RECOVERY PLAN

Uchumi hopes to hit first profit by June 2020

Uchumi faces liquidation if its recovery plan, currently in court, is not approved

In Summary

• According to a recovery plan, the retailer is projected to make a net profit of Sh61.5 million as at June 30,2020.

• Uchumi is entangled in a land row with the Kenya Defence Forces over a 20-acre-Sh2.4 billion land in Kasarani.

Customers doing shopping at Uchumi supermarket. Photo/File
Customers doing shopping at Uchumi supermarket. Photo/File

Troubled retailer Uchumi Supermarkets is now counting on a Company Voluntary Arrangement (CVA) to bounce back to profitability after half a decade of poor perfomances amid liquidation traps.

The retailer has sought the services of financial advisory firm-InVhestia Africa Ltd to help resolves its financial woes, which has seen the development of a CVA to help restructure its debt and business optimization.

“Creditors and shareholders approved the CVA in May. The CVA is the first such plan in Kenya and is the surest way to revive Kenya's oldest retail chain. The CVA was filed in court and we await the court's decision,” the management told The Star yesterday.

According to the draft plan, the retailer is projected to make a net profit of Sh61.5 million as at June 30,2020, bouncing back from a net loss (provisional) of Sh515.9 million in the year ending June 2019.

The plan comes after the retailer left its creditors with no option but to forfeit Sh2.5 billion debt owed to them as part of the proposed recovery plan, with Uchumi paying 30 per cent of the accruing debt.

Fourty per cent will be converted to equity through preferential shares while 30 per cent will be discounted debt.

“In the event that the creditors reject the CVA then they will not be able to recover any portion of their debt,” the management has alluded where only 6.8 per cent of the balance sheet is recoverable once secured creditors are settled. This leaves its creditors with no option but to play ball.

According to Chief Executive Officer Mohamed Ahmed Mohamed, the arrangement will help Uchumi continue to trade, enhancing its ability to settle the negotiated creditor debts.

The CVA has lower set-up costs and is expected to support the retailer operate while protected from potential legal actions by creditors.

However if rejected, the alternatives available to creditors is having the retailer placed under administration, scheme of arrangement or liquidation.

Uchumi owes its creditors and suppliers over Sh3.9 billion which is way above its assets (Sh1.4billion) as at June 30 2018, meaning even if its assets are all sold, it will not be able to clear its debt.

The latest developments come even as Uchumi remains entangled in a land row with the Kenya Defence Forces(KDF) over its 20-acre land in Kasarani(near the Thika Road Mall), an asset Uchumi has been counting on to settle its debt.

The valuation of the property was Sh2.4 billion as at 2016.

The management had entered into an agreement with Kasarani Mall Limited, to liquidate the property in a bid to partially settle some of the debt and at the same time inject some liquidity into the business to finance working capital.

However, the KDF has laid claim on the land where it has moved some artillery on site.

“We are progressively engaging with the KDF,” Uchumi's management said yesterday, hoping to reach an agreement in the short term.

Uchumi's financial woes have seen it close more than 25 branches in the last three years, including shutting down its operations in Tanzania and Uganda in October 2015. It had a network of over 40 branches in Kenya, Uganda and Tanzania.

Its biggest blow included the closure of the Sarit Centre 'Hyper' branch in Westlands,which it shut in February last year after operating for 30 years.

Currently,the retailer is operating six franchised branches with an annual income of about Sh310 million and four fully flegded Uchumi branches, where annual turnover is estimated at Sh3.7 billion.

InVhestia Africa has advised on cost management, franchising and good governance.

“Management will pursue franchising of some of the branches and to lower operational costs and create alternative revenue sources,” the debt restructuring proposal and creditors plan, dubbed “Project Mara” reads in part.

The retailer has been making losses for more than four years now with the latest being being the Sh895 million after-tax loss for the year ended December 2017, which nearly doubled from Sh547 million recorded during a similar period the previous year.

Efforts by the government to inject capital to support its recovery has bore little fruits. The last capital injection was worth Sh1.8 billion which was to be released in tranches.

The proforma fincancials prepared by InVhestia Africa indicates after optimization, Uchumi's profit is expected to further jump to Sh347 million in 2021 and Sh452.7 million in 2022, as the retailer continues to clean its balance sheet off pending debts and realign its business.

By June 30, 2024, Uchumi is expected to have fully recovered with a profit after tax of 734 million and above.