Investment firm Centum #ticker:ICDC has in recent years held the distinction as the company whose employees enjoy the best remuneration in Kenya. That outstanding level of staff compensation has its roots in the Centum’s bonus policy, which, unlike many companies, is not based on annual profits but on the growth of net asset value.
Centum chief executive James Mworia, who has recently been in the news over his remuneration, talked with the Business Daily’s Victor Juma about the business environment, this bonus policy and other subjects.
How many employees does Centum have and how many are eligible for bonuses?
We are 140 and everyone from management to the lowest participates. This includes those working for subsidiaries.
The bonus is based on growth of net asset value (NAV); right?
No, it is based on cash returns.
So, it was changed because previous annual reports said it is based on growing NAV above 15 per cent.
Since we came up with the policy in 2009, it has not had a lot of modifications. The bonus policy takes into account market-based movements.
So, even if we have a revaluation of assets, it does not go into the calculation. You must have a market-based transaction, meaning either realised gains, dividends or where the company has had a market transaction, meaning the value is based on a realised price. The hurdle rate is 15 per cent and whatever is above that is what goes into the bonus pool. The annual report is abridged and does not go into details of how the bonus is calculated.
We shall soon publish a detailed version of the bonus policy for transparency. The calculation of the bonus — and this is where the detailed bonus computation comes — is really based on cash returns to the company and not on the book value. If it was based on book value, it would have been on a different multiple. So, we don’t take into account revaluation movements. In the total return statement, revaluation movements are included.
So, for example, if you buy land and get development plan approval and the valuation changes, those valuation movements are factored in the total return. For purposes of calculating the bonus, all those revaluations are removed. The only thing you are left with is the cash return.
What was the reason for setting up the bonus plan and why are employees rewarded in cash while shareholders get gains that may or may not reflect on the share price?
When we conceived it, the objective was to drive growth in value and to incentivise the management to either realise that value or back up that value based on market transactions.
Because we are an investment company, sometimes the returns tend to be lumpy, i.e. returns can be huge in some years because of the investment profile.
What we wanted to do is to reduce the fixed component of the remuneration of the team because the biggest component of our costs at the time was salaries. We wanted to have a structure where the fixed salary bit was relatively modest and then you have a cash bonus bit which is tied to your ability to create cash returns.
So that’s why we established it with a view to ensuring that in aggregate, our total costs don’t go above a ceiling of 2.5 per cent of assets at the time. What has happened over time is that total costs have actually been coming down.
By end of 2016, our total cost as a proportion of assets came down to 1.3 per cent inclusive of the bonuses. So the bonus is now the bigger part of remuneration but it is a variable pay. So in any given year if cash return is low, the bonus is also going to come down.
Let us talk about Centum’s dividend policy. There was a freeze and then you started paying dividends recently. Will the payouts continue?
Let me take a step back and explain why we came up with that (zero dividend) policy in 2009. We introduced it because we were focusing on growth and wanted to use internally generated funds to finance that growth. During that time, the share price was closely correlated with the NAV per share and the two moved up in tandem.
The thinking was that as a shareholder, you can create your own dividend by selling part of your shares. In the last three years, several things have happened.
We’ve continued to grow but then as the business has matured, the assets we were creating have generated cash from operations or by being sold. So we reached a point where we were able to pay a dividend.
The second point is that the stock price fell below book value. So we don’t want to encourage our shareholders to sell their shares at a discount. That then made us start paying dividends.
On the undervalued stock, what happened to plans to remedy this by buying back shares?
There are several issues with the share repurchase. I think regulations of the details of how to go about the repurchase are not yet in place. But share repurchase works under several conditions. The market price must be at a discount to the company’s value which is the case here. The company should have surplus cash. Finally, for the company to opt to repurchase its shares, it should not have other better ways of using the cash it has.
This last condition has not been satisfied in the sense that the cash we have can be better deployed on the investments we are pursuing. We also took a decision to reduce borrowings this year.
In this context, it is not appropriate to repurchase shares which is the same as returning capital to shareholders.
Can one deduce that you will keep paying dividends as long as the share price remains depressed?
My own ambition is to raise the dividend and at worst maintain it because our focus now is to generate cash from the investments we have been making and we have no debt maturity in the short term. We believe we can generate enough cash to pay dividend, interest expenses and fund investments.
On the debt issue, you recently redeemed your corporate bond using a Sh5 billion loan from Rand Merchant Bank (RMB) of South Africa. This is more of a debt rollover than reduction.
The net debt repayment was Sh2.7 billion. We owed RMB Sh3 billion and had a Sh4.2 billion corporate bond. Both were due this year. So we paid the Sh3 billion RMB loan and took a fresh loan of Sh5 billion from the bank.
There were equity-linked notes in the corporate bond whose redemption value was roughly Sh200 million. The total amount we paid bondholders was Sh4.7 billion, including accrued interest. So the net debt reduction is Sh2.7 billion which is not an insignificant number.
Centum recently revalued its minority stake at Isuzu East Africa – writing it down by Sh1.6 billion based on the price Isuzu Motors used to acquire GM’s 57.7 per cent stake in the motor dealer. Is this an indication that Centum’s valuation is aggressive?
In this particular case we have to go with the most recent transaction price, which was not in our control. However, if you look at most of our exits, we have received more than the value at which we carried those investments.
We believe proper valuation is validated by market transactions. So, it is not a case of buying land, revaluing it up and asking for a bonus.