Madison 2016 Annual Review
Finance, Insurance, Madison Financial Services Plc

You are not a truly Zambian premier company if you have not listed on LuSE or have ever been first to market. We would like to believe that is how Madison views themselves as indicated in their 2016 annual report. Its arsenal currently comprises of Madison General (Insurance), MLife (Life Insurance), MFinance (Microfinance), MGen Tanzania and MAMCO & MCapital Capital (Unit Trusts). With net profit in 2016 up by 490%, Dr Lawrence Sikutwa’s smile on page 9 of the AR is justified. He boasts of the group of companies turning around its fortune from an almost complete loss position of K3.83 million in 2015 to a positive net profit position of K14.95 million in 2016. Although 2016 was a much better year on the back of tightened monitory policy and stability in the exchange rate, other macro factors still hurt business in general. These ranged from electricity shortages and high interest rates. Other factors that hurt them included an exponential rise in costs including insurance claim costs and management and administration costs.

According to Dr. Sikutwa, the anatomy of the turnaround was attributed to 3 factors that included: Innovative marketing,strategic partnerships (both local and abroad) and implementation of cost management strategies. In addition, the Doc believes that the Group remains focused on improving the performance of subsidiary companies in order to improve returns for the shareholders. In order to achieve this, he cites the following as key areas where this can be achieved: Continually improving operating efficiencies,  Strengthening the control environment, Continued innovation, Property development,  Growth of the deposit taking business,  Increase market penetration rates,  Regional expansion, Our Human Capital, and Environmental and Social Sustainability. This is a lot in terms of focus but it is expected when you have a plethora of companies to manage. However, it is prudent to ensure that the strategy is cohesive and streamlined in order to achieve maximum impact on the group of companies.

Our assessment of the group of companies shows that overall, revenue rose by 12.6% with EBITDA strongly positive in 2016. Our estimation of cost of sales shows a 3% drop with operating cash flows rising by 84.5%. Profit before tax rose by 164.7. Total assets and liabilities both rose by 11% with gearing marginally increasing by 1% to 123% in 2016. The groups liquidity remained strong with an acid test above 1 (they have enough money to cover the current obligations). However, as indicated by the chairman,SGA rose significantly by 26.4% indicating pressure from administration and staff costs. We anticipate they will be keeping an eye on this is 2017 especially considering labor productivity ratio (employee count divided by revenue) shows a 7.6% reduction.

For shareholders such as the VCs or PEs,they will be pleased with the improved return on equity of 11% in 2016. In addition, earnings per share (EPS) rose by 127% in the year under review.However, for the dividend hungry investor, a 30% reduction in dividend will not be pleasant. On the back of the harsh macro environment of the previous years, CFOs are constantly at pains to justify dividends and maintain the dividend policy. When reductions arise especially in the midst of a declared profit,shareholders are programmed to expect a dividend north of the value they received in the previous year.

Dr Sikutwa and his team are currently studying the region in the hope of creating value away from the Zambia market that has seen many new entrants hence destroying value. There focus will be markets with high earnings potential and low barriers of entry. Pursing low barriers of entry however, will ensure that they will quickly find themselves in a situation where more players also enter those foreign markets. If its competition they are running from, they must answer the question of whether its market share they desire or superior competitive advantage through cost differentiation. Growth markets are fast depleting worldwide.

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