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.
