Madison at Half Year 2018
Finance, Madison Financial Services Plc

In a recently published SENS Announcement on LuSE, Madison Financial Services Plc recorded results that showed a decrease in net performance over the half year period of 2018. With IFRS 9 effects being felt on the financial statements (IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments in particular, addresses requirements for recognition and measurement, impairment, derecognition and general hedge accounting), the statement issued by company secretary Kafula Mwiche on behalf of the MFS board  blamed the under-performance on the increased opportunity cost on non-performing assets from two key areas. The areas included the non-accruing of interest income from a 2017 fully impaired receivable of K35 million and the property units that were pending construction completion while interest costs were still accruing.

The top half of their income statement showed a 14% improvement in results from operating activities (down from 69% in the previous year). Revenue was up 10% (up 1 point from half year 2017). According to the issued statement, “the improved results are largely attributed to the continued good results from the insurance companies together with the impressive turnaround which was recorded by the micro-finance business”. Furthermore, “the asset management business also held its own as it maintained good performance on the asset management side”.

Evidence of the causes of improved results are seen in the 7.32% increase in assets which was attributed to the aforementioned turnaround in the micro-finance business. Working capital at half year appeared to be marginally strained albeit in positive territory with current ratio moving from 1.5 in 2017 to 1.3 in 2018. This is indicative of tightening liquidity issues in the market.

However, investors will be dismayed by the 75% loss in earnings per share. EPS was 0.05 compared to 0.19 at mid-year 2017. Our estimate is that forward EPS will come in around 0.1. The management team and their board remain upbeat about their prospects of achieving a significant turnaround in the 2018 financial year from the previous year’s loss position (caused by K35 million impairment).

A walk down memory lane, specifically in his 2017 annual report address to shareholders, revealed that Group Executive Chairman Lawrence Sikutwa indicated that the areas of MFS that had under performance were areas that had counterparties whom MFS had receivables, as well as a few of the SME borrowers whose businesses experienced poor recovery. Furthermore, their property portfolio experienced depressed demand for their medium to high cost housing offering, resulting in a large number of unsold housing units on the Groups balance sheet against rising cost. However, in Kafula’s recent statement, only the former issue is raised and an amount is specifically declared (the impairment) that the counterparties owed that caused distress on the MFS income statement. Conversely, there is no mention of how the housing unit sale is now fairing in what is slowly becoming a saturated property market. If the 2017 Chairman’s statement is anything to go by, we anticipate further increase in inventory of housing units upon completion of the current projects.

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