Markets & Finance

How Uchumi used property valuation to inflate profits

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Former Uchumi Supermarkets CEO Jonathan Ciano. PHOTO | SALATON NJAU

Retail chain Uchumi Supermarkets used the revaluation of its properties to conceal losses it made in the past two years, analysts said, revealing the depth of the company’s management and financial troubles that led to last week’s sacking of its chief executive Jonathan Ciano.

Without the gains from the property revaluations, which were included in the profit and loss accounts, Uchumi would have been in the loss-making territory from 2013, according to London-based Exotix and Kenya’s Equity Investment Bank.

Though a normal accounting practice, the International Accounting Standards (IAS) require that revaluation for companies that are not in the property business and which are not tax deductible, flow through the income statement after the net income.

Exotix says that Uchumi’s decision to include the revaluations as part of its income had the effect of obscuring the true status of its financial position — moving it from loss-making to profitability.

“After stripping out the revaluations, we calculate that Uchumi would have reported a Sh123 million loss in 2013 against the Sh357 million profit it reported and a Sh336 million loss in 2014 compared to the Sh384 million profit it declared,” Exotic analysts say, adding that they expect the retail chain to make a Sh413 million loss because of an even weaker top-line performance and increasing overhead costs.

Uchumi reported Sh14.6 billion sales for 2014 and Sh14.27 billion in 2013, a marginal 0.6 per cent increase while loyalty points stood at Sh92.8 million in 2014 down from Sh98.04 million a year earlier — indicating a decline in purchases from the regular customers.

Total revenues were Sh14.46 billion in 2014 from Sh14.37 billion a year earlier, a 10.6 per cent increase.

The information memorandum on the November 2014 rights issue that raised Sh896 million indicated that Uchumi had four registered properties, including the parcels of land where its Ngong Hyper and Langata Hyper branches are located and two parcels of land along Thika Superhighway.

The parcels of land, totalling 20 acres, are held under Uchumi’s property management subsidiary Kasarani Mall Limited and were valued at Sh2.2 billion at the end of June 2014.

The retailer has since reported a half-year loss of Sh262.3 million for the six months to December 2014 compared to a net profit of Sh106.9 million recorded for a corresponding period a year earlier.

READ: Uchumi loss reveals price of expensive bank loans

Uchumi directors denied any accounting irregularity, insisting that everything was above board.

“Uchumi Board did not overstate its profits, based on revaluation of its property holdings. International Financial Standards require a company to state the true value of its property when reporting its finances. We therefore complied with the requirement,” Uchumi chairperson Khadija Mire said.

The accounting revelation comes a week after the Uchumi board sacked Mr Ciano and Chadwick Omondi Okumu, the chief finance officer, and suspended human resource manager Michael Kibe.

Financial consultancy Deloitte has been appointed to search for a new chief executive for the listed retail chain.

The Uchumi board also said it was looking for a management consultant to help craft a new strategic plan besides selling some of the retail chain’s non-core assets to pay supplier debts worth Sh1 billion.

Uchumi’s cash-flow problems have also delayed payment of the annual dividend to shareholders and remission of money it collected on behalf of utility firm Kenya Power.

The delay saw Kenya Power terminate its contract with Uchumi last month — just weeks before Mr Ciano was forced out.

Analysts said Kenya’s retail market remains robust and that Uchumi can make a second comeback if the new management shapes up shop floor operations.  

“They need to stop expanding both locally and regionally for now. Their focus should be to regain market share locally and streamlining operations,” said Agnes Achieng, a research analyst at Sterling Capital.

Uchumi has 37 branches in Kenya, Tanzania, Uganda and Rwanda.

A major retail industry investor who is privy to Uchumi and other retailers but who declined to be named because of the special position he has with the retailers described the ongoing expansion of the retail chains as unsustainable because of their reliance on heavy borrowing.

“Owners are putting in little capital. They are all expanding using debt and supplier credit,” he said, adding that the local chains have a tough task ahead with the coming of larger and well-oiled international chains.

Choppies of Botswana, Frence’s Carrefour and America’s Walmart are the major retail chains that have set their eyes on Kenya to compete with local brands Nakumatt, Tuskys, Naivas and Uchumi.

Exotix and Equity Investment Bank also maintained that Uchumi still has a strong brand especially amongst older shoppers and that there is hope that a new management team may remedy the firm’s financial ill health.