AEL Zambia Limited – Dynamite comes in reduced packages.

We have been waiting with baited breath for our first company analysis for 2017. The financials for AEL dropped on our desk and we knew it had interesting insights on the performance of this explosives company that services the mines. Although the annual report is not yet out (we used audit financial results for 2016 published on LUSE), it is clear that 2016 was a very challenging year for this company whose services are embedded in the mining industry value chain.

Revenue was down 7.1% in 2016 compared to 2015. This was mainly attributed by the decreased business the firm received from the upstream and a strengthening kwacha. However, what the summarized results indicated that they have an astute corporate finance team. Although revenue dropped, they were able to increase profit before tax by 47.2%. This in part inspired an over 900% increase in the boards proposed dividend for 2016 which ZMW 2.40 (ZMW 0.24 in 2015). We will note judge, we understand the need to keep investors interested on the back of haircut that come from foreign exchange transaction losses in 2016 of K23.958 million (compared to gains of K93.051 million in 2015).

It is clear that in order to achieve earnings growth of 71.8%, the AEL belt was tightened as well. Return on sales doubled from 6% in 2015 to 12% in 2016. Return on equity grow by 8% to 23%. With cost of capital within that region, investors will be pleased as they placed a good bet on this company. Furthermore, the notable reduction in liabilities (down 47.4% on Current & down 20.8 on Non-Current) indicates prudent management of working capital as well as reduction in capital expenditure. This fueled the 60.2% increase in operating cash flows (OCF) as well as evidence of financialization (look out for our blog on this in a Zambian context) through a more than 8000% increase from financing activities. In times of high interest rates (on the back of the macro factors we cited in 2016), financing day to day activities organically is king when OCF is positive.

In the environment, financial prudence often hurts stakeholders such as suppliers to a firm. It is clear that the management of AEL help the promise of growing value from the 71.7% growth in earnings per share (EPS). With an improvement in the copper price in circa 2017, increased activities and resumption of operations at certain mines, we anticipate further growth for AEL in 2017.


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