Cargen eyes real estate development for its prime land

NSE-listed machine and equipment vendor Car and General (Cargen) plans to move its dealership from the current premises and redevelop its prime land holdings in Nairobi and other major towns, against a rating agency’s advice.

Some of the land owned by the company includes plots on Lusaka Road, Uhuru Highway, in Mombasa, Uganda and Tanzania.

The land was valued at Sh600 million in the firm’s latest annual report, which was termed as conservative by the management, and chiefly hosts low-rise structures.

“In 2017 we will be moving from these sites (along Lusaka Road) because they are too prime to be hosting a distribution business,” said Car and General’s managing director Vijay Gidoomal.

A 14-storey building is currently under construction by another developer on the land adjustment to Cargen’s head offices on Lusaka Road, signaling the direction of redevelopment on the road that is set for dualling.

The decision to hold and develop the land goes against advice given by rating agency Global Credit Ratings (GCR) company.

The South African-based agency had advised Cargen to sell some of its land holdings to clear debt obligations to help it reduce interest costs.

“We would like to hold on to these properties as the next opportunity for our shareholders,” said Mr Gidoomal arguing that the current debt was not pressuring their business. He declined to go into details on the future real-estate development.

READ: Car & General ditches credit rating agency amid debt pressure

As at end of September last year, the firm had Sh1.9 billion debt. Its gearing ratio — calculated as net debt divided by capital — stood at 70 per cent and its financing costs at Sh213 million.

The company reported an 18 per cent increase in net profit last year to Sh315 million driven by a rise in revenue.

Car and General exited the rating process noting that it was not deriving value from the process estimated to cost an annual fee of more than Sh860,000.

While most companies undertake the rating to access credit, Mr Gidoomal said Cargen was not planning to raise cash.

The company’s stock lost 8.1 per cent at the Nairobi Securities Exchange on disclosure that it had exited the rating process a few months after being assigned a negative outlook by GCR.

The negative outlook was based on dropping sales, increased competition and rising debt. Cargen’s management, however, argues it needs the debt to drive its new business lines, which include selling of tyres, tractors and forklifts.

“If you want to develop a business you need funding, which is either from profit, debt or equity,” said Mr Gidoomal.

Cargen has been dominant in the sale of motorbikes and three wheelers but is now diversifying as it seeks to exceed an annual turnover of Sh10 billion.

The company believes it will generate enough profits to help it diversify into real estate when it exceeds the Sh10 billion turnover mark.

Last year it had sales of Sh7.1 billion and aims at Sh9.9 billion this year. Its motorcycle business has also been adversely affected by introduction of value added tax on unit sales besides rivalry from Asian imports.

The company sold 22,146 motorcycles last year in Kenya and 1,643 tricycles.

Car & General, which has operated in Nairobi for more than 75 years, has branches in Mombasa, Kisumu, Nakuru, Kitengela and Eldoret besides presence in Uganda, Tanzania, Rwanda and other eight African countries.

On Wednesday the company shares traded 5.6 per cent higher than the previous day at Sh33 per unit at the bourse.