Banks, Teleco’s worth the money for stock investors

Following the Covid-19 pandemic, data from Uganda’s publicly traded companies show mixed results, with some posting consistently high returns and others long-term losses.

Prosper Magazine has established that particular companies are losing investors due to their deteriorating financial performances.

Let us reference from June 2023’s trading activity.
A total of 40.1 million shares were traded on Uganda Securities Exchange (USE) in June 2023, valued at Shs5.58 billion as turnover.

In financial markets, turnover refers to the total value of securities (like stocks or bonds) that are bought and sold within a specific period, usually a day or a year. It is a measure of the trading activity within the market.
In comparison to the same month last year, a 12.15 percent increase of turnover from 4.97 billion was registered.

In large part, supply and demand dictate the per-share price of a stock. If demand for a limited number of shares outpaces the supply, then the stock price normally rises. If the supply is greater than the demand, the stock price typically falls.   
                                         
What does June’s activity mean? 
MTN Uganda’s counter had the highest participation in trading for the month, accounting for 90.07 percent of the total turnover. 
Umeme’s shares accounted for 6.98 percent of the total turnover and shares of Stanbic Uganda Holdings Ltd came in third with 1.51 percent of the total turnover.

Development Finance Company of Uganda’s (Dfcu) shares had the smallest contribution among the mentioned counters, accounting for 0.52 percent of the total turnover performance on the bourse.
The top four companies that contributed to the highest turnover on the stock exchange in June included at least two banks, one telecommunications Company, and one power distribution company.
Before we go any further, it is worth noting that all four of these companies sell services in their business model.

The stock market gives a company access to a larger pool of resources to finance future expansion and exposure to retail and institutional investors, both domestically and internationally.
Additionally, it raises a company’s profile and improves its capacity to draw qualified executives and directors. 

The exchange’s regulatory body, the Capital Markets Authority (CMA), which has at least nine listed companies on the local index, reported in July that the domestic market capitalisation of the bourse had increased by 4.3 percent to Shs7.3 trillion by the end of June 2023 from March of the same year.
However, one thing has not changed for a while: Banks and Telco’s are thriving on the exchange while other companies are showing declining profits and losses, making them less attractive to trade.
Returning to the exchange data for June.  It does, after all, represent what has been occurring in the market for some time.

Only 0.02 percent of the total turnover was generated by the trading of Bank of Baroda (BOBU), Cipla Quality Chemicals Uganda Limited (CQCIL), National Insurance Corporation (NIC), and Uganda Clays Limited (UCL).
These are dominated by manufacturing firms CQCIL and UCL, both of which have reported profit declines for at least this year. UCL issued two profit warnings, and CQCIL is being sold by its Indian parent company, Cipla because it is unable to perform financially as it was expected.

British American Tobacco Uganda, a cigarette manufacturing company, is also included on the local index. It has not attracted any investment in a while due to its low dividend yield.

Telecoms and banks
According to the company’s financial statements, MTN’s service revenue increased by 15.0 percent in the first half of 2023, meeting the company’s medium-term target thanks to a strong performance in voice, double-digit growth in data and fintech revenues. 

The Telco’s profits increased by 17.8 percent during the first six months of 2023, to Shs228.04 billion. 
Additionally, over the same period, Dfcu saw an increase in total comprehensive income from Shs20.2 billion to Shs30.9 billion.
Stanbic Bank Holdings Limited also saw a 23.5 percent increase in profits after tax to Shs200 billion in the first six months of 2023. 
“We continue to see growth across all our businesses, driven by our anchor subsidiary, the Bank,” Andrew Mashanda, the chief executive, Stanbic Uganda Holdings Limited, said.
It is only Bank of Baroda Uganda that saw a slight decrease in its total comprehensive income by at least Shs325.6 million.

National Insurance Corporation profits after tax increased by 31 percent to Shs4.22 billion in 2022, up from Shs3.2 billion in 2021.
However, companies like CQCIL, Umeme Ltd, Uganda Clays and British American Tobacco Uganda all reported a decline in profits in their most recent financial reports.

Uganda Clays
Uganda Clays’s total after-tax profits fell from Shs5.9 billion in 2021 to Shs2.4 billion in the 12 months to 2022, primarily as a result of stagnant production as the business expanded its manufacturing plant to produce more clay-baked building materials of higher caliber.
The manufacturing firm even experienced stock outs in January, October, and November in 2022 as a result of its production line breakdown.
UCL says exposure to foreign exchange risk, primarily from the US dollar, greatly impacted its operational costs.
“If the Uganda Shilling strengthened against each currency, the effect would have been the opposite,” UCL noted in a statement.

The business is also struggling with a sizable debt of Shs20.6 million owed to National Social Security Fund (NSSF), which it intends to settle in five years from 2024 after receiving anticipated profits from its new manufacturing facility.
UCL has now issued two profit warnings to its shareholders in the first half of 2023. It expects a possible return to profitability in 2024.

Cipla Quality Chemicals
Cipla Quality Chemicals Industries Limited (CQCIL) reported lower revenue and earnings in 2023. Revenues in the pharmaceutical company have decreased over the last three fiscal years, falling from Shs284.5 billion in 2020-21 to Shs221.5 billion in 2022-23.
This is pegged to the company’s reduced demand for its products both locally and internationally.
Its share price has fallen from Shs256.5 to Shs70 since its initial public offering in 2018.
Africa Capitalworks SSA intends to enter into an agreement with Cipla India, the parent company, to purchase the majority of Cipla’s shares to make it more competitive while injecting the necessary capital to boost its revenues.

