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Red alert as blue-chip firms lose shine at NSE

By Dominic Omondi | July 14th 2020

Like human beings, companies have their lifespan. Some may look like they will be around forever, but then some unforseen change comes about, and unable to cope, they die. Others shut down within hours or days of being born.

While some stay on life support for an unusually long time, others make a surprise recovery. And still others succumb to a rather mild illness.

Kenya’s corporate sector is littered with numerous giants that stumbled in clear waters, raising the question: how many will weather the latest storm in the form of the coronavirus?

Several famed behemoths – corporations whose shares at the Nairobi Securities Exchange (NSE) were selling like hot cake because they regularly churned out decent profits and dividends for shareholders – have either fallen or are on their knees.  

Once best-performing counters at the NSE are now treading a well-trodden path like others before them, such as Eveready, Kenya Airways, Uchumi Supermarkets, TransCentury and Sameer Africa.

Unsettled giants

Covid-19, a viral disease caused by the coronavirus, is unsettling giants. Within three months, the pandemic has pushed companies that were fairly profitable into the red.

The list of companies issuing profit warnings, which means they expect their profits to dip by more than 25 per cent from previous earnings, has been growing longer and longer.

It includes Nairobi Securities Exchange (NSE), Eveready, Nation Media Group, Kenya Power, Kenya Airways, Standard Group, Old Mutual, Kenya Re, Unga Group, East African Portland Cement, BOC Group, Kapchorua Tea and Britam.

Some of these companies have been forced to take drastic measures already, including cutting operations and downsizing, adding to surging unemployment numbers in the country.

Cash-strapped Kenya Airways might not feature at the NSE in the next three months.

To patch up what appears like a mortal financial wound, the bleeding national carrier might soon be wholly owned by the State after a Bill to have it nationalised was tabled in the National Assembly.

“The company’s operational and corporate restructure and government buy-out is now imminent following the publication of the National Management Aviation Bill, 2020 on 18th June 2020,” said NSE in a statement.

“Consequently, the company has applied for suspension of trading in its shares and closure of its register until the resolution of its future is determined.”

The incessant poor performance saw KQ, the airline’s international code, plunge into massive losses.

Its once-upon-a-time blue-chip stocks turned into penny stocks, forcing the NSE to knock it off its index of 20 most admired stocks at the bourse – the NSE-20 Share Index – in 2016.

Another company that might soon be exiting the stock market in a bid to reverse its fortunes is TransCentury, an investment firm.

Ten years ago, TransCentury used to run the show. It was managing mega projects in Kenya and across the region.

Some critics reckon that companies like TransCentury mirror the political patronage that is endemic in the country, with the end of its zenith coinciding with the exit of Mwai Kibaki as president.

TransCentury has, however, dismissed this school of thought.

Back in its heydays, the investment firm acquired a stake in Civicon, an engineering firm with significant contracts in the nascent oil sector.

The company also came to the aid of the concession of Kenya Railways, buying a stake in the Rift Valley Railways, a consortium that won the contract to manage the railway line from Mombasa to Jinja in Uganda.

Now, the firm is in bleeding.

Financial turbulence

But its chief executive, Ng’ang’a Njiinu, believes that the cash-strapped firm will not only emerge from its current financial turbulence but that its growth will also transcend 100 years.

At its peak, the share price of the NSE-listed company hit a high of Sh60 soon after it started trading at the bourse in 2011. 

The stock has since tumbled, closing last week at Sh1.61, wiping out billions in paper wealth. Lenders who have extended credit to the firm also stand to lose a fortune as losses eat into its assets.   

Fearing the worst, the company has decided to delist. Its shareholders will meet at the end of this month to vote on the delisting plan.

The company joined the NSE’s Alternative Investment Segment (AIMS) less than a decade after going public.

“The recommendation is in line with the ongoing strategic initiatives anchored on delivery of commercial opportunities, debt profiling, fundraising and accelerating execution of emerging opportunities,” said the firm in a statement last week.

Another NSE-listed company that has issued a profit warning is battery distributor Eveready East Africa.

Eveready, once a colossus of the dry cell battery market in the region and a constituent of the NSE 20 Share Index, is hanging on a thread.

Battered by imports and electricity-connected consumers moving away from dry cell, Eveready shut down its local plant in 2014 and opted to instead import batteries from its Egyptian subsidiary, rendering close to 100 people jobless.

It sought to diversify into car batteries, shavers and light bulbs.

