Earnings Review Q3: Afromedia Looking Outdoor

Competition most consumers agree is good in a market economy. Prices are steadily driven down, innovation is encouraged  and product quality is nearly guaranteed. One other benefit is the trickle down effect it gives other business who they depend on for services and supplies to fight off competitors and maintain market share. One Industry that has immensely benefited from competition is the Outdoor Advertising Business. Just drive around any of the major roads in Lagos and indeed Nigeria and you will see countless billboards displaying ads from the major telecommunications companies. Afromedia is by far the leading Outdoor Advertising Company in Nigeria and currently the only one that is quoted. So, when financial results are announced expect them to be reviewed here.

Revenue

They recently released their Q3 2012 financials and posted revenue of N1.9b down 25% from the N2.6b posted same period last year. The huge drop in revenue may be due to stiff competition from a symbiotic combination of small time competitors who help competition stricken telecoms drive down cost in line with their budgetary expectations. Despite the dip in revenue, Gross Profit Margins was 59% better than the 50% obtained same period last year. This was achieved by beign able to reign in on cost of sales which was N807m a 38.6% dip from last year.

Expenses

Operational profit was N354m down 12% compared to the same period last year. This is mainly due to the dip in revenue as expenses remained largely unchanged at 69% of Gross Profit. a 31%. The efficiency in cost is equally reflected in the operational margin as operational profits came in at 18% of revenue.

Profit before tax

Profit before tax dropped significantly by 50% to N124m indicative of a high finance cost. Interest payments amounted to N236m for the period. Strangely, the company had a loan balance of N293m suggesting that this interest cost may have included prior year adjustments for interest charges not captured. It could also have been interest on large overdrafts that may have been taken during the course of the year and repaid already. Whatever the case, this impacted heavily on profits as interest payments took a chunky 65% of operational profit, leaving only N123m for taxes and equity holders.

Bottom Line

Afromedia’s share price has remained mostly flat for the year trading at rock bottom price of 50kobo. Its current market value (N2.1b) is currently less than (42%) half of its Net Assets indicative of a very low price to book ratio. It may seem as a bargain buy on the surface but with return on equity for Q3 at just 1.8% value investors may have to look elsewhere for shareholder value. The company paid 3kobo on dividend last year, a 6% yield on current prices. But without much share price appreciation the real yield is probably -6% as it may be eroded by inflation. Yes, the company makes money but as it stands it is for banks. Increased competition and heavy reliance on the telecoms sector is also bound to shrink revenue further in the coming months. The company surely will have to search for new areas of growth as it seeks to remain dominant in the outdoor business, but for now things remain gloomy indicating a red bottom line.