What to make of company blues on the stock market

It looks unprecedented but a close look at their filings reveals a slow macroeconomic environment that has handicapped a number of households who wouldn’t consume their products. This year already, two companies—New Vision Printing and Publishing Company Ltd and Uganda Clays Ltd—have issued profit warnings, expecting a loss by the close of 2024.
 
Stock market watchers have not received this with a surprise. These companies are the usual suspects. They were among the five companies that issued profit warnings this January for their 2023 financial performance. 
The full list included Quality Chemicals Industries Ltd, New Vision Printing and Publishing Company Ltd (NPPCL), NIC Holdings Limited, Umeme Ltd, and Uganda Clays Ltd (UCL), USE data shows. Accountants at these companies observed that, given their cash flows and net revenues, they are likely to end the year with at least a 25 percent drop in profit or revenue, which compelled management to issue notices to the public since they are listed companies.

Stronger trading rules introduced by the USE in April 2021 mandate that listed companies disclose any significant operational or financial changes promptly. This marks a shift from the previous regulations, which were less specific and lacked a penalties framework for inadequate disclosure practices.

New Vision
Last week, the Board of Directors of New Vision informed shareholders that, based on preliminary assessments, the company’s earnings for the financial year ending June 30, are expected to result in a loss. That is the worst thing any shareholder can ever think of. But not a surprise for the local bourse’s onlookers. 
The company cited a tough business environment, marked by falling newspaper sales and advertising revenue, coupled with rising raw material and operational costs. Don Wanyama, its managing director, says the Board and Management remain “committed to ensuring improved financial performance of the company.”
Vision Group has posted losses in three of the last four years, with 2022 being one of the roughest patches. As these losses mounted, its market value has decreased as well. There is now a looming possibility that the company’s plummeting value could lead to its removal from the stock exchange. 
At present, Vision Group’s market value has dwindled to just Shs11 billion from Shs41.78 billion in 2017. Capital Markets data shows that in the past three months, only 1,400 shares of its 76.5 million shares have been traded, raking in a mere Shs214,200 before commission fees, figures that demonstrate angry investors.
Many of its investors are looking to sell its stock, but are struggling to find buyers. Small wonder, its stock price has stayed still at Shs153 for the three years now to August 9. Although there may be a recovery plan in the works, shareholders remain in the dark about it.

What happened?
“In its heyday, New Vision demonstrated impressive growth—the company saw its revenue double from 2010 to 2020.  However, the treasury began leaking and in 2023 alone a total Shs23 billion revenue evaporated without any visible corrective strategies on the horizon, It’s so bad at the company that it’s now generating less than 20 cents of revenue per share,” said Alex Kakande, a financial markets researcher and consultant.

“The pendulum of fortune continued to swing in the wrong direction, with the company’s profits free-falling alarmingly. Last financial year, the company recorded losses amounting to Shs3.7 billion, averaging a pernicious Shs1.2 billion in losses after tax over the past three years. Not even the government gazetting of adverts going to them alone is saving the fortunes of this once thriving company,” Mr Kakande adds in his writing, from his substack.

The company’s share price has dramatically fallen from Shs1,030 to Shs155 over 12 years, which is an 85 percent decrease in value for shareholders, something that depicts significant financial trouble or mismanagement. It is now feared that the company’s valuation may fall to Shs5 billion by 2026 if the current downward trend is maintained, according to projections.

This is because the company’s average days to collect receivables (money owed by customers) has increased from 60 to 124 days, something that signals, said one expert, “potential liquidity problems and potential inefficiency in managing receivables.” The company’s majority shareholder (53.3 percent) is the Government of Uganda and at times it has injected more cash in the firm in financial distress.

“It’s highly probable that the government will cede some of its stake to a strategic private investor otherwise, the investment is not working. There are so many good performing stocks on the bourse that investors are now mulling to carry their trade to,” said one of the stock market’s investors who once considered buying a stake in the company but pulled back.

Uganda Clays 
Uganda Clays also issued its second consecutive profit warning in the same days as New Vision’s, signalling continued struggles. Investors are wary, especially after the company reported that it made a loss in the first six months of 2024. With no profits, shareholders won’t see any dividends.

