Category Archives: Uchumi

Uchumi Rights Issue: CMA Acts – Part I

Yesterday the Capital Markets Authority (CMA) meted out punishment, following the Uchumi Supermarkets (USL) rights Issues.

Back in 2014. Uchumi’s rights issue to raise Kshs 895 million ($10 million) by offering shareholders 3 shares for every 8 held at Kshs 9 per share, with the funds to be used for expansion in East Africa and refurbishment of stores.

(Excerpts from) The CMA statement reads:

  • The regulatory breaches of the former directors and the two USL officers were identified in respect of the period of 2012 – 2015 and involved making changes to the Information Memorandum (IM) after CMA approval; failing to make proper disclosure of material information to inform investor decision making; misapplication of Rights Issue (RI) proceeds; mis-statement of financial statements in 2014; weaknesses in board oversight of the branch expansion programme; inadequate conflict of interest management; and inadequate disclosure of asset sale and leaseback arrangements. The breaches of the transaction advisor revolve around not ensuring changes made to an approved IM were submitted to CMA for further approval.

Also that

  • Out of the Ksh895 million right issue proceeds received by USL in January 2015 it was established that a small portion was used to pay the rights issue expenses but the balance was transferred to the trading account from where payments were being made to settle outstanding suppliers’ debts as opposed to funding branch expansion.

And

  • With respect to the financial statements for the period ended June 30, 2014, that were used to support the Right Issue, it was established that a Ksh350 million asset sale and lease back transaction was recognized, while the agreement for the same was signed and funds received in September 2014 . As a result of this recognition, USL’s profits as at June 30, 2014 were enhanced by Ksh19.97 million arising from the gain on sale of the assets. Further, the USL liabilities were understated to the tune of approximately Kshs.1 billion. The Board subsequently reversed this treatment in the audited accounts in 2015, stating that this recognition had been premature.

Other recent actions by the CMA have targeted directors of Imperial Bank and CMC Group.

Uchumi: This Is It

It’s hard to believe that I’ve been writing about Uchumi Supermarkets for as long, as I’ve had this blog – about ten years. The company seems to go through a cycle every few years of capital injection, expansion & new store openings, shareholder reassurance, a few years of smooth sailing, followed by diminishing stocks of products, management change (Suresh Shah, Titus Mugo, Kennedy Thairu, Masterten-Smith, Jonathan Ciano), restatement of accounts, change of auditors, restructuring of debts etc.

At the 2010 special meeting of shareholders (during a receivership period), Kenya’s solicitor general (speaking for the government, which had bailed out the company) said nothing was fundamentally wrong with Uchumi when it collapsed, just bad governance.

But this time, it hopes to have put the past behind, and things are now looking up again for Uchumi. Its CEO, Julius Kipngetich, was on a TV blitz last week where he recapped the position that the supermarket is in and the way forward. Uchumi is now lean after laying off 2,300 staff, closing its unprofitable Uganda and Tanzania subsidiaries as well as 7 branches in Kenya, one of which was in a mall (Taj) that was going to be demolished for expansion of a highway. They are in the process of selling non-core assets (3 land properties), re-negotiating with suppliers to settle debts and (in exchange for some equity) resume supplies, and seeking a new strategic investor.

Some of these have now advanced recent announcements that most suppliers have agreed to convert some debt in exchange for  about Kshs 1.8 billion of equity in the company. Also the Ngong Road Hyper branch has been sold (but Uchumi plans to continue occupying it as a tenant) and just this week the Visa Oshwal Business Community, who comprise key suppliers,   agreed to resume supplying stocks, with one of them ending a lawsuit to wind up Uchumi.

Uchumi’s latest restructuring is happening is at a time when supermarkets are ‘apparently’ booming in Kenya. Nakumatt just opened its 61st stores, Naivas and Tuskys are growing, despite the family battles they have, Choppies (of Botswana) has taken over Ukwala and Carrefour has just opened at The Hub in Karen, in upmarket Nairobi.

