Afromedia Plc Stock Valuation

AFROMEDIA PLC

Ticker:                            AFROMEDIANature of Business:    ServicesLocation :                              Nigeria
Recent Price:           NGN0.2052-Week High/Low: NGN0.20/0.20Estimated Fair Value:      NGN0.60-NGN0.92
Expected Return:      143.5%Consider Buy:                   Below NGN0.76Business Risk:            Average
Financial Risk:      AverageEconomic Moat:              WeakCorporate Governance: Average

Company Overview
Afromedia Plc (AFROMEDIA) was one of the two companies that emerged from West Africa Publicity Limited (WAP) in October 1959. WAP was established by the Royal Niger Company (later United Africa Company Limited) in 1928 to manage its media agency and media contracting display services. The other company that WAP spun off was Lintas Limited. AFROMEDIA was charged with the responsibility of providing media contracting display services while Lintas Limited offered media agency services.

AFROMEDIA was indigenised in 1974 in accordance with government legislation. It became a public company in July 2008 and a quoted company on the Nigerian Stock Exchange in May 2009. It displays advertisements on structures in the airport and along the roadside. The airport structures include backlit box, electroluminescent and ultra-wave structures while roadside structures include LED lamp post banners, IAT Unipole and lamp post banners.

Alhaji Lateef Akande Bakare is chairman, the board of directors of AFROMEDIA.  Otunba Akinlola Irewunmi Olopade rose through the ranks to become the group managing director of the company.

Investment Thesis
AFROMEDIA has been offering outdoor advertising services in Nigeria for over sixty years. The company started using solar to power its advertising sites to reduce the of powering generators and improve its profit margins. However, digital transformation has been eroding the earnings of AFROMEDIA and, by extension traditional advertising companies. Online/digital advertising has formed an essential part of companies’ advertising campaigns as more and more of their target audiences embrace digital technology. Besides, larger audiences can be reached at a cheaper rate than what is obtainable with traditional advertising.

While the efforts of the company’s management at turning around the company are laudable, we believe that the overhaul of its business model in accordance with the current realities can help the business to navigate through the difficult times. In addition, AFROMEDIA has to rein in costs in order to restore its profitability.

The customer base of AFROMEDIA is weakening with two companies accounting for 61% of the revenue in 2021 while three firms produced 64% of the revenue in the prior year. Guaranty Trust Bank Limited was responsible for NGN95 million or 29% of revenue in 2021 (2020: NGN116.3 million or 34% of revenue); First City Monument Bank Limited generated 32% of total revenue in 2021 compared with 25% in the earlier year. In fact, it did not make any revenue from airport advertising in the year under consideration; roadside advertising produced all the revenue for that year.

Shareholders’ wealth has been eroded over the years. The company’s fundamentals have been deteriorating. Though it trades below our estimated fair value, we do not recommend a buy in the light of its worsening performance. We will keep close tabs on the company.

Valuation
A share of AFROMEDIA should trade between NGN0.60 and NGN0.92. But it is currently trading at a heavy discount to our estimated intrinsic value. We anticipate a return of 143.5% on the company’s shares.

Financial Overview
The performance of AFROMEDIA has been going downhill for about a decade. The revenue of NGN323 million made in the 2021 fiscal year was equivalent to a 10-Year Compound Annual Growth Rate (CAGR) of -20.6%. Roadside advertising sales, the only revenue source in 2021, dropped 6.7 percentage points year-over-year as against a 0.5% increase in the year before. Airport sales revenue has been diminishing over the years.

The company accumulated huge losses between 2011 and 2016; net losses incurred within that period exceeded NGN11 billion. The result: accumulated losses have wiped out shareholders’ fund. Shareholders’ fund was -NGN3.2 billion as at 31st December 2021 (2019: -NGN3.4 billion). The difficulty in growing advertising sales, coupled with huge administrative expenses, led to worsening profitability.

AFROMEDIA has been earning a gross profit since 2018. But it has not been able to make an operating profit in the last eleven years because gross profit could not cover the operating expenses of the business. In 2021, the company announced an operating loss of NGN198.2 million as against an operating loss of NGN9.1 million in the year before. The positive Profit Before Tax (PBT) declared could be attributed to other income made by the company. AFROMEDIA’s Profit Before Tax (PBT) was NGN177.2 million in the year under consideration (2020: NGN492.9 million). Profit After Tax (PAT) was decreasing at a compound rate of 27.7% over the past three years. Gross profit was 29.1% of turnover, having shed 9.3 percent year-over-year. PBT and PAT margins were 54.9% and 44.7% respectively.

Though it has been negative for ten straight years, working capital improved to -NGN745.3 million at the end of the 2021 fiscal year. Debt increased by 3.4% year-over-year to NGN3.3 billion. Debt almost doubled the total assets and was the major source to finance the business as shareholders’ fund was negative. Return on shareholders’ equity has not been encouraging. AFROMEDIA, in our opinion, may be headed towards a liquidity problem.

Business Risk
AFROMEDIA is facing strong competition from both traditional and non-traditional advertising media companies. This makes earnings and margins vulnerable. The business landscape is changing and the ability to use technology to improve business models is a critical success factor in the industry.

Recommendation: Hold

In NGN thousands
Earnings Chart of Afromedia Plc

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