Uchumi share price falls as it sinks Sh2bn deeper in the red

Retail chain Uchumi sank Sh2 billion deeper into the negative equity position, according to the belated 2016 financial results that were released late Monday, even as its auditors warned that the insolvency could be worse because the values of some assets are doubtful.

The erosion of Uchumi’s balance sheet and core retail business means the government must take quick and decisive action to bail out the retailer or offer guarantees to strategic investors who have been approached to provide new capital.

Uchumi has lately been operating on the goodwill of creditors, including suppliers, who are betting on an implicit State guarantee to continue doing business with the retailer.

The Treasury is a significant shareholder in Uchumi with a 14.6 per cent stake.

The Capital Markets Authority (CMA) has also allowed Uchumi’s shares to continue trading on the Nairobi Securities Exchange despite its negative net worth position, arguing doing so will make the investing public draw confidence from the government’s ownership.

Uchumi’s share price fell 3.3 per cent to Sh2.85 in Tuesday’s trading as speculators reacted to the latest reported results that stacked up Sh5 billion in assets against liabilities amounting to Sh7 billion in the year ended June 2016.

READ: Treasury lines up Sh500m for Uchumi bailout

KMPG said the published results — which were delayed for months — are unreliable due to opacity relating to the retailer’s closed operations in Uganda and Tanzania besides uncertainty regarding the values of its non-current assets.

“The financial statements … were audited by KMPG Kenya who issued a disclaimer of opinion on the group’s financial statements due to lack of audit evidence on foreign subsidiaries up to the date of loss of control and a qualified opinion on company financial statements with regard to lack of audit evidence on property and equipment’s balances,” Uchumi said in a statement.

The doubtful properties form the bulk of the company’s Sh3.3 billion long-term assets and their potential downward revaluation will worsen the insolvency.

Uchumi’s former external auditors, Ernst & Young, in 2010 revalued the retailer’s assets upwards to Sh2.2 billion from Sh450 million, ignoring ownership disputes involving some of the properties, according to court documents.

The retailer, for instance, is fighting in court to keep a 20-acre piece of land in Nairobi’s Roysambu to which a group of alleged squatters has also laid claim.

The legal battles have thwarted Uchumi’s efforts to raise some Sh2 billion from sale of the assets, with the company intending to use the proceeds to pay creditors including suppliers.

The company’s loss-making subsidiaries in Uganda and Tanzania ceased operations in October 2015, leaving employees and suppliers unpaid.

The size of Uchumi’s pending obligations in those markets in not clear. The closure of the foreign operations more than halved the retailer’s sales to Sh6.4 billion in the year ended June, partly contributing to the Sh2.8 billion net loss recorded in the period.

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The loss narrowed 17 per cent from Sh3.4 billion the year before thanks to a 32 per cent cut in operating expenses to Sh3.2 billion.

Uchumi also recorded relatively lower asset write-offs of Sh466.7 million compared to Sh1 billion a year earlier.

The retailer said it is seeking to turn around its operations by selling shares to a strategic investor, receiving shareholder loans and entering a possible franchise deal with retailers interested in riding on its brand.

“The board and management are focusing on a turnaround strategy which includes adoption of a franchising model, funding through shareholders loan, ICT improvements and supplier support,” the company said.

Franchising would see the retailer earn licensing fees from other parties operating under its decades-old brand. The decision to go the franchise route signals a retreat from an aggressive debt-fuelled expansion spree carried out by the previous management.

The government last year said it was ready to fund Uchumi to the tune of Sh1.2 billion but did not indicate whether the cash injection will be in the form of debt or equity.

The Sh1.2 billion is, however, insufficient to rescue the retailer and it remains to be seen whether the company can get a strategic investor to provide additional capital.

Uchumi earlier said it was targeting Sh5 billion from an investor who would end up with a controlling stake as current owners take a massive dilution.

The government may need to sweeten the deal for the prospective investors, including through guarantees, in light of Uchumi’s mounting liabilities and flagging operations.

“The search for a strategic investor is ongoing. Discussions are ongoing with several potential partners and the board is hopeful that the discussions will be concluded in 2017,” Uchumi said.
Uchumi’s long-term investors have suffered some of the worst wealth destruction at the NSE, joining shareholders of Kenya Airways that is also in negative equity and multi-year losses.

Mumias Sugar, another State-owned firm, last year avoided falling into negative net worth after revaluing its land holdings upwards by Sh9.2 billion.