Will Mumias Sugar rise from the ashes?

Kenya: Mumias Sugar Company (MSC) is back to the drawing board to map out a new growth plan, after its under-performance and loss making traits left shareholders staring at an estimated Sh72 billion in losses in less than eight years.

According to an internal memo seen by Business Beat, the board headed by the newly appointed chairman Dan Ameyo is set to deliberate on a fresh strategy with hopes of lifting the sugar miller out of financial abyss and returning it to profit-making.

In the circular addressed to board members, Mr Ameyo has directed a galaxy of professionals to propose new strategies, translate them into policies, procedures and plans for management action as well as provide a sound basis for subsequent control.

"You recall that during the release of the annual financial results about a fortnight ago, we assured our stakeholders that the board would put in place new strategies to bring the company to sustainable growth and profitability,” read part of the circular dated September 24.

“As a board, we have two primary roles — the performance role of strategy formulation and policy-making and the conformance role of supervising executive activities and accountability,” he notes.

“In the discharge of these crucial roles, we need to set the direction for MSC business in the context of the current and potential external competitive and customer market situation, in the light of prevailing economic, political and technological factors.”

The directors are preparing for a retreat to actualise the new strategy, which not only responds to the company’s existing challenges but also provides homegrown strategic solutions.

“We also need to have a long-term view and look at MSC in its strategic environment. We need to have a second look at the current mission, vision and values of the company so that the strategy we develop should have these in mind,” the circular continues.

When contacted, Mr Ameyo acknowledged that MSC is formulating a new growth plan to address the challenges the company is facing. “We want to restructure the company since its current structure is not responding to the challenges the miller is facing,” he said, adding that reforming staff culture, regaining confidence of disgruntled farmers and bringing down the cost of production is critical.

“We want to bring down the costs for farmers completely by re-looking at the cost of cane development, transportation and seen cane. I believe these costs can be reduced substantially so that a farmer gets a decent return,” he said.

Downgraded

In June this year, MSC was knocked off from a list 20 blue-chip companies constituting the Nairobi Securities Exchange (NSE) 20 Share Index and by last week, its stock had fallen to as low as Sh2 per share. And with an estimated 1.53 million shares held by the company’s shareholders, the miller has lost about Sh72.67 billion of the shareholders wealth since December 2006, when the Government offloaded its 18.04 per cent stake (91.9 million shares) in the company at a price of Sh49.50 per share.

Amongst the hardest hit are an estimated 131,902 local shareholders who control 51.4 per cent of the stock, representing 786.46 million shares, and about 667 foreign shareholders holding 126.3 million shares accounting for 8.26 per cent of the stock, this according to data from the company’s annual report (2013).

Others include the National Treasury which controls a 20 per cent shareholding (306 million shares), Kenya Commercial Bank (1.72 per cent, 26.32 million shares), Standard Chartered Nominees (1.7 per cent, 26 million shares) and the Jubilee Insurance Company Ltd (1.46 per cent, 22.33 million shares).

The downgrade of the sugar miller by the NSE from being a blue-chip company however, did not come as a surprise to many, considering the management turmoil and the subsequent drop in the company’s earnings. According to analysts at AIB Capital, the uncertainty about the future continuity and performance of the company has greatly worried investors, which is depicted in the share price movement.The share price peaked at a high of Sh4 and a low of Sh2 this year.

The miller posted a loss of Sh2.23 billion in 2012/2013, with the loss widening to Sh2.7 billion in 2013/2014. This is attributed to challenges arising from a significant drop in sugar prices due to an influx of illegally imported sugar over the year as well as management inefficiency as depicted by the decline in the net profit margin from 13 per cent in 2012/2013 to -21 per cent in 2013/ 2014.

Additionally, cane supply was affected by shortages arising from low yields due to poor soil fertility and poor husbandry, all of which affected the crop harvested during the year under review. The costs of production also more than doubled leading to the sharp decline in gross profit margin to six per cent in 2013/ 2014 from 29 per cent in 2012/2013.

Incentives

Revenues however grew by 9.4 per cent from the previous year, attributed to higher sugar and ethanol sales volumes achieved. According to analysts Teddy Yanga and Parshv Shah at AIB Capital, the company has been affected by gross mismanagement. “This therefore requires the management to put in place sufficient measures and governance structures if the company is to return to profitability,” they said.