Uchumi basket

Banks like UBA are ready to support. KCB has been a long terms banker, and Jamii Bora banks is the largest shareholder (15%) of Uchumi, closely follow by the government (14%).

Uchumi stores now have almost all products back on the shelves, but with some familiar brands still missing, for now.  As the CEO, said in one interview, Uchumi aim to serve middle class consumers, who want to buy Kenyan products .

In the next three months, they hope to narrow down a strategic investor to be the anchor shareholder of Uchumi, from a pool of bidders that were invited privately.

Nairobi Mall and Supermarket Moment

A research report by Knight Frank notes that Nairobi has about 470,000 square meters of shopping center space under  development underway and is one of the five largest cities in Africa (excluding south africa) in that regard (it currently has 391,000 square meters of shop space).

Knight Frank Shop Africa Nairobi spotlight

Knight Frank Shop Africa Nairobi spotlight

Knight Frank notes that, aside from Actis (the pioneering UK investor), most of the developers and landlords of Nairobi’s shopping centres are local Kenyan property owners.

A second Buffalo Mall is  to be built in Eldoret. This comes after the Pivotal Fund acquired 50% of Buffalo Mall Naivasha.

Carrefour: This week opened their first store in East Africa. a 60,000 square foot hypermarket at the Hub in Karen, one of 57 stores that have opened there. Carrefour will be the anchor tenant and are run under franchise of Majid Al Futtaim Retail of Dubai.   EdIt – Carrefour Kenya have an app for shoppers 

(The) Game operated by Massamart. in which Walmart has a majority stake, opened at Garden City Mall as the anchor tenant. 

Khetia:  are in the midst of a Kshs 1  billion expansion in western Kenya. They plan to open up stores in Kisii, Busia and Kericho, each of which requires Kshs  200 million.

Nakumatt: Just launched their 59th branch in Kakamega – the Nakumatt Midtown Supermarket. It was remodeled after nakumatt acquired three supermarket stores in Western Kenay (Kakamega, Bungoma, Busia) from Yako Supermarkets in a Kshs 260 million investment program. They have also added new stores like  Sports Planet departmental  at the reopened Westgate mall. 

Naivas The ownership of widely admired chain is subject to an inheritance court case. 

Sarit Center: Nairobi’s first formal mall is undergoing an expansion program to add more stores.  

Society Stores: An offshoot of a Khetia family member  – Trushar Khetia, hopes to grow the store brand. He says that they had the first chance to buy out Ukwala, but it wasn’t backed by the board and the deal fell through.

Two Rivers backed by Centum and built by Avic will also house a Carrefour store at the 62,000 square meter site in Ruaka that sits on 100 acres.

Tuskys: is focusing this year on staff welfare and streamlining customer service delivery through deployment of  digital platforms for e-commerce. Shareholders are also trying to settle issues in readiness for a listing at the NSE by 2018.

Uchumi:  Is under new management and, once again, in search of a restructuring deal that involves working with suppliers, sale of assets (such as Ngong Road and Langata branches) and a share sale to a new anchor investor for about Kshs 5 billion. This has been complicated by some suppliers who sued to wind up the company, but talks are ongoing with the government, and it  appears that majority of the  suppliers will agree to convert Kshs 1.8 billion of the dent owed to them into equity at Uchumi.

Ukwala was bought by Choppies of South Africa. The deal was completed after an tax agreement deal  was reached with the Kenya Revenue Authority who were demanding back taxes from Ukwala.  Ukwala had admitted to owing the taxman Kshs 101 million, but appealed the additional Kshs 845 million that KRA was demanding. 

Finally, suppliers,  have complained about delayed payments by supermarkets retail chains. This was highlighted in letter from the Kenya Association of Manufacturers (KAM) to Tuskys, Nakumatt and Naivas.

$1 = Kshs 100

Urban Inflation Index September 2015

Tracking changes compared to five years ago

Gotten Cheaper

Utilities: An electricity in June 2015 showed that consumers incurred costs of 251(US) cents per kilowatt hour, and forex adjustment ones of 40 cents per kwh. Five years ago it was 340 cents per kwh while forex was 57 cents per kwh.

