TO BUY OR NOT TO BUY INTO UCHUMI AS IT SEEKS US$9.95 MILLION IN FRESH CAPITAL

Uchumi Supermarkets is in dire need of fresh capital to complete its turnaround, which analysts say now hinges on the success of the ongoing $9.95 million rights issue targeting shareholders across East Africa and other investors.

Last week’s commitment by the Kenyan government to inject $2.93 million into the region’s oldest retail chain came as a relief after the counter witnessed a mass exodus of foreign investors, sending its stock tumbling to a price below the rights issue face value of Ksh9 each ($0.1).

The proportion of foreign investors in the firm has shrunk from 42 per cent to 28 per cent in the past one year, according to the firm’s management, a development that has also seen the share price drop by more than 50 per cent from a high of about $0.24 each to $0.1 over the same period.

National Treasury Cabinet Secretary Henry Rotich told The EastAfrican that the government was taking up all its rights in Uchumi and that discussions were underway to take up more shares than it had earlier applied for.

“We had budgeted for it this financial year and with the falling share price we are considering taking up more shares,” said Mr Rotich.

“I have been informed of the operations of this company, its historical legacy issues and the business plan the management is executing. We believe Uchumi is on a recovery path.”

Currently, the government’s stake in Uchumi stands at 16.1 per cent.

Mounting debt levels plunged Uchumi into receivership about eight years ago. To stay afloat, the firm signed deals with its creditors who included suppliers, the government and two commercial banks — KCB and PTA.

The total amount owed to KCB, PTA and suppliers was $24.4 million. In 2008, the supermarket took steps towards its recovery after it recorded $1 million in profit.

By 2009, it had made $4.6 million in profit. And through various debenture issues and conversion of debts into equities, the retailer was able to pay off most of its debt. The government loan was fully paid up by June this year.

But in recent times, the supermarket has been fighting for survival due to stiff competition, a growing debt portfolio, negative working capital and alleged delay in payment to suppliers. 
Uchumi’s working capital (difference between currents assets and current liabilities) stands at negative $12.2 million, according to figures from the 2013/2014 financial statements.

Its debt portfolio has risen to $11.1 million from $4.2 million last year mainly due to an additional loan of $6.6 million from KCB and an asset financing facility of $4.4 million) from Co-operative Bank.

However, the supermarket chain’s chief executive Jonathan Ciano said the company was not in trouble and had paid its creditors, adding that the minimum supplier payments stood at $3.3 million every week.

“As a result, 63 per cent of supply debt is current (1-60 days) while only 37 per cent is overdue (beyond 60 days). At any one time our 20 big suppliers don’t have a problem with us,” he said .

So is the stock a worthwhile investment?

“I think there is a possibility that the company will turn around if it gets the right funding. The local retail market is still underserved, and there is still a lot of potential. I would recommend a hold for Uchumi stock particularly with a long-term view of the company,” said Nkoregamba Mwebesa, chief executive of Standard Bank Group Securities, a subsidiary of CfC Stanbic Holdings Ltd.

According to Geoffrey Odundo, chief executive of Kingdom Securities Ltd, the prospects for Uchumi seem bright.

“The company’s total debt has come down drastically. Uchumi will have a very strong cash flow position after the rights issue,” said Mr Odundo.

But John Kirimi, executive director of Sterling Capital, said Uchumi’s future is dependent on its ability to fix its finances, pay off creditors and use its expansion programme to generate revenue.

“I would recommend ‘buy’ with long term outlook because Uchumi has good management and a good turnaround strategy,” said Johnson Nderi, the manager in charge of corporate finance and advisory at ABC Capital Ltd.

A total of 99.53 million new shares are on offer to existing shareholders on the basis of three new ordinary shares for every eight held. Trading of the rights started on November 10, and closes on November 28.

The funds are to be spent on opening new outlets and refurbishing existing branches as Uchumi embarks on the second round of its regional expansion strategy.

READ: Uchumi plans several branches in Rwanda

Uchumi is pushing through an ambitious expansion programme that will see it open more branches in Kenya, Uganda, Tanzania and Rwanda. The firm also plans to expand to Burundi and South Sudan.

The cost of the seven-year plan is estimated at $22 million.

From 15 branches in 2006, Uchumi now has 37 branches — 27 in Kenya and five each in Uganda and Tanzania. In Rwanda, three branches are under construction.

The firm is, however, struggling with non-performing regional outlets, which partly explained the seven per cent decline in its profits in the 12-month period to June 30.

The East African