Over the last couple of years, Centum Investment has sold out of at least four companies, exiting Almasi Bottler, Platinum Credit, GenAfrica Asset Managers and now Sidian Bank.
Business Daily sat down with James Mworia to look at its portfolio and review the thinking behind the company’s strategy.
Your exit from Sidian means your portfolio is really shrinking. What is the thinking behind the strategy to exit your exposures?
Because we are in many sectors — we sit on the board of an automotive company, a bank and so on, we are selling from books to agricultural products. So we got a feeling around 2018 that the market was going to come down. That was our view.
We then said if we think the market is going to come down and we have created so much value in some entities but that value is very sensitive to a downturn in the market, option A is to stay and hope it does not happen. B is take your winnings and lock your gains.
If you look at Almasi at that time, because we are benchmarking with breweries which was at 10.65 EV (enterprise value to) Ebitda or earnings before interest, taxes, depreciation, and amortisation, if you look at March this year it is around six times.
So it is true what we feared was going to happen happened. So had we stayed, the movement from 10.5 to six is almost 40 percent of the value of the company which can now wipe out the profit of the thing.
Does this mean you do not see value in the market or even an opportunity to go back at these lower multiples?
Just because you think multiples are going to come down, do you go back to the market immediately? If you go back at high multiples, then why were you exiting and then coming back at the same multiples? Because then you are not consistent in your strategy.
So we said now that we have exited it is not a good time to buy because we think the price has not re-rated to what is likely to happen. If you are buying now you will be buying at the peak then it will come down and you will be nursing losses.
Right now the environment is not yet there. If you go too early you can easily move from the Sh10 billion and it becomes Sh5 billion. I was looking at the banking stocks, from March 2019 to March 2022; they have fallen 30 percent, the Sh10 billion would now be Sh7 billion. So you have to be disciplined.
When is the right time to go into the market?
If you time the market you’ll get it wrong. For me what I believe from my experience, is you wait and see, work on evidence, don’t work on expectations. Look at the market where it is, and I don’t believe in saying the market has bottomed out. We’ve been here long enough to be proven wrong many times. So wait.
The market is such a complex thing that is driven by so many factors. Like you could not have anticipated the war in Ukraine, and even when the war came, the spillover effects. So for now my view is that just preserve capital, boost your liquid income, and don’t be too greedy to do transactions, because you know private equity deals are long term and the pricing you get in all that is very critical to your success so be careful.
Negotiate yes, look if the deal makes sense, do it, if it doesn’t make sense, don’t be in a hurry it’s a seven-year, eight-year game, it’s a marathon. And don’t get excited to please people, no no, you’ll get it wrong.
So how have you deployed the money as it comes in?
What I am very sure of is that I can pay my debts, because the cost is known. If I was paying 12 percent that is a direct bottom-line saving of 12 percent.
Next, because I want to preserve capital so that when it is the right time to go in I do not find I have 40 percent less capital than I started with. Then you go to an asset class where you can preserve the capital. That is why we decided to focus on fixed income, preserve our capital and earn a recurrent return.
Even with this Sidian exit, that money can go to the bench, the whole bank was making Sh500 million. Just on our Sh4.3 billion, even if we deploy at 16 percent we will make Sh600 million cash, so if I was waiting for three years I would have made Sh1.8 billion. For me, it is a choice between positive Sh1.8 billion versus minus Sh2.4 billion.
Do you think the market has understood you given the dip in your share price?
The stock market is a gallery, the media, and twitter. The gallery now thinks these guys have paused, they are missing upside that is now what affects the share price. You have paused the play, because of what you are seeing, as a coach you think I will have injuries.
I want to save my firepower, the market is saying we want excitement, we want to see announcements so you have to be very disciplined.
This capital we have built through blood, sweat and tears, we have never raised a shilling of equity. We do not want to build capital for ten years and then lose it and then you reverse everything you have done for ten years.
It is not just the portfolio, the market is also looking at your dividends. When will you resume your higher payout policy?
We said the most important thing for us is not to lose our capital. So we now want to align our cost and dividend to fit within interest income, and recurrent income so we do not pay dividends out of capital.
If I sold the shares, paid the debt and was left with money, like Sh7 billion, I want to have that Sh7 billion when the opportunities come. We had to cut dividends and costs so that we can live within the cash income without affecting capital.
But then the gallery put in pressure; why are you not increasing dividends? But then I have to try and restrict this thing within the income.
With all these exits, do you think you have become too heavy on real estate and doesn’t that carry the risk of exposure to a sticky sector?
What people are forgetting is our net asset value per share is at Sh62 but everything else other than real estate is Sh25, then real estate is Sh42 and borrowing is Sh6. Of these 25, we were valuing Sidian at Sh2.7 billion.
We have now realised Sh4.3 so there’s an extra Sh3 up there, so make that Sh28. So that’s the current split and it is not that we invested Sh42, it is that this asset class did well.
Our net investment in Centum Re is lower than Sidian, half of it but the value is high. Now is it the fault of the company that the value is high?
At Two Rivers we invested Sh2 billion for a 58 percent stake but the investors who came paid a premium for the 42 percent. So those are things you cannot predict in business. Some of the areas we also invested a lot of money like the power plants (but) did not generate as high returns.
Are you still keen on the private equity space or you have set your sights on public companies in the near term?
Right now private equity is competing with public equities. Because you see you can go now to a startup or a private company, or you can go to Safaricom at Sh24 and it might even go down further and it’s a market leader so in recovery it might even do better because of the more liquidity. So we are agnostic. For me, my own philosophy is driven by objectivity.
Private equity was making sense when the prices in the public markets had gone crazy, they were very high so it no longer made sense to participate in the public. The advantage of Centum is that we see all worlds. You can go to private or public.
What I’ve learned is that money is made at the point you buy. You need to buy cheap enough to have locked in a profit. If you buy high with the expectation that the growth will make up for it the external market volatility is such that that realization may not be met.