The Central Bank ÔÇô Bank of Botswana ÔÇô might have been credited for moving beyond text book analysis by not changing interest rates recently in the face of rising prices, but the country’s largest security company is reeling under the weight of high inflationary pressures. This week, the mid-cap Botswana Stock Exchange (BSE) listed security company ÔÇô G4S painted a grim trading condition in light of ever rising general prices.
“Economic and trading conditions are currently challenging,” said the company in its final results released this past week.
The company puts particular emphasis on national year-on-year inflation for the month of March, which stood at 9.8%, having gone up 80bp from the February figure of 9.0%. The report argues that at 9.8%, the rate of inflation is 3.8 percentage points above the revised medium term target of 3-6% that the central bank had set this year when unveiling its Monetary Policy.
The effect of this high level of inflation rate, the report noted, is a rise in the cost of sales which, for the company, include fuel costs for the seemingly large fleet.
As a result of high inflation, margins are expected to be under pressure in the short-term.
The report notes that the problem is aggravated by the company’s inability to fully pass on costs to the end consumer due to the price sensitivity of the market.
“These high costs erode both gross and operating margins. On the consumers’ side, inflation reduces purchasing power and the amount of disposable income available,” the company said.
When casting eyes to the horizon, the security company sees further bleak landscapes. It says the expectation is that inflation would rise further in the short term, driven particularly by the increase in petroleum and food prices as well as the expected increase in other administered prices.
The inflationary pressures would result in reduced demand; of particular concern to the company is that security component would now become a luxury to the household. The recent 15% across board salary increment and subsequent introduction of ‘attraction and retention policy,’ dubbed scarce skills allowance, would be of little value to the company’s fortunes this financial year.
They cast aspersion on the increment, saying it is not sufficient to fully protect margins given that fuel costs have been increased more than once since the beginning of 2008. The company has forecasted gross
margins to fall to 41% by the end of 20078 ÔÇô marginally lower against 42.2% of last year and earnings are expected to grow by a sluggish 4%.
“We expect a drop in sales of luxury products and/or services; alarms included. While it increases the level of disposable income, the recent civil service salary and allowance increment is inflationary. We, therefore, believe that inflation will rise further as a result of the increment and consequently the net benefit of the increment to G4S may be minimal.”
However, it looks like all is not that deem, the company says the implementation of the public and private sector projects is expected to drive the revenue in the medium to long-term. These projects include the construction of the Botswana Metal Refinery (BMR), the Mmamabula Power project, the second University in Palapye as well as mining activity in the northern part of the country.
These projects are expected to create employment and possibly drive up the level of disposable income in the economy. These may then result in an increase in consumer spending, which would drive the demand for luxury goods/services.
G4S further added that its cash management service, which is an add-on to cash transportation, is “up and running. The division is currently providing service to one commercial bank, but there is still potential for growth, especially in view of the growth in the banking sector.”
The integrated services division is expected to be the major future growth driver. The challenge, however, the report said; is that the market is currently dominated by competitors and is a lower margin business.
“Despite this, G4S has the advantage that its service has some add-on benefits, which include the communication link between the guard and the control room for purposes of back up. The company can, therefore, leverage on this competitive advantage in its marketing campaigns. The service would, therefore, be preferable to high end consumers whose demand is not that price sensitive and, therefore, present lesser challenges in pricing.”
The company’s revenue rose by 14.7% to P90.2m, driven by, among others, a price increase of about 8% in late 2006. It is projected that full year results for 2008 would yield revenue to growth of about 13.8% – largely driven by the increase in prices of about 10%, which was effected in November 2007 as well as the expected increase in the level of disposable income in the economy.
Cost of sales went up by 24.5% to P52.2m, on the back of rising petroleum prices. This growth was 9.8 percentage points higher than the growth in revenue. As a result, gross margins dropped by 4.5 percentage points to 42.2%. Finance expenses were up 50.7% to P566 000, while finance income grew by 73.8% to P1.5 million. Profit before tax went up by 17.4% to P17.5million. The income tax expense for the year was P3.2 million, indicating an effective tax rate of 18.2% against 14.7% of the previous financial year.
The company’s total assets went up by 10.7% to P50.9m from P45.9 million while fixed assets amounted to P17.2m ÔÇô rising from P15.9 million of 2006 and current assets amounted to P33.7 million from P29.9 million. The growth in assets was driven by the acquisition of some fixed assets as well as a considerable growth in amounts due from related parties.