Debt-free Centum plans buy-back of its ‘undervalued’ shares

Centum Investments can breathe easy after repaying the Ksh16.14 billion ($161.4 million) debt which had, in the past five years, affected its cash flow and eroded shareholder earnings, restricting its options for new debt for growth and investments.

Last week, the firm made a final debt payment of Ksh6.6 billion ($66 million) due to accrued interest and a variable return to holders of the Equity Linked Note component.

The debt, which had accumulated since 2015, had seen the company spend a massive Ksh1.8 billion ($18 million) every year on interest payments.

Chief executive James Mworia told The EastAfrican that the company took a radical approach and sold residential houses and parcels of land which generated Ksh10.7 billion ($107 million) for the business in barely six months. This improved its financial position. By March 31 this year, they had sold a parcel of land valued at Ksh2.9 billion ($29 million) across its entire portfolio and 999 housing units valued at Ksh7.8 billion ($78 million), that accounted for about 70 per cent of the 1,442 units under development.

However, Centum has certainly more reason to celebrate as net profit for the year ended March 31, 2020, increased by 12 per cent buoyed by the improved performance of its private equity investments.

The firm which is listed on the Nairobi Securities Exchange (NSE) and cross-listed on Uganda Securities Exchange (USE) saw its profit after tax rise to Ksh4.62 billion ($46.2 million) from Ksh4.12 billion ($41.2 million) the previous year, after a portion of the earnings were wiped off by a one-off provision for impairment of assets totalling Ksh2.75 billion ($27.5 million).

Its investment income grew 57 per cent to Ksh14.99 billion ($149.9 million) from Ksh9.54 billion ($95.4 million) while finance costs jumped 28 per cent to Ksh3.22 billion ($32.2 million) from Ksh2.51 billion ($25.1 million).

RECOVERY CYCLE

“We have completed repayment of our loan. We repaid the last tranche on June 8. The global economic crisis arising out of the Covid-19 pandemic has validated the appropriateness, and importance, of focusing on balance sheet resilience and having a strong liquidity position,” said Mr Mworia.

“As we enter the economic recovery cycle, Centum’s strong liquidity and balance sheet position has put it in a strong position to take advantage of investment opportunities that will emerge given the significant corrections that have taken place on valuations of even very strong companies, and the growing need by companies to shore up their equity capital positions and the general capital flight from frontier and emerging markets to developed markets.”

With the debt out of the way, the company expects to use the excess cash to boost its shareholder kitty and buy back its shares.

“We currently incur close to Ksh1.8 billion ($18 million) a year in interest expense. If this was directed to buying back our shares at a 10 per cent premium to the current average price of Ksh32 ($0.32) per share, we would purchase some 56 million shares per year. Sustained over a three-year period would translate a purchase of 168 million shares. This will increase the dividend per share by 33 per cent, assuming we kept the absolute dividend payout at the current Ksh799 million ($7.99 million) per year,” Mr Mworia added.

“The twin objective of enhancing dividend payouts and buying back our shares has therefore informed our objective to focus on investments that can provide a more regular cash generative investment.”

SHAKY POSITION

Centum’s debt has been ballooning in the past five years (2015-2019) fuelled by a number of mega projects that the company has been undertaking. The debt more than doubled to Ksh16.14 billion ($161.4 million) in the 2018/2019 financial year from Ksh7.56 billion ($75.6 million) in the 2014/2015 financial year.

The debt included Ksh10.2 billion ($102 million) worth of corporate bonds, Ksh191 million ($1.91 million) in additional cash received by investors in the Equity Linked Note component of the bond and an estimated Ksh5.74 billion ($57.4 million) worth of bank loans.

By March 31, 2019, the firm’s debt had declined to Ksh13.88 billion ($138.8 million). In September last year, it disposed of its combined stake (82 per cent) in Almasi Beverages Ltd and Nairobi Bottlers Ltd to Coca-Cola Sabco East Africa Ltd in a transaction valued at Ksh19.5 billion ($195 million).

The company then used part of the funds to cut its total debt to Ksh6.36 billion ($63.6 million) from Ksh13.88 billion ($138.8 million) after repaying a Ksh7.52 billion ($75.2 million) bank loan.

The huge debt on Centum’s balance sheet had weakened the firm’s debt-service coverage ratio, a measurement of the cash flow available to pay current debt obligations, to a low of 1.7x in 2019 from a high of 9.3x in 2015.

Last June, Centum suspended further capital expenditure and put key investments on sale as part of a grand plan to pay off mounting debts amid a shaky cash flow position and deteriorating debt-coverage ratio.

Centum’s share price on the NSE has fallen to a low of Ksh25.85 ($0.25) per share by June 9 from a high of Ksh64 ($0.64) per share more than five years ago in 2015.

Although the legislation on corporate share buyback had been incorporated in the Companies Act 2015, former AG Githu Muigai suspended its implementation on the advice of the regulators.

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WHAT LAW SAYS

Kenya has however suspended plans to allow companies with excess cash to buy back shares from shareholders, over concerns about eroding liquidity and stifling activity on the Nairobi Securities Exchange.

While most companies had expressed interest in reducing the supply of their shares in the market to enhance their value and boost dividends to shareholders, the regulators — the Capital Markets Authority and the NSE — made a dramatic about turn on the policy after realising that it could hurt the stock market.