Prosper has learned that the deal has been postponed because COMESA, the Common Market for East and Southern Africa, is worried about a decline in competition in the region where Cipla QCIL is one of the biggest pharmaceutical manufacturers.

COMESA is made up of 21 African countries with a combined population of over 600 million people.
Cipla’s operational performance is deteriorating, with production volumes falling by one million tablets from 2021/22 to 76 million tablets in 2022/23, despite an increase in overall equipment efficiency, according to the company’s 2023 integrated annual report.
“Africa Capital Works SSA’s expertise, resources, and strategic insights will undoubtedly catalyze our efforts to innovate, diversify, and further enhance the value we deliver to our stakeholders,” said Cipla QCIL board chairman Emanuel Katongole.
“Through this alliance, we shall be able to leverage synergies and capitalise on emerging opportunities,” he added.

CQCIL operates in a rapidly changing healthcare landscape characterised by technological advancements, regulatory changes, and shifting market demands. To take advantage of opportunities and overcome obstacles, it must be agile and adaptable to market demands.
The emergence of new competitors on the market and development of novel therapeutic regimens for ARVs and ACTs, including the intravenous ARV (injectable), show that Uganda’s pharmaceutical industry is becoming more and more competitive.

The company continued to encounter pricing difficulties for the tenders it took part in, particularly in the East African region. This was primarily because of competition from bigger players in the market, whose prices were slightly lower. 
“The combination of the above risk factors can have an adverse impact on our business profitability and product launch decisions,” CQCIL said in the report.

BAT Uganda
Although BATU acknowledged in its annual report that its business continues to struggle with the “scourge of illicit trade,” thanks to its resolute performance, its revenues increased by 8 percent to Shs48.9 billion in 2022 from 2021. 
“For our industry, illicit trade impacts not just business receipts, but also tax revenues for the government and the consumer’s ability to purchase legitimate goods,” BATU noted in a report of its performance.
The company, which has 1208 shareholders in East Africa, has been dormant on the stock exchange because of its low dividend yield. Illegal trade and anti-tobacco campaigns have long had an impact on its cash flows. 

Umeme 
Power distributor Umeme saw its profits after tax fall to Shs13.2 billion in the first six months of 2023, down from Shs64.4 billion in the same period in 2022.
As the natural term of its concession expires in March 2025, the company saw a significant depreciation of many of its assets after revaluation.

“Consequently, the amortisation charge for the period increased to Shs210 billion compared to Shs79 billion of 2022,” the company’s financial statement said.
This had an impact on its revenues, which had increased by 19.9 percent to Shs1.076 trillion in 2023 from Shs897 billion in 2022 due to an 8.3 percent increase in electricity sales, underlying pricing, and the provision of construction services.

What experts say?
Mr Andrew Mwiima, a financial markets consultant with Asigma Capital Advisory Services, an investment advisory company on the Uganda Securities Exchange notes that post-Covid-19 investors are now looking for safer havens by putting their money in Treasury bills, bonds, and unit trusts to receive guaranteed returns because their budgets are now being squeezed.

As a result, there was less capital available for businesses in the manufacturing and insurance sectors to strategically allocate the necessary resources for both production and product research and development.
The outlook for stock prices is expected to be positive, according to stock brokers, but it will take some time to realise significant increments.

People are still struggling to make ends meet, and this situation will not change until the economy stabilises, which, according to Mr Mwiima, could happen by next year (2024).
He adds that banks are performing well because they are well-regulated. As a result, investors are comfortable having the Bank of Uganda as their regulator, so they invest in much more than other sectors.

Manufacturing firms hope to post higher profits if they strategically position their products for the current market trends.
A lecturer of Economics at Makerere University School of Economics, Dr Fred Muhumuza, asserts that since investors seek returns on their investments, they eye profitable businesses, and that the market turnover, which shows manufacturing companies being out-competed by banks and Telcos for investors, proves that the stock exchange is functional because the manufacturing sector has failed to adjust to market dynamics.

“All banks and telecom companies are making more money than other businesses because they can quickly adapt to market changes, for instance, use of microfinance and mobile money. The telecom industry is also moving away from voice and short-text message revenues towards data. Manufacturers like Uganda Clays Ltd must create products that the market wants because, in reality, there are now less expensive, higher-quality alternatives on the market,” Dr Muhumuza asserted.

According to the macro-economist, the rate of recovery for these businesses may be influenced by how quickly the economy bounces back. Nevertheless, he warns that manufacturers must keep an eye out for market opportunities to boost their profits or risk losing the confidence of investors.
“Many businesses in our economy are struggling with competition because they have not revised their products to meet consumer demand in a way that enables them to compete successfully. There are many alternative products in the market today,” Mr Amos Lugoloobi Amos, the State Minister of Finance and Economic Development cited the same.
He made note of the fact that the majority of banks have foreign affiliates, which makes it simpler for them to raise core capital during financial crises. 
The Treasury notes that this issue is more micro than macro in nature.