Retail chain Uchumi sank Sh2 billion deeper into the negative equity position, according to the belated 2016 financial results that were released late Monday, even as its auditors warned that the insolvency could be worse because the values of some assets are doubtful.
The erosion of Uchumi’s balance sheet and core retail business means the government must take quick and decisive action to bail out the retailer or offer guarantees to strategic investors who have been approached to provide new capital.
Uchumi has lately been operating on the goodwill of creditors, including suppliers, who are betting on an implicit State guarantee to continue doing business with the retailer.
The Treasury is a significant shareholder in Uchumi with a 14.6 per cent stake.
The Capital Markets Authority (CMA) has also allowed Uchumi’s shares to continue trading on the Nairobi Securities Exchange despite its negative net worth position, arguing doing so will make the investing public draw confidence from the government’s ownership.
Uchumi’s share price fell 3.3 per cent to Sh2.85 in Tuesday’s trading as speculators reacted to the latest reported results that stacked up Sh5 billion in assets against liabilities amounting to Sh7 billion in the year ended June 2016.
KMPG said the published results — which were delayed for months — are unreliable due to opacity relating to the retailer’s closed operations in Uganda and Tanzania besides uncertainty regarding the values of its non-current assets.
“The financial statements … were audited by KMPG Kenya who issued a disclaimer of opinion on the group’s financial statements due to lack of audit evidence on foreign subsidiaries up to the date of loss of control and a qualified opinion on company financial statements with regard to lack of audit evidence on property and equipment’s balances,” Uchumi said in a statement.
The doubtful properties form the bulk of the company’s Sh3.3 billion long-term assets and their potential downward revaluation will worsen the insolvency.
Uchumi’s former external auditors, Ernst & Young, in 2010 revalued the retailer’s assets upwards to Sh2.2 billion from Sh450 million, ignoring ownership disputes involving some of the properties, according to court documents.
The retailer, for instance, is fighting in court to keep a 20-acre piece of land in Nairobi’s Roysambu to which a group of alleged squatters has also laid claim.
The legal battles have thwarted Uchumi’s efforts to raise some Sh2 billion from sale of the assets, with the company intending to use the proceeds to pay creditors including suppliers.
The company’s loss-making subsidiaries in Uganda and Tanzania ceased operations in October 2015, leaving employees and suppliers unpaid.
The size of Uchumi’s pending obligations in those markets in not clear. The closure of the foreign operations more than halved the retailer’s sales to Sh6.4 billion in the year ended June, partly contributing to the Sh2.8 billion net loss recorded in the period.
Credit: Business Daily