The firm also promised to launch undisclosed household and personal care products. Its 20 acres in Nakuru, where the battery plant sat, would be used for the development of rental housing units.

But even these measures have not helped much. Listed at the NSE in 2006, the loss-making company has not paid dividends since.

Recently, it found itself in the crosshairs of the Capital Markets Authority (CMA) after it failed to issue a profit warning.

Declared bankrupt

Eveready East Africa’s share price at the NSE has fallen significantly, trading at Sh1.03 last week, nearly 10 times lower than its initial public offering (IPO) price of Sh9.80 when it started trading in the secondary market in 2006.

Mumias Sugar Company, on the other hand, was expected to resume trading in April after the board suspended the miller from the Nairobi bourse when it was declared bankrupt.

Trading in the miller’s stock was first suspended in September last year after KCB Group took over operations.

Once a blue-chip stock at the NSE, and its product a must-pick from supermarket shelves, the debt-ridden Mumias now awaits a State’s rescue plan.

Part of the plan is to have the company privatised.

In June 2014, Mumias was knocked off the NSE-20 index, which is used as a barometer for economic performance, following an extended period of loss-making.

A myriad of factors have been blamed for the near-death of Mumias Sugar, including wanton looting and inefficiency, as well as industry-wide issues such as illegal importation of cheap sugar.

A parliamentary draft report on the ailing sugar industry has called for some of the miller’s former managers to take “full responsibility for the fraudulent transactions”.

The report accused them of overseeing the looting of the sugar miller – a number of officials have since been identified for prosecution.

Willy Njoroge, the CEO of Kenya Stockbrokers and Investment Banks, insisted that such cases reflect some companies’ poor performance.

“If a company is fundamentally doing well, its share price will go up, and vice versa,” said Njoroge.

He said Covid-19 presents a mixed bag of fortunes for listed companies.

“There are those that will end up increasing their trading and market share. These ones might witness an increase in the value of their stocks,” he said.

However, there are some, like those in the hospitality industry, that he said would be negatively affected as the sector struggles to survive in the near future.

Just like Mumias Sugar and Kenya Airways, Uchumi was doing well until it became apparent that its dazzling performance was not all it appeared to be.

The retail chain, which was part of the many commercial non-strategic public enterprises on which the government loosened its hold, is a shell of its former self. It has shut down several branches.

Financially weak, it has been losing some of its prime properties and has shed employees to stay afloat; it is yet to rise.

Its appeal for a government bailout has fallen on deaf ears. No strategic investor is willing to come on board, fearing they will sink with it.

Yet, Uchumi’s financial woes are not any different from those of other embattled former public enterprises.

The government, through the Industrial and Commercial Development Corporation (ICDC), had a 90 per cent stake in the retail chain.

This was reduced to 44 per cent after an IPO in 1992.

Before the High Court cleared former Uchumi Managing Director Jonathan Ciano of fraud charges, CMA, relying on a forensic audit report by KPMG, slapped him with hefty fines.

Mismanagement and corruption have been cited as Uchumi’s bane, departing from the initial expectation that privatisation would leave the retail store better off. In 2014, Uchumi was expunged from the NSE-20 index.

Bought up

Another company that has fallen off its lofty perch is cement manufacturer Athi River Mining (ARM). After years of a dismal performance, ARM was acquired by the Devki Group, which owns National Cement, the makers of the Rhino brand.

In October last year, steel magnate Narendra Raval, who owns Devki Group, officially took over cash-strapped ARM, bringing to an end 45 years of the Paunrana family’s leadership.

Once a high flyer with tentacles beyond Kenyan border, ARM’s fortunes turned sour, culminating in the company being placed under administration on August 17, 2018, and its shares suspended from the NSE three days later.

By the time lenders pushed it into administration, under a caretaker manager from audit firm PricewaterhouseCoopers (PwC), the then second-largest cement maker owed banks close to Sh15 billion.

Before being put under administration, the company had tried in vain to get out of the red, with liabilities far exceeding its assets.

ARM’s former CEO Pradeep Paunrana blamed the state of affairs on costly miscalculations he made when he invested in the Tanzanian market.

Another firm that has faced years of financial trouble is tyre manufacturer Sameer Africa. Since 2013, the has been making losses. So much so that in 2016, it decided to shut its local plant and shift production offshore, hoping to stem mounting losses, which it attributed to increased competition from cheap imported tyres.

