Six NSE companies in survival dogfight as massive debts hurt
The corporate manoeuvres come at a time when investors have suffered dividend suspensions and major share price declines on the Nairobi bourse. PHOTO | FILE
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The huge debts, which have left some of the firms owing more than their net value, have left investors facing low prospective returns for years to come.
Kenya Airways has the biggest debt problem among publicly traded firms, owing creditors including banks Sh209.8 billion against total assets of Sh176 billion.
Uchumi Supermarkets also took loans to finance its expansion locally and in the region that in hindsight appears to have been imprudent at best.
Six Nairobi Securities Exchange-listed companies have accumulated massive debts that have pushed their management into a survival dogfight, exposing the perils of credit-fuelled expansion in tough economic times.
The huge debts, which have left some of the firms owing more than their net value, have left investors facing low prospective returns for years to come.
The upcoming fundraisers look set to cause a major dilution of existing shareholders who, alternatively, will be required to pump in new capital to protect their equity positions. Some of the firms are also considering borrowing new loans or rolling over upcoming debt maturities, effectively postponing their day of reckoning.
The corporate manoeuvres come at a time when investors have suffered dividend suspensions and major share price declines on the Nairobi bourse, with some of the stocks nearly wiping out their shareholders.
Investment analysts warn that it could be a long wait for the affected investors to see a turn-around of their firms, arguing that they will require a combination of sustained robust economic growth, tepid interest rates and some dose of luck to pull through.
“Debt can boost the return on equity (ROE), but can also lead to collapse of a company if badly used,” said Robert Bunyi, an investment analyst and founder of Mavuno Capital.
Kenya Airways has the biggest debt problem among publicly traded firms, owing creditors including banks Sh209.8 billion against total assets of Sh176 billion. This has wiped out its shareholders’ net worth, taking it to a negative Sh23 per share or Sh33.8 billion in aggregate. The stock is trading at Sh4.4 apiece, having declined 55 per cent over the past one year alone.
Investors in Uchumi Supermarkets, which last paid a dividend of Sh0.3 per share in 2014, are about to hand over a controlling stake in the company to a strategic investor in exchange for a Sh5 billion capital injection in the form of equity or convertible debt.
Like KQ, the retailer also took loans to finance its expansion locally and in the region that in hindsight appears to have been imprudent at best.
Shareholders of ARM Cement are also set to cede a significant stake to an institutional investor expected to provide Sh12.7 billion in exchange for preference shares to be converted into equity in seven years.
The cement firm intends to use the new cash to pay down debts that have weighed down its earnings.
Investment firm, TransCentury, is also facing a major debt overhang that has left shareholders facing net claims from its creditors. The holders of the stock also face a significant claim on future earnings if the March 25 maturity date of the outstanding Eurobond is extended.
The firm issued an Sh8 billion bond in June 2011 but investment of the proceeds has not paid off, leaving it in a precarious position of having to repay a debt that is about five times its current market capitalisation of Sh1.6 billion.
Most companies, including the six listed firms, use debt to grow faster as they bet on making returns high enough to repay the loans and leave them net gainers.
The troubled six have, however, seen their debts hurting profitability as sales and margins failed to cover their finance and other operating costs. Some of the companies’ problems have been compounded by increased competition and allegations of incompetent or fraudulent management, leaving little margin for manoeuvre in their debt-laden balance sheets.
Their ability to generate cash has also not matched the punishing debt obligations.
“Ideally, companies with short cash conversion cycles and predictable sales and costs can be more aggressive in using debt,” said Mr Bunyi.
He added that firms with large capital expenditures and operating in highly competitive industries such as airlines and cement firms should use debt more cautiously.
Mr Bunyi noted that most companies use debt, including bank loans, because it is readily available and can boost returns especially if it can be sourced at a favourable cost.
KQ recently hired advisory firm PJT Partners to help it explore options of raising an estimated Sh60 billion in new capital, including debt and equity.
The company has started dismantling its ambitious expansion strategy dubbed Project Mawingu that saw it take on huge debts to finance the acquisition of new aircraft, which in the end led to expensive overcapacity.
The upcoming new round of equity financing is also expected to see the government’s ownership in KQ go above 50 per cent from the current level, significantly diluting other shareholders.
This, analysts say, is based on the expectation that most retail investors would avoid pumping new money into the ailing airline having booked major capital losses besides missing out on dividends since 2012 when a payout of Sh0.25 per share was made.
KQ floated a major rights issue in 2012 at Sh14 per share, an offer price from which the stock has fallen steadily in subsequent years.
The airline’s losses widened to Sh11.9 billion in the half year ended September from Sh10.4 billion a year earlier, signalling a continuation of the dividend drought.
At Uchumi, new CEO Julius Kipng’etich has accused the former management of accounts manipulation and conflict of interest that affected the retail chain’s performance.
The sacked executives have also been accused of running through the Sh900 million raised in the 2014 rights issue without resolving the retailer’s working capital problems.
Part of the Sh5 billion sought by Uchumi is expected to be used in repaying the retailer’s debts that have significantly contributed to its losses. Uchumi’s finance costs increased more than five-fold to Sh335.8 million in the year ended June, reflecting the impact of a 52 per cent jump in liabilities to Sh5.1 billion in the same period.
The retailer made a net loss of Sh3.4 billion in the period, wiping out the net profit of Sh364.3 million a year earlier. Its share price has dropped 35 per cent over the past one year alone to trade at Sh7, significantly below the Sh9 at which the retailer priced its rights issue in 2014.
ARM’s short term debts jumped 35 per cent to Sh14.4 billion in the nine months ended September, raising its finance costs 3.3 times to Sh1.1 billion. This contributed to its net loss of Sh469 million in the same period, reversing the net profit of Sh1.1 billion the year before.
ARM, which paid a dividend of Sh0.6 per share for the year ended December 2014, has issued a profit warning for the subsequent year.
Its share price has dropped 62 per cent over the past one year to trade at Sh32.5.
TransCentury, which last paid a dividend of Sh0.4 per share for the year ended December 2013, has seen its share price decline 68 per cent over the past one year alone to trade at Sh5.9.
The company’s net loss narrowed to Sh676.1 million in the half year ended June from Sh1.6 billion the year before, with higher finance costs extending its stay in the red.
Home Afrika and Mumias, also highly leveraged, have similarly recorded disastrous stock declines and multi-year losses that have denied investors dividend income and capital gains.
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