Auditor raises the red flag on Crown Paints units’ losses

External auditors of Crown Paints Kenya Limited have warned that increased losses and liabilities at its subsidiaries could put it out of business in the near future.

The red flag came as the subsidiaries racked up a cumulative loss of Sh706.8 million in the year ended December, a performance that saw their liabilities exceed assets by Sh599 million.

The Nairobi Securities Exchange-listed firm has, however, committed to support the loss-making units in Uganda, Tanzania and Rwanda, indicating a widening of its exposure.

“These conditions … indicate the existence of a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern,” Ernst & Young (E&Y) said in their assessment of Crown’s financial position.

The auditors’ opinion means there is doubt as to whether the paints manufacturer has the resources to continue operating indefinitely, facing the specific risk of liquidation from creditors.

The subsidiaries’ combined negative net worth of Sh599 million represents 44.2 per cent of the group’s net assets of Sh1.3 billion in the same period, with the company’s reserves declining to 996.8 million from Sh1.2 billion the year before.

Crown chief executive Rakesh Rao is, however, optimistic that the bleeding at the subsidiaries will end soon.

“These are initial hiccups. The subsidiaries will be able to stand on their own feet,” Mr Rao said, adding that the units are expected to make a smaller loss of Sh100 million this year.

The units posted a combined loss of Sh240.3 million in the year ended December led by Crown Paints Tanzania at Sh199 million, Regal Paints Uganda Industries (Sh35 million), Crown Paints Rwanda (Sh4.5 million) and Crown Paints Allied Industries (Sh1.8 million).

The subsidiaries’ cumulative losses stood at Sh323 million, Sh301 million, Sh12.8 million and Sh70 million respectively. Crown’s Tanzanian subsidiary has the largest negative equity at Sh291 million, followed by Uganda (Sh236 million), Crown Paints Allied (Sh60 million) and Rwanda (Sh12 million).

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The paints manufacturer fully owns the troubled subsidiaries which are depending on it to continue their operations.

“The subsidiaries rely on the parent company for provision of working capital and their ability to continue as a going concern depends on the continued support they receive from the parent company,” Crown said in its latest annual report.

The company added that it has committed to continue providing financial support to the units to help them meet their obligations.

“The directors have no immediate plan to cease operations for any of the subsidiaries and /or liquidate them,” the firm said in the report.

Mr Rao said Crown is likely to borrow additional sums to support the subsidiaries as they work on improving their profitability. Crown’s borrowings, including bank overdrafts and short term notes, stood at Sh1.1 billion as of December.

He added that the units in Uganda and Rwanda have broken even so far and that Tanzania could follow suit next year.

Crown embarked on an aggressive regional expansion plan in 2014 to reduce its reliance on Kenya and benefit from potential growth opportunities in the new markets.

The company has, however, found it difficult to gain market share in the neighbouring countries, with about 94 per cent of all sales coming from the local market.

The expansion has seen Crown’s net profit, which previously peaked at Sh213.8 million in 2013, drop to Sh30.7 million last year.