Centum next growth agenda requires a change of narrative

The number of Nairobi Securities Exchange (NSE) 20-Share Index constituent companies currently trading below their tangible net worth have now increased to 11.

Typically, buy-and-hold investors want to pay a premium if they believe the long-term prospects of a company are bright. And the converse is true. But the Covid-19 pandemic overhang on stock markets aside, some companies have also been on the discount basket for quite some time.

One such is Centum Investments Company. The company’s stock has been trading at a third of its net asset value (NAV) for some time and the blame lies squarely on the company.

First, it has failed to exhaustively inform the market of its strategy. Centum has largely been a specialist in fattening bulls using debt; and then exiting at decent multiples.

The exit proceeds are then deployed into (i) deleveraging balance sheet (ii) funding new acquisitions; and (iii) distributing to shareholders. Indeed, over the past five years, it has exited nine investees, realising Sh33.4 billion in exit proceeds, out of which, it says, Sh20 billion went back to providers of capital (both debt and equity).

Essentially, the company has been creating value from the liability side of its balance sheet. This is something that needs to come out quite clear to the market. Another aspect is portfolio allocation. Over the past decade, the company has reduced its private equity holdings from half of its NAV to a fifth and increased exposure to real estate from 23 percent to 69 percent.

That’s a huge move and the market hasn’t been particularly impressed. It appears the market liked it when the company was overweight on private equity because it contained some cash-generating names such as the Coca-Cola bottling franchises Almasi Beverages and Nairobi Bottlers.

But to be fair, overstaying these assets can be counterproductive, especially given that they are debt-funded. And this is something that the market also needs to appreciate.

Finally, earnings volatility is also something investors haven’t enjoyed. But beyond strategy communication, the balance sheet also appeared to be choking with leverage.

At its peak in 2019, the company’s debt stood at 36 percent of assets (it has since come down to 13.6 percent). Debt had been a deliberate funding strategy (since shareholders appeared reluctant to inject cash), something the market also missed.

So broadly, Centum needs to change the narrative, and I have seen the company table some strategies to narrow the price-to-NAV gap. First is to enhance stakeholder outreach and communications on funding, investment and deleveraging turn-around times.

Second is to smoothen earnings; for which the company appears to be building an annuity pool with an initial target portfolio of Sh10 billion and a hurdle rate of 12 percent per annum.

It also needs to cut real estate to a third of the portfolio and regrow PE back to half. It’s began the process of monetising its real estate portfolio, which has come at the right time. For buy-and-holding, Centum can be a bargain hunter’s chessboard.