ARM sinks deeper after Sh21.3bn factory write off

Troubled cement maker ARM’s #ticker:ARM administrators have written off Sh21.3 billion in bad loans that the company advanced to its Tanzanian subsidiary, Maweni Limestone Limited, shrinking the company’s assets by 61 per cent and taking it to a negative equity position of Sh2.4 billion.

PricewaterhouseCoopers' (PwC) decision to act on the long-hidden loan means ARM is now worth even less than previously stated, with only Sh14.2 billion assets compared to Sh36.8 billion in December 2017.

“In addition, in the period between January 1 and August 31, 2018, a large intercompany receivable owed from Maweni was written off causing the large movement in administrative expenses in this period,” PwC says in the report, noting that ARM’s retained earnings were consequently wiped out.

The write off has left ARM creditors underwater by Sh2.4 billion, meaning only secured lenders are now fully covered by the now-shrunken asset base.

ARM has long treated the Maweni debt as a performing loan despite the fact that the subsidiary had defaulted on the same for many years, effectively misleading investors.

Top on the list of those apparently taken in by the dishonesty is UK sovereign wealth fund CDC group, which bought a 42 per cent stake in ARM for Sh14 billion in 2016.

The entire company can now hardly be sold for half that amount, taking into account its outstanding liabilities.

The true financial position of ARM remains sketchy and the administrators have appointed Knight Frank Limited to undertake a comprehensive valuation of the company’s hard assets.

“Their mandate includes valuation of land, plant and equipment, furniture and fittings as well as limestone deposits,” PwC said adding that the work will provide a replacement cost and forced sale valuation of the assets to guide the assessment of various options for the administration.

PwC says writing off the loan has the effect of boosting Maweni’s assets but added that this is only an accounting treatment with no real economic benefit to the subsidiary or its parent company.

“This however is a notional improvement and does not reflect an improvement in Maweni’s performance or have an immediate impact in cash flow,” the administrator says in the report.

PwC says its decision to write off the debt came after it became clear that Maweni cannot be expected to repay the loan any time soon. The subsidiary, whose principal activities are extraction of minerals and manufacture and sale of cement, has been making losses for years.

Maweni made a net loss of Sh1.7 billion in the eight months ended August, and was on course to surpassing the Sh2.3 billion net loss it made in the full year ended December 2017.

The company has a clinker plant in Tanga and a cement grinding plant in Dar es Salaam that is currently not in operation while construction of its cement grinding plant in Tanga remains incomplete.

ARM becomes the latest publicly traded company to face accusations of irregular accounting bordering on fraud. Besides the controversial loan, PwC has unearthed several suspicious transactions amounting to some Sh153 million which it is investigating further.

ARM, for instance, says its directors are owed Sh76.7 million but cannot specify the period for which their remunerations are outstanding. The company also paid a group of unidentified customers Sh24.6 million, unexplainably reducing its actual “other assets” by the same amount.

PwC says it also came across an unusual item of Sh41.2 million, which represents 80 per cent of the company’s total fixtures and fittings.

“This item is classified under Head Office division and is described as ‘Reclassification from CWIP Fittings- The Westwood’ which we understand from management relates to furniture and fittings in their current office at Westwood that were transferred from the company’s previous premises,” PwC said in the report.“Following our queries from management, we have been provided by invoices relating to this item. This matter is still under review at our end.”