Feature of the week:
Centum Posts 82.1% Improvement in After Tax Loss for the FY2020/21
Centum reported an 82.1% decline in the company’s after tax loss to a loss of KES 606.0 million from a loss of KES 4.4 billion registered in FY2019/20(“FY2020”). The improvement was on the primarily on the back of lower impairment provision on assets and a decrease in finance costs.
Investment and other income declined by 58.9% y/y to KES 1.5 billion. According to management this was due to lower dividend income (as portfolio companies withheld cash to preserve liquidity) as well as an unfavorable environment for exits in FY2020/21(“FY2021”) therefore no gains were realized (FY2020: booked gain worth KES 2.2 billion in the income statement from exit of Almasi Beverages and Nairobi bottlers).
Operating and administrative costs fell by 25.3% y/y to KES 669.0 million. This was attributed to cost containment measures effected by the company.
Finance costs decreased by 66.8% y/y to KES 603.0 million as the company benefited from the deleveraging initiatives such as the redemption of the KES 6.6 billion bond. According to management, this was aimed at strengthening the company against any future economic shocks.
The decline in operating and finance costs was however not enough to cushion against the decline investment and other income. As a result, total operating profit fell by 75.1% y/y to KES 245.0 million (FY2020: KES 985.0 million).
Impairment provision on assets declined by 75.1% to KES 1.1 billion. The impairment related mostly to assets in the development portfolio that were previously carried at cost. According to management, the impairment was in line with the company’s conservative asset valuation policy and the prevailing economic conditions.
Income tax expense fell by 72.4% y/y KES 220.0 million due to a tax credit.
The Net Asset Value per Share (NAVPS) declined to KES 62.85 from KES 71.29 in FY2020. The decline was attributed to the KES 606.0 million loss in the period, unrealized fair value loss of KES 4.2 billion through other comprehensive income and KES 799.0 million FY2020 dividend that was paid during the year.
The board of directors has recommended the payment of a first and final dividend of KES 0.33 per share (FY2020: KES 1.2 per share). According to management, the divided was lowered on account of economic uncertainty and the need to build resilience.
Portfolio Performance Highlights:
Real Estate
The real estate business segment represented 63.5% of the Net Asset Value (NAV) and 63.5% of total assets. Units under construction are worth KES 4.5 billion with 63.0% pre-sold. Two Rivers Development Limited (TRDL) recorded a loss of KES 1.9 billion driven mainly by high finance costs attributed to the underlying capital structure. Centum currently holds 58.0% equity stake in TRDL. According to management, Centum is focused on reducing the debt costs with an aim to fund TRDL mainly through equity. This will lower the company’s stake in TRDL.
Private Equity
Private equity represented 18.5% of NAV and 20.5% of total assets. Total private equity assets stood at KES 9.8 billion in FY2021. According to management 5 out of 9 portfolio companies were profitable in FY2021.
Sidian Bank registered an improvement in performance to a profit after tax of KES 102.0 million in 1Q2021 from a loss of KES 86.0 million in June 2020. The NPL ratio improved to 11.0% from 20.0% with the bulk of the NPLs on the old loan book. According to management, the bank shifted to short term lending (cashflow based) and focused on growing non-funded income.
Longhorn was adversely effected by the COVID-19 pandemic with recovery expected by the company in 2021.
Centum’s private equity exits were paused owing to the adverse effects of the COVID-19 pandemic.
Marketable Securities
Marketable securities amounted to KES 7.5 billion allocated as follows; 72.1% in fixed income, 6.2% in mutual funds, 20.7% in cash and 0.9% in equities.
The company achieved annualized gross return of 12.0%, net of fees and taxes by March 2021, dampened by a gradual shift from equities which underperformed.
Development Portfolio
AMU power project is still facing delays.
Commentary
The performance was expected given the harsh operating environment.
The contribution of real estate segment to NAV is still at a level that we feel poses some concentration risk to the company. However, with creation of a separate real estate subsidiary, Centum Re – which accounts for 49.0% of company’s NAV, we do a see a possibility where the company could offload its stake(currently owns 100.0%) in the company to a strategic or financial buyer. This provides a much quicker path to reduce the concentration risk.
We are NEUTRAL on Centum.
Equities Market Summary:
Nairobi Securities Exchange Performance
The All Share Index (NASI) and the NSE 20 Share Index eased by 0.8% w/w and 0.4% w/w to close the week at 177.52 and 1,974.29 respectively. Market turnover fell by 7.9% to KES 1.7 billion while the volume of shares traded rose by 13.5% to 55.2 million shares. We partly attribute the decline in the NASI to a price decline on Safaricom Plc (2.0% w/w to KES 41.95). EABL’s share price also dropped by 2.7% w/w to KES 179.50 following the group’s announcement of a 0.9% y/y decline in after tax profit to KES 7.0 billion and the absence of a dividend for the year.
Centum’s share price fell by 12.0% w/w to KES 15.45. The company reported a loss of KES 606.0 million for FY2021 which was an improvement from the KES 4.4 billion loss registered in FY2019/20(“FY2020”). The board however recommended a much lower dividend of KES 0.33 per share (FY2020: KES 1.2 per share).
In the banking sector, most of the counters recorded price gains; I&M (3.6% w/w to KES 22.95), Co-op (3.4% w/w to KES 13.55), KCB (2.6% w/w to KES 45.70), Equity (2.2% w/w to KES 48.90), NCBA (1.5% w/w to KES 26.55) and DTB (1.2% w/w to KES 65.75). We attribute this to speculative activity ahead of the 1H2021 results release. We expect activity on banking counters to remain high.
*We are currently updating our recommendations