Mr Martin Kasekende, the company’s Chairman of the Board, attributed the losses to a machinery breakdown that led to product shortages, a challenge the company has faced repeatedly for more than two years now. The situation was exacerbated by macroeconomic pressures, including high inflation and the depreciation of the Uganda Shilling against the Euro, which drove up operating and production costs as the company looked at importing new machinery from Italy to revamp its production plant.

Uganda Clays has been doing this while also aggressively clearing its debt, having paid off Shs6.9 billion in loans since 2022. This affected its revenue that dipped from Shs18 billion in 2022 to Shs13.3 billion in 2023. The company is now focused on stabilising its financials, aiming to return to profitability by 2025, mostly from its Kamonkoli plant investment.

Disillusioned by the recent profit warning from the building products manufacturer, investors reacted swiftly, sparking a major sell-off on July 16, driving the share price further down from Shs12 to Shs10.70 by August 8. This marks a stark contrast to January when a similar warning left the share price stable at Shs13, despite the company’s annual loss. That prior steadfastness of Uganda Clays’ shareholders was even noted by USE CEO Paul Bwiso, who attributed it to their belief in the company’s long-term prospects.

Feeling the heat
Specialising in roofing tiles, walling materials, and decorative clay products, the company is feeling the heat from fierce competition. Steel manufacturers such as Roofings Group, Steel & Tube Industries, and Uganda Baati have gained significant market share with more affordable, lightweight, and durable alternatives. This competitive pressure has deeply cut into Uganda Clays’ market presence, a persistent challenge in its strategic planning.

During its latest annual general meeting, which happened early this year, Uganda Clays’ managing director, Mr Reuben Tumwebaze, expressed optimism about the company’s recovery trajectory. He highlighted a significant restructuring of its long-term loan with the National Social Security Fund (NSSF), and confidently stated that “come 2025, we will begin paying it very well.”
Back in 2010, Uganda Clays secured a Shs10 billion loan aimed at bolstering its asset base. However, sluggish operations led to diminished output, revenue, and profits, causing the loan balance to grow to Shs20.6 billion. 

In 2023, rising financing costs—soaring 325 percent to Shs1.8 billion—forced the company to renegotiate terms with the NSSF. The restructured agreement reduced the loan amount from Shs20.6 billion to Shs17.4 billion, while increasing NSSF’s equity stake in Uganda Clays from Shs41 billion to Shs43 billion. 

Work cut out
Under the new terms, repayments will begin on January 2, 2025, spread across 10 equal semi-annual instalments, with an annual interest rate of 14 percent. The looming question is how Uganda Clays will manage these repayments while also restoring dividend payouts to shareholders, especially after last year’s losses prompted the directors to suspend any dividend distribution.

The revenue decrease and cost adjustments gave the company a net loss of Shs2.8 billion in 2023, resulting in a decline in earnings per share for its shareholders from Shs2.7 in 2022 to negative Shs3.6 in 2023. The company’s management assured shareholders that the company is still sustainable in their retreat early this year in Kampala. It’s now looking at diversifying into other products so as to cope up with competitors, but this is sensitive information.

Next year, Uganda Clays believes there’s going to be full utilisation of its assets and more cash will be generated as a result. As all of this encouragement continues, shareholders’ appetites for dividends grow, and they were comforted by the hope that the business would turn a profit this year. They do, however, have the NSSF loan nostalgia, whose loan repayments begin next January. This could potentially lower their dividend share as well as the capital that the business needs for inventories and innovations.

NIC Holdings
National Insurance Corporation (NIC) is another stock to watch closely, as many investors anticipate a potential profit warning or even a loss. Over the past year, NIC’s share price has languished between Shs6 and Shs5, reflecting its current undervaluation.

Earlier this year, NIC Holdings warned investors of a 25 percent drop in its 2023 profits due to changes in accounting standards. The company faces challenges due to changes in international financial reporting standards, which now require insurance firms to adjust asset valuations, such as land and buildings. This reform prevents companies from inflating earnings based on rising tenancy rates and real estate values.

