Capital Markets

NSE-listed firms intensify asset sales to shore up flagging profits

asset sale

Nairobi Securities Exchange (NSE). FILE | NATION MEDIA GROUP.

Nairobi Securities Exchange-listed companies are increasingly turning to asset sales to shore up their medium-term performance in an operating environment that is beset by slow growth.

Sameer Africa, East African Breweries Limited (EABL), Sasini, and Standard Chartered Bank Kenya make the list of companies that have raised a total of more than Sh12 billion from disposal of land and buildings in the past five years as short term performance dipped.

Uchumi Supermarkets and Eveready East Africa are in the process of selling decades-old land holdings for billions of shillings to raise money for flagging operations.

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Analysts said the shift to an asset-light business model is mostly being made to boost returns and enhance efficiencies. Some distressed firms have also been forced to liquidate assets to remain afloat.

“Disposing of excess or non-core assets raises a company’s return on assets, which is a measure of efficiency,” said Robert Bunyi, an analyst at Mavuno Capital.

Mr Bunyi noted that companies can use proceeds from the asset sales to reinvest in their principal activities, buy financial assets or return the cash to shareholders through dividends and special distributions.

EABL, which has sold more assets than all other listed firms combined, for instance, paid a special dividend of Sh4.5 per share or Sh3.5 billion in aggregate last year after selling a glass manufacturing subsidiary for Sh4.5 billion.

The beer manufacturer has sold several subsidiaries, land holdings, and discontinued factories for more than Sh8 billion since 2011.

It has more recently put a six-acre property in Mombasa’s Shimanzi Industrial Area on the market at a base price of Sh700 million.

Unga Group and Sasini have similarly increased their dividend payouts after selling assets, including land and operating subsidiaries.

The human and animal feeds manufacturer in 2015 sold its interest in packaging firm Bullpak for Sh342 million, boosting its earnings and the dividend payout, which rose by a third to Sh1 per share or a total of Sh75.7 million.

Sasini also booked a gain of Sh830.7 million from sale of land in 2015, allowing it to raise its dividend payout that year five times to Sh1.25 per share or Sh285 million in aggregate.

Returning cash to shareholders indicates that the companies’ current operations are fully funded or that there are no significant acquisitions on the horizon.

Mr Bunyi reckons that if a company distributes most of the proceeds from an asset sale, investors should make a commensurate downward adjustment in its share price to reflect the shrunken asset base.

Besides, firms that have sold properties out of weakness end up eroding their buffer against hard times and become exposed to more distress should their financial situation deteriorate further in the near future.

Kenya Airways and Uchumi have, for instance, been disposing of assets just to stay afloat after years of loss-making whittled down their ability to service debts.

The two firms, which have fallen into negative equity positions, will need additional capital injection to stay above the water as their liabilities exceed their assets.

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Operating losses

This means that their assets have been gobbled up by operating losses, leaving shareholders with some of the worst wealth destruction ever seen at the NSE.

KQ, as the airline is popularly known, has raised billions of shillings from sale of aircraft and some of its land holdings in Nairobi’s Embakasi.

Retail chain Uchumi has moved to raise more than Sh2 billion from its land and buildings but most of the transactions are stuck in courts – other parties having laid claim to the assets.

Mr Bunyi said excess assets are a drag on returns since they generate little or no cash flows. This means that their value can only be realised through sale or lease to other parties.

Land and properties held for decades have, however, generated large returns when sold in recent years due to their sharp appreciation, benefiting firms like EABL and Sasini.

The land sold by Sasini for Sh1 billion in 2015, for instance, had been carried in the agricultural firm’s books at Sh1.3 million.

Most of the listed firms have described the sales as strategic moves that are meant to let them focus on core business and to shed unproductive or loss-making assets.

Some firms have, however, taken asset sales to extremes, leaving them with intangible assets like brands or intellectual property and drawing a backlash from a section of their shareholders.

For instance, minority shareholders of Longhorn Publishers last year shot down a proposal by management to sell the company’s head office–its principal asset — for an estimated Sh500 million.

The firm’s management had said proceeds from the sale would have been invested in higher-return publishing fields.

Longhorn would have rented space in a different location if the transaction had been approved and concluded.

While holding idle assets like land weighs down returns, it can also enhance a company’s ability to diversify if its mainstay business collapses.

Express Kenya, for instance, is using its land holdings in Nairobi to venture into real estate development after its transport division was hit by the loss of its EABL contract.

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