Corporate

Overweight and undervalued: why Centum is selling real estate stake

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Centum Group CEO James Mworia during the interview at his Nairobi office. PHOTO | DIANA NGILA | NMG

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Summary

  • Investment firm Centum recently announced that its real estate arm was looking to raise Sh17 billion from an equity deal with Luxembourg based private equity firm GEM Global Yield, as part of a wider shift from debt.
  • The company’s chief executive James Mworia spoke to the Business Daily about the plans to list the real estate subsidiary, new investment areas and what can revive its undervalued stock at the bourse.

Investment firm Centum recently announced that its real estate arm was looking to raise Sh17 billion from an equity deal with Luxembourg based private equity firm GEM Global Yield, as part of a wider shift from debt.

The company’s chief executive James Mworia spoke to the Business Daily about the plans to list the real estate subsidiary, new investment areas and what can revive its undervalued stock at the bourse.

NOW THAT CENTUM IS CUTTING BACK ON EXPOSURE TO REAL ESTATE, WHAT ARE THE NEW INVESTMENT OPTIONS YOU ARE LOOKING AT?

We were overweight in real estate, because in Centum Real Estate (Centum Re) we hold 100 percent, whereas in other companies we don’t hold 100 percent. Therefore there is room to attract other shareholders in Centum Re.

From an asset allocation perspective, our limit for marketable securities is 20 percent and 80 percent private equity. As of September 30, 2021, we were at 18 percent in marketable securities.

We don’t have a lot of headroom to get to the limit, so any exits that we do will most likely be recycled into new investment opportunities in the private equity space.

The sectors we are looking at include FMCG [fast-moving consumer goods], where we have made good returns before, healthcare and energy. Our focus is actually less on sectors and more on entities that can give us a net present value (NPV) of at least Sh1 billion.

HOW ARE YOU ADDRESSING THE UNDERVALUATION OF THE CENTUM SHARE AT THE NSE? ANY EXPECTATIONS OF A SHARE BUYBACK OR DO YOU THINK AN ENHANCED DIVIDEND POLICY WOULD BE ENOUGH?

We are doing several things around the net asset value (NAV) of the company, looking at whether the way we value the company is a fair representation of its value, particularly the Centum Re and Two Rivers Development Limited (TRDL) which don’t have market comparators.

Part of the reason we are doing transactions such as the one of Centum Re and GEM is to get some price discovery of what the market is prepared to pay for these assets.

There is also the new dividend policy which we want to stick with.

We also indicated that our board is now looking at the share buyback option. The rules only came out in November and so the board has now tasked the investment committee to look at it and go back with recommendations. That is a work in progress.

The low price to NAV ratio is also a marketwide issue at the NSE, where financial service entities have good underlying book values and low prices. These will only be resolved when the whole market recovers.

CENTUM’S DEBT HAS GONE DOWN. IT GIVES YOU ROOM TO BORROW MORE BUT ALSO POINTS TO A COMPANY LOOKING ELSEWHERE FOR CAPITAL. HOW ARE YOU HANDLING NEW CAPITAL NEEDS?

We last raised equity capital 20 years ago in 2001. Our growth in the past 10 years has been funded by debt. We decided at some point to pay down the debt and use the profit from exits as our own capital.

The interest on the debt was eating too much capital and competing with dividends. Once we repaid we would have freer cash flow to distribute. We are not looking to go back to taking on huge debt, but we do have facilities that are acquisition facilities — where you can borrow to make specific acquisitions. But our primary source of capital now is exits, whose proceeds will be recycled in the capital.

WHAT IS THE LATEST ON THE PROPOSED LISTING OF CENTUM RE, AND HOW DO YOU INTEND TO DRAW DOWN THE SH17BN FINANCING IT WILL UNLOCK FROM GEM?

This GEM deal will be done through the creation of additional shares in Centum Re. They (GEM) have a put option with a formula that will determine how many shares they can place with Centum Re based on the underlying trading volumes, over a 36-month period.

If the company is achieving its milestones, the price will hopefully be going up. That is why we control the timing because you ideally want to draw down when the price is optimal.

The pricing is, however, off market. If the market price of the shares is lower, we can’t be seen as dumping the shares on them on the cheap because their price is off-market. The goal is to attract other investors because the company might grow too big for us to be able to finance on our own.

HOW MUCH WILL CENTUM BE SAVING ANNUALLY FROM THE RECENT CORPORATE RESTRUCTURE?

When we were starting all these companies, they did not have their own management, we were operating on the shared services concept. The shared idea was a temporary concept to incubate them to a point where they could have their standalone boards and management, and we achieved that by 2019.

By 2020 we should have done the restructuring, but due to Covid, we decided to hold on until last year. In the process, a lot of the staff in the shared services were progressively absorbed in the different entities.

Ultimately, when we would up CBS, which at its height had 50 people, only about six jobs were affected. These six jobs were actually in senior positions that could not be absorbed into the different units.

HOW IS THE COMPANY HANDLING THE TRANSITION FROM THE LEADERSHIP OF THE LATE CHRIS KIRUBI?

At a personal level, he was a friend, mentor and father figure — elements that are not possible to replace.

From a business perspective, we are progressing well. It has meant that whatever he was doing has been shared by the remaining board members. We all have to do a bit more.

We filled the vacancy on the board and appointed a chairman and a vice-chair. We haven’t changed the strategy and the roadmap is the same. He was not involved in the execution, he was involved at the strategy level. We have a very clear vision.

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