When a company suddenly drops into steep losses after years of profitability it becomes imperative to read the chairman’s statement and see if there is a logical explanation from the arrowhead of the board. The Chairman’s report for its 2011 financial year ended up covering about 7 pages of the 71 page annual report with just one full page explaining the reason for the poor results. Back then Afromedia posted a revenues of N3.2billion and Pre-tax loss of N409million. Things have seen gone from bad to worse as it. The company posted a revenue of N1.6billion for the year ended September 2012 and pre-tax loss of N4.4billion. Third quarter 2013 earnings forecast projects a revenue of just N400million not enough to show a sign of an imminent recovery.
Why the decline?
At last year’s chairman’s report the company blamed declining profitability on the rising cost of concessioning outdoor advertising space from the likes of FAAN and LASAA as well as the drop in price due to budgets cuts from its major customers particularly in the telecoms industry. That surely may have been a reason at the time but the drastic reduction in revenues is one to send shudders down the spine of shareholders and wonder what had happened. Revenues dropped by 50% year on year whilst gross profit margins also dropped to 31.4% from 44% the year before. To add salt to injury, operating expenses rose sharply by 181% to N4.5billion (2011:N1.6billion). It will be interesting to know why they incurred this huge rise in opex even though I might guess they may have written off prepayments and trade debtors which otherwise may no longer materialize.
The company will go on to declare a loss after tax of a whopping N4.4billion nearly wiping put its entire equity. This makes me now postulate in retrospect that the reason for the dividend payout last year and bonus issues may just be a premonition that major losses was to be expected in 2012, a situation that may have created a moral deficit and inability to declare dividends.
Whats the way forward
Afromedia has been in operations since 1928 when it was called West African Publicity Company. It obviously has survived the pre and post colonial era and rode through wars, coups and counter coups. The current result is probably the stiffest test the company faces to remain solvent. The company’s external debts of N300million as well as overdrafts of over N1billion is a definite pathway to bankruptcy if its equity raising plans are not pursued with increased urgency. Recent increase in the activity in the stock market may well be the best sign yet that it is time to consider a public offering. It will be foolhardy to suggest a recapitalization alone will solve their problems.
They need to renegotiate advertising concessions with owners to align with the realities of the advertising markets. Companies have since realized fancy billboards and branded bus stops do not necessarily promote brand awareness as well as TV and Radio commercials. Don’t be surprised if commuters spend more time glancing at ads in social network sites than they do on the backdrop of billboards on bus stops as they await to board. The company claims to have invested over N133million in exploring potential markets that may provide a source for revenue growth. Well, that investment had better start yielding fruit in 2013. Unfortunately, the first quarter 2013 results suggest that is not the case as revenues have declined further by 44% to N313m (2011:N704million). They forecasted a revenue of over N400million in the third quarter ending June 2013 pitting them at profit of about N5million. Is the loss hemorrhaging receding?
Buy or dump the shares?
The shares has been flat over the last year trading at a rock bottom price of 50kobo. No point looking at the price earnings ratio as as losses make those irrelevant making me look at their price to book ratio. At 50kobo per share their share price is almost 5x its book value!!! By the way, Okomu Oil’s’s share price is just 1.7x its book value. In other words, Afromedia’s share price of 50kobo makes the current price eve flattering and making a “buy” order quite ambitious. For those who own the shares and looking to sell, best of luck.
Afromedia Plc 2012 Audited Accounts is posted on the website of the NSE
