In the rarefied realm of Jonathan Ciano, the master of turnarounds in Kenya, conversation usually revolves around good things. Expansion. Change. Growth.
He has seen Uchumi Supermarket rise from receivership in June 2006, which was occasioned by over Sh2.2 billion in debt, to being re-listed at the Nairobi Securities Exchange (NSE) in 2011.
For a long time, the retailer’s rebound inspired optimism in Mr Ciano. But last week, negativity intruded as his company’s share price began to drop. He is now facing a challenge beyond his control.
ACCUSING FINGER
At his Industrial Area offices in Nairobi, Ciano watched stunned as the NSE live feed showed the retailer’s stock sink past the discounted share price being offered in its cash call — Sh9. It went on to touch a one-year low of Sh8.00 on Monday. The stock closed last week unchanged.
This means it is cheaper to buy the company’s shares on the open market than through the rights issue.
Data released by the NSE on Friday showed the stock had dropped 5.9 per cent over the past week. And, in the 12 months to November 10, its price had dropped 58.9 per cent.
But Ciano believes the current price does not reflect the true value of the 38-year-old chain. And he is pointing an accusing finger at some companies and individuals whom he alleges have been trying to buy Uchumi, and are now playing dirty with the firm’s share price.
“There are a number of players who are coming up in the market, some of whom were interested in Uchumi, and they are playing a game where they are buying shares and then selling them at a lower price,” Ciano claimed in an interview with Business Beat last week.
“There are a number of people who wanted to take over Uchumi from the back in a hostile manner, and they were unable to.”
He further alleged that there are investors who had wanted to be given a chunk of Uchumi shares.
“We can’t do that. Our law does not allow a listed company to give a chunk of its shares to someone.”
Ciano’s sense of foreboding is supported by some stock brokers and investment bankers, who point to possible sabotage. However, many market players agree that such a sinister motive would be hard to prove.
Further, there could be less ominous reasons behind the share price drop.
“The company has suffered negative market sentiments, including the closure of a branch in Uganda and seeking out huge amounts of credit to pay off its suppliers,” said John Kirimi, the managing director of Sterling Investment Bank.
“Further, foreign investor flight from the counter due to a weakening shilling and introduction of capital gains tax could have combined to drive down the price of Uchumi shares.”
Poor performance
But there is also another scenario that could explain the poor performance of the company’s stock at the NSE: short selling.
This term describes a situation where investors, knowing the price of a share will drop in the future, sell their stock to buy it back at the lower price.
Aly Khan Satchu, an investment analyst, said on Friday that nearly 10 per cent of Uchumi’s stock had traded at a more than 10 per cent discount on the rights issue price. This, he warned, could jeopardise the cash call.
“My view is that there is a very loud signal in the noise ... Uchumi’s management needs to talk to the market, otherwise an unravelling is in sight,” said Mr Satchu, who is the chief executive of Rich Management, an NSE-authorised data vendor.
For Ciano, the drop does not appear to be naturally driven by market dynamics. He believes that for some time now, a number of gaintakers have been playing the share down.
“You have those people who make sure that the price is down so that they buy as much as possible. And then they hold back the demand. When everybody thinks the price is down, they sell off their shares, and these individuals buy up more stock to own a larger share of the company,” he claimed.
“These are faceless investors who are not up to any good at all; they are a group, and they are known all over the world.”
He took issue with last week’s activity at the counter, singling out last Tuesday’s movement of 11.91 million shares, which was done in 68 transactions. It was the highest number of Uchumi shares transacted in 12 months.
By the market’s closing, the retailer’s share price remained unchanged from the Sh8 registered on Monday, when another six million shares changed hands.
Ciano accused this group of “faceless investors” of short selling, and then coming back to the market to buy even more shares by offering a higher, more attractive Sh9.
By the time of going to press, Capital Markets Authority Acting CEO Paul Muthaura had not responded to our messages requesting comment on this, and calls to his mobile phone were not going through.
Cash call
But Eric Musau, a research analyst at Standard Investment Bank, said the share drop is not unique to Uchumi, but rather, is driven by demand and supply.
“Ahead of the rights issue, foreign investor supply appears to have been heavy, outweighing local investor demand at higher prices. That probably explains why the share price has declined,” he said.
“Over the last week, we have also seen a number of other counters posting declines, so Uchumi Supermarket is not an exception.”
Ciano also attributed the performance of the Uchumi share, which is 11.1 per cent below the rights issue’s Sh9, to the delays that plagued the firm in the run up to the cash call.