Through their market report, the analysts noted that revamping MSC would require sufficient incentives and good returns to farmers as well as enhanced supplier-buyer relationships to ensure increased production levels of the raw material. “The smuggling and illegal importation of cheap sugar into the country is however expected to continue affecting the revenues of the company and the industry as a whole, so long as the Government does not stop the illegal importation of cheap sugar,” they said.

MSC recorded a profit before tax of Sh1.19 billion in the financial year 2008/2009 and Sh2.17 billion in 2009/2010 financial year. In the 2010/2011 financial year, the company continued on an upward trend, raking in Sh2.64 billion before declining to Sh1.76 billion in 2011/2012. In the 2012/2013 financial year, the sugar miller posted a loss of Sh2.23 billion - widening to Sh2.7 billion in 2013/2014 financial year.

According to AIB, cheap sugar imports from the regional trading bloc are here to stay, which means increased competition for local produce and reduced top line revenues. This requires efficiency in the company so as to reduce the cost of production and operation costs and prices. This, they argue, will position the company competitively both locally and regionally.

The extension of the country’s protection against cheap imports from the regional trading bloc is just a temporary measure, which gives the company time to reorganise its operation’s. The safeguards expire in February 2015.

MSC is also in talks with several banks to restructure its Sh5 billion of debt. This is part of the cost cutting measures the company has embarked on, which also includes retrenchment. “The banks have agreed with us. We have talked with them to restructure our loans and they have agreed so as to give the company opportunity to generate revenues,” said Ameyo.

Return to profitability

MSC’s total amount of issued shares as at June 30, 2013, stood at 1.53 billion, according to the annual report (2013). The Government reduced its shareholding in Mumias for the first time in an initial public offering (IPO) in 2001 to 38.04 per cent.

In the second IPO in December 2006, the Government sold 91.9 million shares further eroding its stake to 20 per cent. According to the company’s financials, declining area under cane and inefficiency in the utilisation of capital to generate returns have compounded the miller’s misery. “Availability of quality cane continued to be a major challenge as a result of decreased areas under cane, declining cane yield per hectare and cane poaching,” said Ameyo.

The company’s borrowings as at last year (2013) stood at Sh5 billion comprising of loans from Proparco (Sh1.45 billion), Commercial Bank of Africa Ltd (Sh364 million), Barclays Bank of Kenya Ltd (Sh240 million), Ecobank Kenya Ltd (1.21 billion), CfC Stanbic Bank Ltd (Sh519.7 million), Kenya Commercial Bank (Sh1.15 billion) and the Kenya Sugar Board (Sh75.69 million).

According to the company’s financial statements for the year ended 30 June 2014, the board has undertaken some initiatives aimed at returning the company to profitability. They include changing the management of the company, an improved farmer engagement programme aimed at securing a sustainable supply of adequate quantities of good quality cane, strengthening the internal control environment, engagement with key stakeholders and initiating organisational culture change.

The company has also embarked on a major initiative to regain its market share through additional packaging plant capacity that will significantly improve margins. It has also commenced negotiations with Kenya Power targeted at increasing tariffs on exports to the grid.

The company has diversified into power, water and ethanol production. It has the capacity to produce 34MW of electricity of which 26MW will be exported to the national grid. It also has the capacity to produce 24 million litres of water and 22 million litres of ethanol annually.

During the last five-years, the return on capital employed for the company stood at 11.88 per cent (2008/2009), 19.82 per cent (2009/2010), 18.28 percent (2010/2011), 11.23 per cent (2011/2012) and -16.83 per cent (2012/2013).

The negative return on capital employed, implies massive inefficiency in the use of capital to generate returns. Total staff costs jumped to Sh2.16 billion from Sh1.62 billion.  The area under cane by out-growers declined to 53,116 hectares from 62,818 hectares, while processed cane fell to 1.72 million tonnes from 2.16 million tonnes.

MSC was managed by a British firm Booker Tate until June 30, 2003, when the contract officially ended. The Government hired PricewaterhouseCoopers (PwC) to conduct recruitment of a new chief executive. A cross section of legislators were not comfortable with the management of Mumias being handed over to home-grown managers and people whom they claimed did not have the expertise to manage a sugar industry.

Dr Evans Kidero, the current governor of Nairobi County was the first Kenyan to take over the management of the company as chief executive. Previously, booker Tate had managed MSC with nearly all of its chief executives being British or of European origin.