Friday, October 31, 2014

UGANDA CLAYS: HOW DID IT COME TO THIS?

An otherwise good investment executed poorly has led to the imminent takeover of tile maker Uganda Clays by the National Social Security Fund (NSSF), inside sources have told the Business Vision.

In a bid to meet growing demand, Uganda Clays Ltd raised money from the public and banks to construct their $15m (sh39b) Kamonkoli plant in eastern Uganda.

“At the time UCL had more than two thirds of the market share but was not effectively meeting demand, so building another plant made sense. It was a good idea,” said a source intimately familiar with the Kajansi based company’s operations.

The choice was between beefing up the Kajansi operation or looking elsewhere. Given that Kajansi’s clay reserves were only good for another 20 years it made sense to find another site. Kamonkoli with its estimated 100 years of clay reserves seemed a promising prospect.

But UCL’s management at the time were clearly not up to the task of making this new investment work.

“The investment was clearly not thought through very well,” the Business Vision’s source said. “To begin with the market research was bad. The anticipate demand from eastern and northern Uganda that was supposed to anchor the investment did not materialise. When they tried to export to Kenya they found the competition was selling at a quarter the of UCL’s price.”

As if that was not enough UCL had little room for manoeuver as the use of heavy fuel oil to fire up the kiln in Kamonkoli was very costly. But even more importantly the clay at Kamonkoli was not as good as that at Kajansi requiring the use of an additive, which meant additional costs.
And that was only the operating costs.

Besides raising about sh10b from its shareholders in a rights issue in 2007, UCL also borrowed from the banks.  Unfortunately instead of getting long term financing they settled for the pricier, short term loans.

This meant that their debt repayments accounted for an average of sh4b a year since 2009, this meant that in four of the five years these costs accounted for more than four in every ten shillings of gross profit, which is was historically high for the 60 year old company. In 2008 the company reported debt repayment costs of sh97m or under two percent of gross profit.

It did not help that revenues did not jump to match the spike in costs.

But one more eventuality must have made the company wonder whether the project was not cursed from the start.

In December 2007 postelection violence in Kenya shut down the route to Mombasa for weeks. This was a problem because the Kamonkoli plant was being imported through Kenya, construction and eventual commissioning of the plant was therefore held up for months, with the attendant cost implications.

"The coincidence of calamities may have accounted for the then managing director John Wafula, who stepped aside at the end of 2010 and his successor  Charles Rubaijaniza, who resigned barely a year later...

In 2010 NSSF loaned the beleaguered company an unsecured loan of sh11.05b with a tenure of 10 years and a two year grace period. The interest on this loan was 15% per year. The company used the money to pay off their creditors, buy spares for the Kajjansi and Kamonkoli plants.

“But they were so focused on restructuring their debt that they forgot they would need working capital. As a result they could not meet their obligations to NSSF and hence the situation UCL is in now,” our source said.

So earlier this month it was announced at the UCL AGM that NSSF was converting the loan to shares raising its interest in the company to 66% from 32.5% previously, as a result they would double the number of chairs the hold on the board to six out of the ten.

“We know that things have been on a decline in the last couple of years, but as major shareholders, we believe in the long term sustainability of the company. We may have to reengineer the way the business operates,” said NSSF acting managing director Geraldine Ssali during the USCL AGM.

“If we pull out, the company will close.”

Ssali suggested that radical changes like moving the Uganda Clays Kamonkoli branch in Mbale to Kampala, the use of managerial contracts and a keen study into the methods the company uses to fire its clay based products may be necessary.

With the hope that the internal dynamics may have been brought under control Uganda’s oldest ceramic tile manufacturer will still have to grapple with totally different market environment, where its market share has been whittled away by private players and changing roofing demands.

“Uganda Clays is still a the market leader in the clay products segment, easily 80% of that market. The problem is that segment is dwindling. There are many more options now for roofing alone than there were say 10 years ago, so its share of the universal roofing’s market is very much smaller. They don’t dominate the sector,” an industry source said.

The new equity composition of the company will see the other shareholders interest in the company halved.

“Our interest shall be diluted but the debt shall go. We have requested NSSF to get better quality board members otherwise they will have more power to do what they have been doing, which is nothing,” said Andrew Muhimbise, general manager of Rats Network Investment Group.

The company, which was the first to have listed on the Uganda Securities Exchange (USE) in 2000 has had a relatively inactive counter with most of its shares held as investments by local and regional institutions.

It was listed at sh4,000 share which price rose to sh11,000 before a 1-for-100 share  split saw its price coming down to sh113 and adding a bit more action on the counter. At the close of business yesterday a share of the company was trading at sh20.

The moral of the story is,

“Despite being a monopoly, complacency can run a business into the ground,” said Ken Kitariko, the CEO of investment bank African Alliance.