The Independent (Kampala)

6 March 2014

Uganda: Too Big to Boom?

Uganda's biggest media group, the Vision Group (NVL), has just released its financial reports for the half year ending December 2013, and the numbers are not looking good.

Although revenue grew by 4% compared to the same period in 2012, the Group's profits were whittled away by a 10% hike in the cost of sales. As a result, according to results released in early February, Group gross profits fell by about 11% per cent to Shs11 billion from Shs12 billion in December 2012.

The Group's profit before tax, which dropped 44% to Shs1.9 billion from Shs3.3 billion in the previous half year, was also impacted by a recorded loss on disposal of property, plant and equipment, and a 4.91% appreciation in distribution costs.

If, by year-end in June, the profit figures continue their downward slide, it will mark the second year in a row of less than desired performance from a group that has a good run for investors since it listed on the Uganda Securities Exchange (USE) in 2004.

Robert Kabushenga, the energetic and voluble managing director of the Group, remains bullish even as he takes appropriate measures to cut costs. He is reported to be walking around the Group headquarters on Plot 19/21 First Street in Kampala city with an axe and, after increasing the cover price of the Group flagship; the New Vision newspaper, by over 30%, he is keeping a keen eye on the market.

However, he remains unwilling to concede one area of his strategy that some are blaming for his woes; rapid expansion. Kabushenga defends even the electronic media segment which, analysts say, is hemorrhaging the Group.

"Four of the six radio stations are performing well," he told The Independent in a recent interview.

The Group electronic media, which includes television and radio, chalked Shs13 billion in total sales, up by 30.8 percent from Shs10 billion in 2012 but maintained a relatively flat net profit of Shs3.2 billion from Shs3.219 billion.

In 2013, print media generated Shs54 billion in sales from external sales and contributed Shs6.4 in net profit, up from Shs51billion in total sales and Shs5.3 billion in net profit, an increase by 5.7% and 18.9% in sales and net profit respectively.

"If we had not diversified, we would be in a worse position," Kabushenga said, "We know what we are doing. If our expansion was a marathon, we would have burnout by now. It's been six years. You cannot run a marathon for six years. "

Kabushenga is referring to the fast pace he introduced since his appointed as MD/CEO in 2007. At the time, the Group had just recorded a whopping Shs3.3 billion profit and was committed to an expansionist strategy albeit with limited ambition. Still in its infancy, the Group performance was derived from mainly circulation sales and advertising of newspapers and magazines. Its first radio station, Vision Voice FM, was in operation and testing was ongoing for its first TV station.

In his first year, Kabushenga declared a 42% leap in profits to Shs4.7 billion. But then the next year, profits shrunk by about 60% to Shs2 billion. Although the topsy-turvy performance has become its characteristic, Vision Group has continued to post stellar performances. That is why shareholders are concerned about the 2013/14 anticipated bad showing.

Expansionist vision:

Vision Group is a public listed company on the USE of which the Government of Uganda is a majority shareholder through the Minister of Finance, Planning and Economic Development and the Minister of state for Finance (privatisation). Kabushenga was company secretary when it listed in 2004.

Today, the Group boasts of publishing four websites, 10 newspapers (both daily and regional), 6 radio stations, and four television stations broadcasting in English, Runyankole, and Luganda.

Its digital platform, which includes websites publishing and Vision mobile, a dedicated Short Message Service (SMS) platform, recorded the highest growth of 117% from the previous half year. It was followed by Television and Radio which rose by 46% and 5% respectively for the half year results of 2013 ending on December 31.

Of the Shs78 billion generated in revenue by June 2013, Shs47 billion was from advertising, Shs 20 billion from newspapers, Shs 10 billion from commercial sales and Shs 542million from scrap sales. In contrast to June 2013, advertising sales yielded Shs 42 billion, newspapers earned 19 billion, commercial printing generated Shs 8 billion while scarp sales contributed Shs 442 million to the total revenue as of Shs 71 billion as of June 2012.

Some analysts say the Group has expanded so fast yet some of the new products are not performing.

"They have expanded so fast in electronic media which is eating into their revenue and affecting its profitability," says Joel Isabirye, a media consultant.

That is not bad, he adds, because electronic media structures yield a return on investment over a long period of time.

"Vision Group has historically had a high cost structure," he concludes.

Since 2009, the Group has been recording increases in revenue but the costs have been growing at a faster rate. This accounts for the single figure annual profit markup ranging between 4% and 8% yet the inflation rate has fluctuated between 28% and 4%.

Charles Kankya, the managing accountant of The Independent and other accountants who spoke to The Independent say this means that in 2013, with the inflation rate at about 7%, New Vision's profit margin is swallowed up.

The group's earnings per share have been declining from 2009 to 2013 and hence declining return on investment for shareholders.

Another accountant told The Independent:"Kabushenga is running an entity making money but also eating money."

Another accountant explained how the Group is facing challenges because of high administration, distribution and other operating costs and hence need for Kabushenga and his management team to downsize and cut these costs. Kabushenga agrees.

"Our performance in the first quarter was below budget. We did not achieve our sales target yet we grew our costs faster than our revenue," he told The Independent, "We are now employing cost cutting measures. The company did not recruit or replace employees who left either voluntarily or involuntarily." He did not give details.

Independent investigations reveal that the Group fired about eight top managers in the sales department and trimmed from over 200 sales personnel to about 79 employees in the same department at the end of 2013.

