The Economic Reveal behind the UMEME & Vision Group Results
The average football manager in the English premiership has an unenviable predicament when things start to go bad. They always have to stay optimistic one way or another. Even as the glass shrinks rapidly from chalice to shot glass, for the premiership manager, it is always half full.
It is clear that football manager's manual of optimism has been adopted by the stewards of the Ugandan economy. From the safety of the dugout, politicians preach prosperity while our businesses are being felled en mass on the pitch. Supporters and sponsors alike are switching to other options elsewhere. It doesn't help that all our hopes are pinned on a dangerous (in a literal sense) substitute named ‘the oil industry’ that has been warming the bench for the past decade.
Tallying the economy is dicey given the vast number of columns that line the table of economic performance. Goals are conceded and scored across a spectrum of inputs. Moreover conflicting conclusions on the same set of data betray the mishmash of opinions that inform them. That’s fine — economics is not a science and as far as being an art form is concerned, its canvas is open to the whole gamut of brushstrokes. To this end, we tend to use proxies called bellwethers to dig into hidden truths. A bellwether stock is one that serves as an indicator of trends in a sector, industry, market or indeed, an economy. Retail giant Walmart in its omnipresence is an apt bellwether as regards to the sentiment of the US consumer and by inference, their economy — US GDP is 86% dependent on the domestic market. In Kenya, one might point towards Safaricom whose tentacles hold the reigns in not just telecoms but also financial services.
It’s a little trickier for an economy like Uganda’s that’s dominated by businesses that are quarantined from the bother of even the mildest strain of accountability. In circumstances like this, the aspect of analytical juacalism is called for — the amateur empiricist needs to get creative. The combined scrutiny of the recently released UMEME LIMITED and the Vision Group interim and full year financials respectively offer some useful insights into what’s really going on.
UMEME’s asset base is dominated by the distribution concession agreement with government of Uganda via the Electricity Regulatory Authority (ERA). The concession comprises 60% of its long-term assets. In effect, UMEME does not exist without the concession. Under the terms of the agreement, UMEME has to invest in infrastructure that doesn’t sit on its balance sheet. It offers them a quasi-monopoly in the distribution of electricity that is enviable at a surface level but also provides challenges when regulatory adjustments are made. In simple terms, UMEME's UGX 115bn hit was down to such a complication; the details of which would take up too much blog acreage. In short, it led to their loss of UGX 47bn (up to UGX 83bn with foreign currency translations differences considered) which is non cash but it does have a balance sheet implication with regards to net equity and its effect on gearing.
The New Vision Group on the other hand was only profitable because the value of physical asset on their balance sheet was revised upwards. The dual irony of a power company sunk by an adjustment on an intangible asset, and a media company where content is king staying in the black because of an adjustment on a physical one should not be lost on you. That said, the contrasting strategies of the New Vision Group and UMEME is not the focus: the source of their revenues, operating performance and interpretations from a broader macro-economic perspective is.
UMEME, as the last mile of electricity is at the non-negotiable end of the expense curve. Salaries can be delayed and water fetched from an offsite location but the sound of an UMEME technician’s spiked boots summiting a pole triggers panic. All enterprises from heavy industry to local dukas require electricity. If power is off or unstable, a business’s efficiency is negatively affected. 73% of Uganda’s power is consumed by industrial & commercial clients. The growth in power therefore serves as measure industrialisation — not exactly earth shattering as far as revelations go but helpful if viewed in a relative context. UMEME’s revenue growth compared to the same period in 2016 was 6% (flat if inflation is incorporated). It is made worse because industrial activity was subdued in the first half of last year because of the elections. Also, in the important categories of medium and large industrials, revenue was driven more by price increase and reduced losses rather than consumption (base tariffs in UGX/kWh for 2017 vs (2016): Large Industrial 372 (369), Medium industrial 577 (544) and commercial 629 (587) — adjustments are made quarterly). This means that not only is manufacturing capacity stunted, the existing players are being burdened by higher energy costs. Proxy empirics aside, the logical conclusion is that manufacturing is actually shrinking (it grew 1.4% y-o-y from 2014 to 2015 according to the Uganda Bureaux of Statistics (UBOS)). With an additional 783MW coming on stream after the completion of the Karuma and Isimba dams, there is much to think about on how industry will be able to run on affordable electricity without diluting the project's return on capital expectations.
The Vision Group on the other hand sources a huge chunk of its revenue from a corporate cost that is totally expendable — advertising. Marketing expenditure is first on the chopping block when it is clear that the consumer is under pressure. Ugandan revellers who were serenaded by Akon and Wyclef when times were good have had to settle for cheaper nondescripts who must be googled beforehand. Moreover this comes at a time when eyeballs are drawn to alternative channels such as digital media and PR. The Vision Group reported an 8% drop in print advertising but the glaring headline was commercial printing which declined a whooping 22% (contrast this with the 39.4% growth in the same category for the previous year ending June 30 2016 that included revenue from the the 2016 elections). Their newspaper sales, down 8.6%, were likely affected by the shift to digital platforms. Vision's business segments touch the commercial and retail consumer alike and both are lower compared to the previous year. The Vision Group had to impair receivables to the tune of UGX 3.1bn because they cannot collect it — the make up of the entities that owe them isn't detailed. This deterioration of credit quality points towards further cash constraints in the economy.
Optimism is a good thing in the economy as it is in football for as long as it somehow translates into results. Even though the table might be easily manipulated, we can measure economic sentiment by proxies that show how loudly the industrial and retail consumer sings from the stands. As football managers know, it takes a split second for those cheers to turn into boos. Something perhaps, for the stewards of our economy to remember.