It did not help much. The firm, majority owned by the publicity-shy billionaire Naushad Merali, saw its losses for the financial year ending December 2019 double to Sh1.06 billion from Sh529 million in the previous financial calendar.

In May, the NSE-listed company announced that it had shut down its tyre distribution business following a loss-making streak. Consequently, the firm will send home close to 125 employees.

To return to profitability, the firm is now eyeing the real estate sector.

“The impact of this change is that the company will henceforth trade mainly in the rental business arena,” Sameer said in a statement.

Sameer Africa, formerly Firestone, was last week trading at Sh3.67 per share, compared to an IPO price of Sh5.

Weighed down by the gravity of time, several giants have slowly but surely shrunk into minions as profitability thins. It is not clear if they will survive the full weight of the pandemic, which has already given some behemoths a cold.

Although the NSE appears to be struggling, Chief Executive Geoffrey Odundo insisted the bourse remains a highly lucrative platform for capital raising.

He cited recent developments such as the listing of Uganda’s Umeme and Rwanda’s Bank of Kigali.

“The delisting of companies is an opportunity explored by companies based on their strategic repositioning,” said Odundo on the recent spate of companies walking away from the bourse.

“We also do delist where the company ceases to serve the best interests of investors. The interest in the market far overides the exits, and hence we definitely are well positioned for growth.”

Others feel the market is simply responding to prevailing economic conditions. David Ndii, an economist, said in a competitive market economy, businesses have to die.

He cited a myriad of issues, from liberalisation to poor corporate governance, as some of the factors that have contributed to the death of blue-chip companies in Kenya. 

“But also if you have a deteriorating economic environment like we have had for several years, you can expect some businesses to fail,” said Ndii. 

“It also depends on, for example, how exposed you are and the decisions you have made. You can also be badly leveraged.”   

Erick Musau, an analyst with Standard Investment Bank, said there is a silver lining, especially in sectors such as manufacturing tipped to do well with the talk of shortening the supply chain now dominating even proposed government policies.  

“There is a lot of encouragement and government support to get things made locally,” added Musau. 

XN Iraki, a business lecturer at the University of Nairobi and a columnist with The Standard, on his part reckoned that “unless they make drastic changes, Covid-19 might send some of them to early graves. But who knows – Covid-19 might be the shock therapy they need.”

And in light of the increasing number of companies delisting from the NSE, Iraki projected the bourse might remain subdued for a year or two.

Telecommunications provider Safaricom, the region’s most valuable company, has not been negatively affected by the crisis and might well be one of the best-performing counters at NSE. But it is not sitting pretty.

Safaricom House has to contend with the Central Bank of Kenya extending the emergency measure of waiving fees for all mobile money transaction of Sh1,000 and below. The initiative, meant to cusion customers in light of the Covid-19 pandemic, has seen the telco forego billions in earnings.

Further, there are reports that subscribers are breaking down large sums into smaller ones that do not attract charges.

Spooked market

So far, it is not clear if the move has affected the telco’s bottom line, but there was a slight bump in its share price when CBK announced the decision.

Banks, too, might be swimming in cash, but they are also feeling the heat. Some of them, like Equity Bank, NCBA and Standard Chartered, have been forced to recall their dividends as they shore up their insurance buffer against possible defaults.

Spooked by the grim possibility of massive defaults by borrowers distressed by the pandemic, banks have parked most of their cash in government papers, with the National Treasury receiving billions of shillings from investors, mostly commercial banks, at 6.2 per cent in its latest offer.

This is the lowest interest rate in seven years.

The Covid-19 pandemic, which is recasting the world around a new normal, might see consumers alter their spending habits or employees change their working patterns. This sets the stage for a new set of players, but may also send some businesses to the corporate graveyard.

Initially, it looked as though the gig economy – the sharing economy that has the likes of ride-hailing taxis and e-commerce – would be the next big thing. Not anymore.

With people not moving around much following the stringent containment measures being implemented by the government, cars affiliated to ride-hailing apps that were acquired using loans are now being auctioned off at an alarming rate.

And while it initially looked like hospitals would be the biggest beneficiaries, they, too, are losing out as people stay at away from health facilities for fear of contracting the virus. As a result, thousands of hospital employees have been furloughed.

For the struggling securities exchange market, Iraki thinks some firms will do well as innovations based on Covid-19 become more widespread.

“Some might merge to benefit from economies of scale. But what will change is the number and types of firms to be traded,” he said.

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