Those decisions must have been very difficult and painful for Kabushenga. Having risen in ranks from company secretary, Kabushenga must be keenly aware of Vision Group's envied position in the human resource market place. It is one of the few companies in Uganda that employ large numbers of people, pays them fair salaries and allowances, and provides other benefits like insurance cover. It is estimated that Vision Group employs over 1500 people.

In 2013, Vision Group was recognised by Superbrands and Private Sector Foundation Uganda as one of the best brands in Uganda. At the FiRe Awards organised by Uganda Securities Exchange, Capital Markets Authority (CMA) and the Institute of Certified Public Accountants Uganda (ICPAU) the group was recognised for exemplary performance in financial reporting in the public sector category. It was also the 1st runner-up in the 2013 National Social Security Fund (NSSF) best employer awards. Some of its employees were also recognised for their exceptional performance at the national and international front.

Kabushenga's vision:

Kabushenga has showed a determination to expand the company's electronic media segment from publishing websites of all the newspapers into radio and television since he was appointed CEO on January 1, 2007 after William Pike's contract ended in June 2006. Pike was the founding managing director and Editor-In-Chief from 1986 when the New Vision Publishing and Printing Company Ltd (NVPPCL) was launched.

As the new CEO, Kabushenga had to deal with a new Editor -in -Chief following the departure of David Ssepuuya in 2006. Belgian Journalist Els De Temmerman replaced Ssepuuya.

Barely four months in office, was Kabushenga hit by another loss; the company's board chairman, Brig. Noble Mayombo, passed on in May.

But Kabushenga plodded on. In August 2008, the Group bought Radio West, launched Bukedde FM, a Luganda radio station, and went full gear into television.

David Ssebabi, then acting board chairman told shareholders in the 2008/2009 Annual General Meeting(AGM) that the expansion required increased staffing yet, he was worried, there was a high rate of staff turnover in the company especially in the editorial department.

"The most important commitment management undertook was not to lay off people as a cost management measure," Ssebabi said, " Once you lose talent this way, it costs more to rebuild it."

Five years later, Ssebabi is now the board chairman and Kabushenga is still MD/CEO. Together, they have had to change attitudes to cope with new realities.

In the 2012/2013 annual General meeting report, Kabushenga informed shareholders that despite challenges the Company remains in a decent financial position and has achieved growth in both revenue and market share.

"However, there are concerns about the level of profit and the stagnated share price. This, as the figures show, has come down to the fact that the business is run at a high cost which not only brings down the level of profit, but also gives the company a low Price-Earnings (PE) ratio."

Kabushenga told shareholders that in the past financial year, overall turnover grew by 10.9%.

"However, due to increased cost of sales and other operating costs, profit after tax reduced by 7.9%. Earnings per Share reduced by 8%," he said.

He added that the market performance in the first quarter indicates that 2014 is going to be a tough year.

Tough times:

The media consultant, Isabirye, says what is happening to Vision Group is not different from what is happening in other media houses. They are all affected by the economic slowdown that has led to a slackening of advertising spend.

Due to the economic squeeze and unlike in 2011 when Vision Group increased its cover price for the week day dailies, and its main rival, Monitor Publications Ltd (MPL) whose flagship is the Daily Monitor, followed suit, this time it is the raunchy tabloid Red pepper and The Observer that increased their cover prices to Shs2, 000 from Shs2, 500 and Shs 1,500 to Shs 2,000 respectively.

"Despite the current market conditions which call for a review of the cover prices," said MPL Circulation Manager Justus Katungi on December 2nd 2013, "Monitor Publications Ltd is still studying the environment and how to serve the market under the current conditions without increasing the cover price."

Alex Asiimwe, the MPL MD told The Independent in an interview that the Monitor move was "tactical" and that they are looking at "other ways to cut their cost line."

He explained that the market has been tight in terms of buyers of media products and advertisers, and that the exchange rate is unfavorable.

"We earn in shillings but spend in dollars."

"There was a lot of government expenditure cuts hence a cut in the revenue mix yet people want higher salaries, and need jobs," Asiimwe said, "I hope 2014 will be a better year."

Innovative teams needed:

Kabushenga told The Independent that in "a challenging environment and tight market of this nature, the most innovative team commands the most revenue."

"The management team needs to grow the revenue faster than the rate at which costs are growing in order to deliver value to shareholders," he said.

He told The Independent that there is, for example, a limit to cost cutting because one needs to retain talent that will be difficult to rebuild when the turnaround happens.

Kabushenga says the cost of sales have increased due to a 10% tax increase on imported materials such as newsprint that the company consumes as it operates.

As a stop-gap measure, the Group in December 2013 raised the cover price of its flagship brand; The New Vision newspaper from Shs1, 500 to Shs2000 to cover the tax increase.

It is not the first time New Vision's cover price was increased due to rising costs. The price was increased from Shs700 to Shs800 then increased to Shs 1,000 in 2008 and later to Shs1, 500 on July 1. 2011. The cover price of Saturday Vision and Sunday Vision remains at Shs1, 500 though Bukedde, the Luganda newspaper, moved from Shs800 to Shs 1,000.

While Kabushenga has leaned heavily on pushing up the cover price and laying off staff, analysts says he needs to target other cost centres, push harder on the electronic media platform, and use the strong segments of the Group to prop up weak areas in the advertising market. Some say he should synchronise bulk advert sales on all platforms instead of having each segment run alone.

Kabushenga was unwilling to comment on his approach to increasing revenue. He described these as trade secrets.

"These are challenges that management has faced in the past and has proved perfectly capable of weathering them," he said, "I am confident that the team will excel in returning value to shareholders." Looking at the half-year figures in February, not all shareholders are that confident.

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