But there is still a perplexing problem, three months after the regulator gave NIC a grace period to publish its financial statements for the previous year, it has not yet done so. The insurer hasn’t even alerted its shareholders how it has performed in the first six months of 2024. The delay in organising these financial records raises concerns and leaves investors in the dark about the company’s financial health.

It’s difficult to understand why but Sunday Monitor has managed to join a few dots. In the company’s 2022 regulatory findings, NIC’s external auditor –KPMG—raised some key audit matters that could paint some red flags. There is a chance that the company may not have appropriately estimated its liabilities as KPMG found in 2023 in the company’s audit.
“Insurance contract liabilities included in Note 28 of the consolidated and separate financial statements form 26 percent of the group’s total liabilities and are made up of reported claims and incurred but not reported (“IBNR”) claims. Valuation of these liabilities is highly judgmental and requires a number of assumptions to be made that have high estimation uncertainty,” it wrote in its audit.

What’s going on?
That’s the last audit available on NIC Holdings’ financial performance. And it demonstrated that should the assumptions used in those calculations change, it could materially affect the company’s financial statements. This suggests that the insurer’s financial health could be more volatile than it appears.

In July 2024, NIC Holdings announced a delay in its 2023 consolidated financial statements, attributing this to the complex new IFRS—Insurance Contracts standard. Mr Elias Edu, the company secretary, explained that the technical processes involved in auditing the subsidiaries’ financials under this new standard have hindered their timely completion.
Traditionally, NIC releases its financial results around July, but the board now anticipates a new release date of August 28. The delay in NIC Holdings’ financial statements raises concerns about the company’s adherence to regulatory requirements. 

According to USE regulations, issuers must provide audited financial results every four months post-financial year-end. Failure to comply results in an ‘L’ annotation on their listing and a notice from USE in the country’s largest papers by market share, with possible suspension until compliance. NIC’s lack of timely financial updates, particularly the absence of Management Accounts from the company’s management, suggests possible regulatory leniency. 

The USE has not marked NIC’s stock with an ‘L’ or issued a public notice, indicating a possible discretionary leniency. As the market awaits NIC’s delayed financials, there are growing fears that the company may announce a profit warning with a loss.

Where do they go?
So where do investors shift their capital after pulling out from underperforming stocks? USE officials, who preferred to remain unnamed, told Sunday Monitor that investors tend to move their funds to companies with consistent financial disclosures and reliable dividend payouts. 
“The market reacts to information,” one explained, highlighting that demand and supply dynamics are influenced by transparency and financial stability.
Mr Mwiima, a seasoned veteran in Uganda’s financial markets with over 20 years of experience as an investor, portfolio manager, and adviser, argues that “not all bad news about companies is detrimental.” He believes that poor financial results don’t always signal a poor long-term investment because many issues may be temporary, and companies can rebound, making them viable investment opportunities in the future.
“Investors should not be blinded by these poor results. They should instead understand what the company wants to do in the long term…the stock market is for those who are looking for long-term returns. Those who come for short-term returns are not investors. In financial markets, we call them speculators. They should go [and invest] in treasury bills,” he concluded.  

Experts say
Ms Cindy Hannah Kukunda, a portfolio manager from ICEA LION, an asset management firm, sees profit warnings as a negative indicator, impacting dividend yields. Financial markets consultant Andrew Mwiima concurs, cautioning that frequent warnings can erode investor confidence and consequently diminish trust in the company’s future returns.

Mr Mwiima isn’t surprised by NIC Holdings’ delay in financial reporting, noting it’s a recurring issue amid declines in shareholder returns. He attributes the company’s struggles to fierce competition and market pressures. He, however, views NIC as a potentially lucrative long-term investment, given its strategic moves to adapt and compete in the challenging insurance sector.

But profit warnings extend beyond just shareholders, boards, and management—they also impact potential investors and the overall market activity on the stock market. These ugly alerts contribute to reduced trading volumes as prospective investors shy away, wary of potential losses, leading to a decline in overall market investment frequency.
 
“That mere absence of investors from your stock is not a good sign. It’s one thing to trade but when they reach a point when they don’t want to do it anymore, that’s when you know you’re doomed,” Mr Mwiina says.