The 20 billion hole that threatens to bring down Mumias Sugar

Mumias Sugar Company Board Chairman Kennedy Ngumbau Mulwa(right) and company Managing Director Nashon Aseka(left) during 45thannual general meeting at Booker Academy bon December 22, 2017. BY BENJAMIN SAKWA

For Mumias Sugar Company, problems are coming in droves. Yet, money -- the one thing they need urgently -- is only trickling in.

On supermarkets’ shelves, the brand is hardly available. And at the Nairobi Securities Exchange (NSE), Mumias Sugar is the only stock trading at below Sh1.

Last year, the company’s chief executive fled the country forcing the company to recruit another one. The company’s legal officer was killed in an unsolved murder case in the same year. This was followed by the country shutting down for maintenance amid piling losses and cane shortages.

It reopened in October, but shortage cane has seen its operations come to a halt yet stocks are running out, unless the milling wing is re-opened soon.

Reports of some rogue importers riding on the brand to repackage imported sugar using Mumias’ packets are still a threat but the new CEO, Nashon Aseka, believes the more pressing problem is to get back into production.

Some irate cane suppliers no longer want to deliver their cane to this western Kenya-based firm. Yet, others have uprooted the plant all together in favour of other crops such as maize. Employees have gone for several months without pay.

The company needs close to Sh20 billion if it is to pay debts it owes cane farmers, banks, employees and Kenya Revenue Authority (KRA).

And the CEO Aseka knows too well that getting such money at once will be a tall order. The thought of calling for a rights issue, he admits, may be unrealistic given the firm’s severely depleted value at NSE.

But while this may sound like a tale of a company abandoned by key shareholders, shunned by potential investors, doubted by current investors and left for a painful death, Mr Aseka is refusing to give up. And he has reasons.

GETTING WORSE

“Mistakes have been committed in the past but the company is healing. There is a story that investors and the public are missing,” says the CEO.

In an interview with Weekend Business, Aseka said the factory is “partially closed at the moment” because of delays in cane delivery. He hopes that next week, enough cane will have been delivered to resume full operation.

At the moment, the sugar wing is temporarily stopped leaving only the distillery wing running. Cane shortage, he says, is no longer a new story but adds that it is getting worse for the company.

“Currently, we have 4,000 tonnes of cane that has accumulated so far and we are waiting for the right size to resume full operation,” said Mr Aseka.

The available cane is less than half the capacity (8,000 tonnes) that the machines can handle per day, meaning they are under-utilised. Meeting such capacity, the CEO said, requires harvesting about 150 hectares of land every day.

The shortage forces the factory to accumulate the cane over time, crush and stop operations for some time to look for another stock.

The CEO has to motivate farmers to bring in the cane and also psyche up his employees to crush the cane even as they await salaries.

Workers are demanding arrears of about Sh200 million. According to Mr Aseka, every month, the wage bill is about Sh30 million or Sh40 million.

“Workers have been missing salaries and we are in the process of repaying the arrears. This has accumulated over three or four months,” he said.

Despite having got a Sh500 million bailout from government to kick-start operations that had stopped between April and October last year, the CEO says this was not sufficient.

The money was spent on repairing the factory facilities and paying farmers part of their dues. At that time, farmers were demanding Sh900 million and therefore managing the repairs and sorting out operations with the bailout was impossible. Currently, that stands at Sh600 million.

“Some of the farmers are reluctant to release their cane when they have not been paid. Their arrears are not the highest but they are the most sensitive,” said the CEO.

The ideal dream would be for somebody to give the firm in excess of Sh20 billion to clear all debts. But that, he understands, is a tall order.

He believes that the firm urgently requires at least Sh5 billion to help it return to a stable course of generating its own revenue to help in reducing the outstanding debt.

If he got money right now, he told Weekend Business his priority will be to pay farmers. He believes that if the company prioritises other problems ahead of that of farmers, this will amount to postponing a problem.

The company is in default of taxes as well as loan repayment. This forced government to intervene in order to calm the situation for a while. While KRA wants Sh4 billion, banks also need to be repaid about Sh12 billion.

According to Aseka, the firm has reached out to the banks for negotiations about the huge loan. 

