An investor monitors trade on Uganda Securities Exchange in Kampala. Sometimes the companies’ performances fall short of expectations and past performances, leading up to earnings announcements. PHOTO/MICHAEL KAKUMIRIZI
Every business aims at making a profit on a sale, whether monthly or annually. However, achieving a loss by the end of this period undermines the essence of investing.
Many businesses are currently experiencing financial difficulties, as highlighted by recent profit warnings. These warnings, which are legally required, inform shareholders to adjust their expectations downward.
Recently, Quality Chemicals Industries issued a warning; NIC Holdings Limited reported a 25 percent decline in its full-year profit for 2023, citing macroeconomic factors and changes in accounting standards.
Umeme also projected a 25 percent drop in profit for the period ending December 2023 and the most recent is Uganda Clays.
Investment analysts predict that this trend will continue, driven mainly by changes in technology that are encroaching on revenue streams that companies once relied upon.
The immediate aftermath of a profit warning can be daunting for investors. Stocks often plummet as market sentiment sours. In some cases, investors are confronted with a tough decision: Whether to sell at a loss or wait for the company to rebound.
The appropriate response to a profit warning depends on several variables, and analysts advise not to panic as reactions can lead to poor investment decisions.
Therefore, as these announcements become more frequent, it is crucial to understand how to respond effectively to safeguard investments and make informed choices.
Diversify
The impact of a profit warning on a company may not necessarily lead to a sell-off, according to Susan Khainza, a chartered holder.
“It depends on how investors perceive the future and whether the warning comes as a surprise,” she explains.
She advises investors to carefully analyse the reasons behind the profit warning, and suggests that conditions can improve if the company pursues diversification and innovations.
“There could be various reasons. People might have found alternatives to what the company offers. When this trend becomes apparent, the company should have already started adapting its business model to keep up with the times,” Khainza explains.
Stay informed
Mr Stephen Kaboyo, the managing director of Alpha Capital Partners, says investors should assess the causes of the loss while staying informed about the business environment.
He explains, “Publicly held companies operate in a business environment heavily influenced by economic conditions. These conditions can be adverse on the macroeconomic landscape, which includes factors such as interest rates and inflation. When these factors are favourable, companies tend to perform well. However, adverse economic conditions can significantly impact a company’s bottom line, and that is what we are witnessing now.”
He adds: “These conditions can be temporary or long-lasting, depending on the economic recovery. Not every year will be the same. There can be economic instability, and it is crucial to adapt. For example, during Covid-19, many companies issued profit warnings. Some faltered, while others survived. How you adapt your business model and approach these challenges will determine your survival. A profit warning does not necessarily mean the company will remain in that position forever.”
A profit warning, as it is commonly understood, indicates that adverse developments have been anticipated before a public announcement is made. Its purpose is to manage expectations. So when the official announcement occurs, it does not come as a shock to stakeholders.
Apart from the panic that might grip investors, some shareholders might automatically consider selling or reducing their shares when a company issues a profit warning.
But Ms Khainza advises, “If you are investing in the stock market, you should focus on the long-term prospects. Consider how you expect a particular company to perform in the next five years and make your decision based on that projection. If you are currently invested in a company that is losing money, reflect on your initial investment decision. What were your expectations five years ago? Was your investment based on short-term gains or on the belief that the company would adapt and thrive in the future?”
These warnings may indicate various factors: an underperforming economy, poor individual investment decisions, or sectoral challenges. While individual investment misjudgments can be mitigated, at the macro level, the situation is different.
Meanwhile Mr Charles Ocici, executive director of Enterprise Uganda, says when companies across multiple sectors start preparing their stakeholders for worse-than-expected results, it becomes clear that the economy is impacting solid brands.
“When established companies resort to issuing profit warnings, they are signaling that their operating environment is challenging. However, examine the pattern. Is the trend confined to a specific sector, such as banking or manufacturing? If profit warnings span different sectors, it confirms that the economic environment is tough,” he explains.
Potential investment sectors
In today’s volatile economic landscape, investors are seeking sectors that can weather financial storms and provide stable returns.
Market uncertainty demands a careful assessment of which industries are likely to thrive despite economic fluctuations. Evaluating past performance, resilience, and future potential is crucial in making informed investment decisions. This brings us to the critical question: Given the unpredictable business environment, which businesses or sectors are favourable for investment?
Ms Khainza explains that it depends on what investors are seeking, but banks have generally been profitable, although they come with risks, such as significant exposure to government debt, especially since the government is borrowing at high interest rates.
For Mr Ocici, investing in mature brands, and sectors such as education in Uganda, is generally a safe bet regardless of the economic climate.
Similarly, the construction materials sector offers resilient opportunities. Despite economic challenges and currency fluctuations, the demand for cement has remained strong, and prices have stayed high.
“Companies that have established themselves in the construction industry with quality materials are likely to continue thriving even in difficult economic conditions,” he adds.
Meanwhile, Mr Kaboyo notes that market risks are ubiquitous, but certain sectors tend to perform well, such as telecommunications, banking, and construction. Other sectors, however, may struggle and it is unrealistic to expect uniform success across all industries. Sectors like banking and telecommunications are resilient and capable of delivering returns to shareholders even in challenging times.
