Mumias Sugar Company acting CEO Coutts Otolo speaks during a media briefing on the company’s financial performance for the year ended June 30, 2014 in Nairobi on September 11. The results showed a total loss of Sh2.7 billion. PHOTO | SALATON NJAU
The last nine months have witnessed a stubborn bear hug of Mumias Sugar Company at the bourse.
The sugar miller has year-to-date dropped 33 per cent of its value following two consecutive years of losses. Recent end-year results show a total loss of Sh2.7 billion from a loss of Sh1.66 billion posted in the previous year.
High production costs, influx of cheap imported illegal sugar, weak internal controls and overdependence on one product, contributed significantly to the negative performance.
The misfortune currently facing the company can be attributed mostly to external factors. Falling sugar prices—they dropped by 26.9 per cent to Sh62,432 per tonne last year—and illegal sugar imports have continued to weigh down on its market share.
Mumias now estimates total revenue loss stands at 60 per cent through sugar importation rackets.
With the coming of quota-free imports from Common Market for Eastern and Southern Africa (Comesa) next year, competition is set to intensify for the listed sugar miller.
Moreover, over-reliance on smallholder farmers who depend on rain-fed irrigation has significantly affected cane supply.
It is possible that markets have been taking notice of this and hence the mass exodus.
Lack of a clear strategy to combat illegal cheap sugar imports is contributing majorly in the loss of confidence.
Recent reports of the company’s secret sugar imports for own packaging and resale is testimony enough of the absence of a proper strategy. This is also goes perhaps to show that attempts to bring down the cost of production have remained unfruitful.
Sugarcane production in Kenya is estimated to cost Sh48,450 per tonne annually compared Sh20,400 per tonne in Egypt. It is, therefore, unsurprising that Mumias’ cost of sales have averaged close to 80 per cent since 2009, a scenario responsible for its razor-thin profit margins. In the 2013/14 report, cost of sales was reported above average at 93 per cent of sales.
The new management has an uphill task . Markets demand to see increased capital investments to improve production efficiencies, close coordination with the government to increase vigilance on illegally imported and counterfeit sugar, strengthening of internal control environment, contracting of large-scale farmers and revenue diversification as a way to return to profitability.
Revenue segmentation show that sugar sales account for 90 per cent of revenues while ethanol and electricity sales account for 7.9 per cent and 1.8 per cent respectively.
Mumias will need to perform better on all these scores if it desires to see investors fall back in love again with its stock.
Perhaps the ongoing review of its co-generation electricity purchase agreement with Kenya Power is a step in the right direction.
The company earned Sh230 million from sale of electricity in the year ended June 30, a 50 per cent decline from the Sh458 million earned in the previous year.
The stock is trading at a new low of around Sh2.15.
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