The Government has on several occasions reached out to help the factory in the past but this has failed to get it out of the woods.

NO RIGHTS ISSUE

But the current CEO is counting on the ongoing restructuring exercise and the goodwill of various players to try and stablise the firm. In the absence of their support, Aseka says the firm will be staring at litigation that could see it end up in receivership.

“If the government gives up, then banks also give up, chances are that we shall struggle a little and eventually close because the funds we are generating are not enough to pay farmers and other creditors,” the CEO said.

That would be a miserable moment in the life of the 47-year old firm. But he wants to avoid it all costs. A number of possible solutions are on his fingertips but only the timelines of their actualization remains a headache.

The sources of finance, he says, are “delicate” and wants to only talk about it when the deals are sealed.

The National Government is still one of his options. He has also reached out to Kakamega County with hopes of opening talks that will help support the firm’s recovery.

Also on his options is to scout for strategic investors to help in Mumias’ revival. In the previous strategy, the firm wanted to raise money through a rights issue. However, this was postponed and later dropped from the menu. 

Currently, Mumias’ share is trading at between Sh0.90 and Sh0.95. At Sh0.90, Kenya’s oldest sugar company has wiped out 85.6 per cent of its value when compared to the 2001 listing price of Sh6.25. At one point, the share rose to a high of Sh60.

It is this dismal performance that makes him pessimistic that a rights issue can deliver anything good now.

“A rights issue for a company whose value at the NSE has been eroded so badly may not be so good,” said Aseka. “The value being shown there is so low that you many think this is a worthless company.”

According to financial statements for half year ended December 31, 2017, the firm’s current liabilities were about seven times larger than current assets, signaling deep difficulties in ability to service short-term obligations.

Usually, a healthy company should have current assets that are twice the current liabilities. Shareholders’ equity, a difference between total assets and total liabilities, sunk to a negative territory of Sh1.2 billion meaning that nothing would be left for stockholders if all assets were sold and all debts paid.

In fact, a negative shareholders’ equity theoretically means stockholders would still be left with debts to settle. However practically, as a limited company, the debts of the company cannot be recovered from individual shareholders’ resources.

For half year ended December 31, 2017, the firm cut its losses by more than a third (33 per cent) to Sh1.95 billion but its revenues fell by 55 per cent to Sh680 million.

Despite this, the CEO is counting on astute investors who can see value beyond the depleted numbers in the financial statements and at Nairobi bourse. He wants investors who can look “further” and see things such as the machinery that has been installed at Mumias and the upside potential of the firm based on its brand.

Despite sugarcane scarcity remaining one of the major problems, the CEO is hopeful that if money comes in, he can win back the hearts of farmers.

In its good old days, the firm used to support farmers during planting then deduct the expenses when the crop was harvested. But now, the firm not only owes farmers but is also struggling to support them in planting.

Another option, the CEO says, is to strengthen the company’s capacity to grow its own cane. Currently, the firm has a cane project at Nucleus Estate but still outgrowers account for about 90 per cent of the cane used in the factory.

Mumias Sugar was a story of pride and success. Then at the peak of the glory, it turned into a den of wastage, individualism and losses. It is now a story of regrets, accusations and struggle for survival. But Aseka believes he can get the company out of this mess.

“Sometimes we feel that if the previous bailouts had been properly applied, then Mumias would have come out of this problems,” he says.

Farmers would love to grow and supply to the factory again, but if only the company pays them. In a region where the main crop is maize, the CEO says he is much aware that temptation to abandon the cane is growing.

With financial support, the company wants to source the crop from as far as Kitale, riding on improved road network. The region is increasingly developing interest in the crop, led by Dr Noah Wekesa.

In the financial year ended June 2017, the firm’s losses widened by 41 per cent to Sh6.8 billion even as the company experienced acute shortage of cane. Total cane delivered for processing more than halved (65 per cent drop) from 1.2 million tonnes in 2016 to 0.42 million tonnes.

Aseka is the fourth CEO to take the Mumias’ corner office since the exit of Dr Evans Kidero. Peter Kebati, Coutts Otolo and Errol Johnston have all tasted the hot seat in the past five years.