senfuma. It’s his role in ensuring effectiveness of the board in all its aspects.

Good corporate governance will not only safeguard our wealth as shareholders but also rust off the mechanics necessary for profitability. 

  

                

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