Capital Markets

Uchumi stock now declines below discounted cash call price

UCHUMI

Shoppers at an Uchumi outlet in Nairobi. The retail chain is issuing an extra 99.5 million shares to its existing shareholders at Sh9 to raise Sh895 million for expansion. FILE PHOTO |

Summary

  • The retail outlet is issuing an extra 99.5 million shares to its existing shareholders at Sh9 to raise Sh895 million for expansion.
  • Genghis Capital is concerned the retail company has been “burning through huge cash piles”. Uchumi has already borrowed hundreds of millions from local banks.

Uchumi share price for the first time slipped below the discounted share price of its cash call Wednesday, touching a one-year low of Sh8.70.

The stock traded at an average Sh8.90 compared to the rights issue price of Sh9 and the previous day’s Sh9.30.

The retail outlet is issuing an extra 99.5 million shares to its existing shareholders at Sh9 to raise Sh895 million for expansion.

Some analysts have advised investors to sell the rights when they commence trading at the Nairobi Securities Exchange on November 10.

“We recommend sale of rights during the upcoming Sh895 million rights issue,” said Genghis Capital in a note to investors.

Shareholders of the retail outlet do not have to buy the extra shares but they can sell the rights to additional shares to other investors in the open market.

OPEN MARKET

Investors normally buy the rights at the market price and go ahead to buy the extra shares at the discounted price.

Currently it will however be cheaper for investors who want to enter the counter to buy the shares in the open market rather than through the rights issue.

However analysts at Old Mutual held that the counter was going to improve with the rights issue set to be successful.

“We expect to witness support levels on the counter above the current trading level,” said Old Mutual.

READ: Uchumi stock edges closer to discounted rights’ price

Genghis Capital is concerned the retail company has been “burning through huge cash piles”. Uchumi has already borrowed hundreds of millions from local banks.

READ: Uchumi borrows Sh405m from Co-op Bank

ALSO READ: Uchumi secures additional Sh600m KCB loan

“The mass merchant appears to be heavily cash strapped with debt teeming at Sh1.45 billion in addition to payables amounting to Sh1.88 billion as at end of June,” said Genghis.

Notably the cash call was approved in December 2012 meaning that some of the shareholders could have exited the counter. Its delay, attributed to delayed commitment from the government—a majority shareholder—has seen the company struggle with supplier debts.

Uchumi wants the cash to fund its regional expansion plans to less competitive markets. Analysts have also noted improving macro-economic conditions which are likely to spur an increase in consumption by the public.

The retailer has been under intense competitive pressure locally from Nakumatt, Tuskys and Naivas besides a string of upcoming supermarkets in towns. Uchumi collapsed in June 2006 but was later bailed out by the government and patient suppliers.

The article first appeared in The Business Daily.