Communications: Call rates are between Kshs 2 – 4 per minute, compared to Kshs 8 five years ago, and SMS are now Kshs 1. There has also been a massive drop in the cost of mobile data. That said there’s a bit of turmoil in the industry. Safari com is diversifying into new segments like health and television, as Airtel is threatening to pull out. Meanwhile Orange is apparently for sale, and Essar folded their Yu brand just a few months ago.

About the Same

Beer/Entertainment:  A bottle of Tusker beer is Kshs 200 at the local pub compared to Kshs 170 five years ago. The competition from the introduction of several new beer and alcohol brands  (like Carlsberg) does not seem to have made prices lower.

Carlsberg Nairobi

Other food item

A 2 kg pack of (rare) Mumias sugar is now Kshs 240. Its rare because both Ucumi and Mumias are going through some transitions with financing, suppliers, and even new CEO’s  Meanwhile, there’s also the debate about whether and at what cost Kenya produces sugar compared to other countries like Zambia, Sudan and even Uganda. The same Mumias pack was Kshs 200 five years ago. Mumias troubles has resulted in other brands like Butali Chemelil Nzoia and other store and generic brands now getting space at supermarkets like Ucumi.

More Expensive

Foreign Exchange:  1 US$ equals Kshs 103 compared to 80 fiver years ago (actually today it’s 106) a steep rise that does not seem to have reached its bottom. This may be due to the strength of the dollar but other currencies have also strengthen due to the trade deficit

Staple Food:  Maize flour is used to make Ugali that is eaten by a majority of Kenyans daily. A 2 kg. Unga pack at Uchumi today costs Kshs 113 compared to Kshs 65 five years ago.

Fuel:  A litre of petrol is Kshs 102.6 petrol compared to 94.5 five years ago (but with the weaker shilling, in dollar terms it’s about $4.5 per gallon (down from $5.25 five years ago)

Shares Portfolio: November 2014

Comparing shares to last year and last quarter, the portfolio is up 7% in three months (excluding new investments), while the NSE 20 share index is up is up 0.5% since August 2014.

The Stable

snoop

Bralirwa (Rwanda) ↓
Centum  (ICDCI) ↑
Diamond Trust ↓
KCB ↓
Kenya Airways ↓
Kenya Oil ↑
Mumias Sugar
Nairobi Shares Exchange ↑
Safaricom ↑
Scangroup ↓
Stanbic (Uganda) ↑
Unga ↑
Changes
In: Mumias Sugar
Out: None
Increase: Kenya Airways, KCB, Scangroup
Decrease: None
Best performer: NSE Kenya (up 121% since IPO), Centum (16%), (Unga 14%)
Worst performer: Kenya Airways (down 22%) Bralirwa (down 19%)
Unexpected Events:
– Bralirwa share dip which has been linked to the bonus share
– KQ’s loss in the half year. Amid the arrival of a half-dozen new Boeing 787 Dreamliners and other aircraft and long serving CEO Titus Naikuni stepping down there was one more shock from the airline in the form of a half year loss of Kshs 10.45 billion ($116 million)
– Are Kenya bank stocks overvalued as a Citi report says?
– Listings by Kurwitu Ventures (at Kshs 1,500 per share, which was higher than British American Tobacco that’s at 904 now) and Flame Tree (FTG) in recent weeks in the GEMS category of the NSE.
– Both Equity and Housing Finance forming holding companies and transferring banking and mortgage business respectively to the new group parents.
– The vicious fallout between BritAm and Cytonn.
Looking forward to
– Unga’s acquisition of Ennsvalley, a bakery worth Kshs 500 million ($5.55 million)
– Uchumi’s rights issue to raise Kshs 895 million ($10 million) by offering shareholders 3 shares for every 8 held at Kshs 9 per share, with the funds to be used for expansion in East Africa and refurbishment of stores.
– Seeing how Mumias Sugar shares proceed..having gone from highs of Kshs 40 in years past, to 1.4 this month.