TransCentury issues profit warning after sale of RVR stake

Investment firm TransCentury is projecting at least 25 per cent fall in net profit this year due to a paper loss from its recent sale of a 34 per cent stake in Rift Valley Railways (RVR).

The company is projecting the material decline in the year ending December, compared to Sh626.4 million it earned last year.

While it recouped all the Sh3.8 billion invested in RVR when it sold its stake to a group of investors led by Cairo-based Citadel Capital, the company did not get replacement value in its books — meaning it will book a loss in the current financial year.

“The projected profit for the group for the year ending December 2014 may be more than 25 per cent lower compared to the earnings of the prior year owing to a fair value loss realised from the sale of the company’s stake in RVR,” the firm said in a statement.

It is unclear what fair value TransCentury had assigned to its RVR equity prior to the divestiture, but analysts estimate the figure at hundreds of millions of shillings.

READ: TransCentury sells railways stake to Egyptians

Standard Investment Bank (SIB) noted the portfolio had been carried at Sh3.85 billion “which will likely have been raised further in 2013.” “From our estimates, we see a strong likelihood that TransCentury will post a loss in 2014,” SIB added.

The profit warning comes soon after the Nairobi Securities Exchange-listed firm announced a 15.4 per cent drop in net profit for the year December 2013 on the back of lower sales.

Its net profit stood at Sh626.4 million in the review period compared to Sh740.6 million a year earlier, with sales declining 12.4 per cent to Sh11.8 billion.

TransCentury said the performance was affected by delayed execution of construction projects for Civicon, its engineering division.

Analysts say the loss from the RVR divestiture could be mitigated by how TransCentury deploys the cash it received in the March transaction.

“The cash realised from the disposal of RVR will be redeployed towards other higher return investment opportunities,” TransCentury said in a statement.

It did not specify what ventures it would undertake with the Sh3.8 billion, but analysts say the company will likely seek short-term investments ahead of a major debt repayment due in two years.

“We see the funds raised as likely to focus on short-payback projects ahead of a 2016 repayment of a Sh5.1 billion convertible bond,” SIB said in a statement.

The investment bank added that bondholders are unlikely to convert their securities into shares, citing TransCentury’s depressed stock.

The firm’s share price is currently trading at Sh23.7, a drop from the Sh50 listing price on July 2011 following the issue of the debt security four months earlier.