The retailer was to hold the issue last year, but its major shareholders, including the Government, which owns 13.8 per cent of the chain, were not ready.
“You cannot go into a rights issue if your major shareholders are not ready,” said Ciano.
The company is issuing an additional 99.5 million shares to its existing shareholders to raise Sh895 million for expansion. The Government has committed to take up its entitlement.
Recoup losses
Uchumi’s expansion plans are in line with the increasing competition in Kenya’s retail space.
The company’s closest rival, Nakumatt Limited, is working to recoup its losses after last year’s terrorist attack at the Westgate Mall, where it was an anchor tenant. Tuskys Supermarket, another major player, has been consolidating its market position by acquiring some Ukwala Supermarket stores.
Activity in the sector is expected to intensify, as multinational retail chains finalise plans to set up in the country and benefit from its burgeoning middle class.
US retail giant Walmart plans to enter Kenya through South Africa’s Massmart, which has booked space at the upcoming Garden City Mall along Nairobi’s Thika Road.
Also, French retailer Carrefour has booked space at the Two Rivers Mall, which is being put up in Runda, Nairobi. Kenya will be the retailer’s second destination in Africa after Egypt.
To keep up with the stiff competition from both local and foreign-owned players, Uchumi is determined to see through its expansion drive, which will see it open five more branches in Tanzania, four in Rwanda and eight in Kenya by next year.
Ciano said Uchumi has entered into agreements with Tanzania’s National Housing Corporation and National Social Security Fund (NSSF), which are building shopping malls, that give the retailer the first right of refusal on tenancy.
Uchumi has signed a deal with Tanzania’s National Housing Corporation to lease the 10 malls it has under construction, and another with NSSF to lease its seven malls in Masaki, Mbagala, Mikocheni, Mbezi, Tabata, Africana and Dar es Salaam’s city centre.
The retailer, which already has two outlets in Arusha, also has a mall coming up in Mwanza, a shopping centre in Morogoro and has completed building in Moshi.
Further, Uchumi acquired Dar es Salaam-based Sifamart Supermarkets for an undisclosed amount.
“Two weeks ago, we were blessed with a baby called Sifamart. The branch, in a place called Kawe, is currently being refurbished,” said Ciano.
“What did this branch cost us? It didn’t cost us anything. We are leasing the assets from a bank, suppliers have agreed to give us the products, the bank will pay for the equipment. The only cost will be that of paying salaries.”
In Rwanda, Uchumi is putting up four branches. The retailer is the anchor tenant in the country’s biggest shopping mall, which is being constructed in Eno Muhima, and has three stores under construction in other parts of Rwanda. It plans to open its first branch in the country in the first quarter of next year.
In Uganda, Uchumi closed a loss-making unit, but plans to open new stores in Mbarara and Kampala.
In Kenya, the retailer is opening new outlets in Naivasha, Limuru, Nyeri, Kenyatta University (Unicity), Kapsabet, Bungoma, Ukunda and Nairobi’s Ridgeways.
“KU has more than 15,000 students. Assume each student comes to buy a packet of milk — I will be home and dry,” Ciano said.
FINANCIAL STRATEGY
He added that despite the retail chain expanding its network, its financial requirements are minimal due to a new strategy it has employed.
“We do not buy property — land or buildings — instead, we rely on developers,” he said.
“This year, we are going into the second level of our strategy of asset leasing. Instead of buying computers or shelves, they will be supplied by someone. The lease leaves us with minimal costs of opening a branch, which means I will only be paying rent and salaries.”
He said the money raised from the rights issue would mainly be for working capital and refurbishment.
However, the delay in launching the cash call, which was approved by shareholders in December 2012, has seen Uchumi struggle with supplier debts and stock outs. The retailer resorted to taking up debt from banks to pay suppliers and grow its network.
It took a loan from KCB and the Industrial and Commercial Development Corporation (ICDC), a Government-owned development finance and investment company, to grow its business from 17 branches to the current 37.
Ciano said the loan from KCB now stands at Sh450 million and would be cleared by next year, while it owes ICDC Sh170 million. He disputed reports that the retail chain had more debt than this Sh620 million, or that it was unable to pay suppliers.
“What we have is standby credit, which is not debt. If I had more cheques, I would run to a bank and draw down the cash,” he said.
“We also have asset financing, which has been taken by Co-op Bank in the region of Sh500 million worth of assets. I’m renting their equipment; to me, this is not debt.”
