How Mumias stock has seen investors lose billions

With a giant market value of Sh4.55 billion from 92 million shares, Mumias Sugar was docked among the most promising firms in Kenya.

The miller had a bright future, perhaps the reason why many investors took their savings, borrowed heavily, fought and ruffled to buy a stake.

But neither the pioneer 20,000 shareholders, nor the current 1.53 billion share-owners could have imagined how deep ‘MV Mumias’ was going to sink.

In two-and-a-half years, thousands of investors have watched helplessly as Mumias collapses to the sea bed following collisions with financial and managerial icebergs in the industry.

For instance, last week, Mumias suspended 27 middle-level managers, announcing that Sh1.1 billion has been lost in mysterious deals.

It has already sacked its managing director Peter Kebati and commercial director Paul Murgor over illegal imports of sugar.

DESTROY WEALTH

According to investment and financial analyst and Rich Management CEO Aly Khan Satchu, “Mumias is a blot on our capital markets.

We have seen a bifurcation over the last few years where some companies such as Safaricom, EABL and KCB have held themselves to a world class standard while others have ducked below the good governance bar. Mumias is the most egregious example,” he noted.

Mumias presents a very bitter lesson on how unabated mismanagement can destroy shareholder wealth, Mr Satchu added.

The magnitude of the decline came to the fore recently when long-term, single largest shareholder, Baloobhai Patel, exited the firm’s top 10 shareholder’s list selling his 17 million shares at a loss.

At the time of exit, his shares were worth Sh42.5 million. At the current price of Sh2 per share, his wealth would have contracted by over Sh6 million. Not long ago, his portfolio could have fetched Sh255 million at Sh15 and Sh1 billion at Sh60 per share.

LOST CONSIDERABLY

At the moment, according to Genghis Capital, the National Treasury is the biggest shareholder in Mumias with 20 per cent stake, followed by Standard Chartered nominee account KE17984 with 2.31 per cent, KCB with 1.72 per cent, Jubilee Insurance with 1.46 per cent, Abdul Karim Popat with 0.94 per cent, Suresh Varsani with 0.60 per cent, Pradeep Patani with 0.59 per cent, Yana Trading Limited with 0.56 per cent, Ramila Mavji and Harji Mavji Kerai with 0.49 per cent, CFC Stanbic Nominees Account R57601 with 0.45 per cent and Others with 70.89 per cent.

Local individuals own 868,440,132 shares, local institutions (552,223,439 shares) and foreign investors 109,336,429 shares. Painfully, local investors have seen their wealth shrink to Sh1.9 billion from Sh13 billion less than five years ago when the share traded at Sh15 apiece.

Anne Wanjau belongs to this band. Recently, she bought 277,200 shares at Sh3.23 each. With the stock trading at Sh2.20 currently, she has lost considerably.

“If I sell now, I’ll lose Sh300,000. If I continue to hold, I may lose more,” she says, betraying a bout of regret. Sailing in the same boat is Peterson Odhiambo.

A month ago, Mr Odhiambo bought 38,400 Mumias shares at Sh2.6 each with hope that the counter would rally to Sh3 or Sh4. “I invested Sh100,000, but today, my investment has lost Sh24,000,” he says.

97 PER CENT LOSS

From September 12, 2006, Mumias stock has contracted to Sh2 per share from an all-time high of Sh60 per share, handing investors 97 per cent loss. On Friday last week, the market capitalisation of Mumias fell to Sh3.44 billion from Sh3.52 billion recorded previously.

As Money found out, stock analysts fear that Mumias may be suspended from trading at the NSE if the poor run persists.

“Every penny investors pump in the stock is a speculative investment due to the risk of suspension and a depreciating fundamental value,” a research analyst at Genghis Capital Silha Rasugu said.

According to Eric Munywoki, a research analyst at Old Mutual Securities, “if a company begins to trade below its per value, the Capital Markets Authority may begin to consider the possibility of suspension,” he says.

The suspension of CMC from the NSE in September 2011 was due to fraud, lack of disclosure of financial statements and conflict of interest amongst board members. Mumias may end up following the same route if no remedy is availed, Mr Satchu noted.

Mr John Mbugua, a research analyst at Investax Capital illustrates using Uchumi Supermarket.

OPT TO EXIT

“In early 2000s, Uchumi started experiencing financial and operational difficulties that were caused by a sub-optimal expansion strategy, poor internal control systems and mismanagement,” he says.

Consequently, on May 31, 2006, the board of directors resolved that Uchumi stops business. On June 2, 2006, Debenture Holders placed it under receivership and the Capital Markets Authority suspended it from the bourse.

The government being the biggest shareholder hasn’t made things any better due to its reluctance to intervene in Mumias. “This suggests that the government could opt to exit and have the company privatised,” Mr Munywoki notes.

Mr Rasugu concurs, adding that such a plan could bring down production costs through factory modernisation, efficiency and uninterrupted business.

LITTERED BY LIABILITIES

However, losses and ongoing poor share run could see the miller lose its value.

“No private investor would be willing to buy a company littered by liabilities. Instead, they could bargain for assets only,” Mr Munywoki notes.

Strikingly, some securities firms advised their customers to walk away from Mumias. For instance, in August 2013, Sterling Capital asked shareholders to exit Mumias then trading at Sh4.32 per share.

This followed a profit warning issued by the company. By then, the share price had fallen from a high of Sh5.05 traded a month earlier.

“We singled out cane poaching, import competition, new entrants in the market and insufficient raw materials as some of the risk factors that would drive the company financials and share price downwards,” research analyst at Sterling Capital Moses Waireri told Money.

The company is yet to issue a profit warning despite the inevitability of suffering loss this year.

“This failure represents an internal dysfunction and even collapse,” says Mr Satchu. Worse, adds Mr Mbugua, “there is a possibility that the stock may go lower than Sh2 if Mumias announces a big loss in its full-year results.”

MONEY TIED UP

“Investors buying the stock or seeking to exit using averaging down strategy are doing so purely on personal speculations. Their manoeuvres will inevitably have to face off with the depreciating value of the counter,” cautions Mr Rasugu.

The firm’s reduced profitability has been due to heavy blows from cut-throat competition and contracting market share. Within four years, 11 sugar millers, five of which are private, have joined the market.

But in March, Mumias got a reprieve after Comesa extended safeguards against cheap imports from the bloc by a year. However, from March 2015, Mumias could be up for stiff competition as the safeguards end.

What happens to investor’s money if the stock is suspended from the bourse? “The money will be tied up in the stock until such a time that it can trade again,” says Mr Mbugua.

“As ordinary shareholders, the liability of the company lies only to their shareholding.” There is little that Capital Markets Authority will do when ordinary shareholders lodge complaints with it.