NAIROBI, JUNE 6 — Cement manufacturer ARM recorded a net loss of Ksh6.55 billion for the year ended December 2017, sinking deeper into losses as the company struggled with low sales.
The loss widened from Ksh2.80 billion the company posted in 2016. Its turnover (revenues from sales) dipped 32 per cent to Ksh8.7 billion from Ksh12.8 billion the previous year.
The Nairobi Securities Exchange listed firm has now blamed its woes to the Tanzania government’s move to ban coal imports which it says affected its operations in the neighbouring country.
This coupled with stiff competition from other players and the slowdown of Kenya’s economy as a result of last year prolonged general election proved difficult for the company to make gains in the cement market, managing director Pradeep Paunrana said.
“2017 was the most challenging for the group since the company’s listing on the Nairobi Securities Exchange in 1997. Whilst the management has navigated many business difficulties well in the past, raised capital for expansion, increased net profits and market capitalization continuously over a 14 year period up to 2015, the challenges of the past year have been unprecedented,” Paunrana said in the firm’s financial statement.
Demand for cement in Kenya was subdued, largely due to the elections, the management noted saying the first elections held in August and the re-run in November had a tremendous impact on demand, especially in the second half of the year.
During the period, liquidity in the Kenyan market was tight and the excess capacity in the market resulted in price pressures with every manufacturer embarking on price reduction strategy to maintain volumes.
The construction sector in Kenya declined and the overall demand for cement dropped by about 7.8 per cent.
“Similarly, the Tanzanian cement industry was also operating in a very challenging environment. The government ban on coal imports had significant impact on production as the Tanga clinker plant,” the company said.
The production of coal in Tanzania is in Songea, about 1,400 kilometres away from Tanga clinker plant and logistics planning was a major challenge for the company, it says.
“In addition, new capacity was added with the entry of a new cement player in Southern Tanzania. Two of the existing cement players in Tanzania increased capacity and the overall cement supply was significantly higher than demand,” the management said.
Some of the manufacturers used a price reduction strategy in an attempt to maintain or increase sales as a result of the competition. This resulted in cement prices falling by more than 30 per cent in Tanzania.
“The net impact was that the group performance was impacted by coal in terms of capacity utilization and price in terms of profitability. The group continued to operate in select market segments to ensure market presence and market stability,” ARM management said.
The group is undergoing a significant review of current operations, asset base and financing structure to address company specific challenges, the firm said.
In the short term, the group aims to reduce financing costs and is engaging with existing and potential new lenders to restructure the current debt levels, while reviewing regional strategy to identify possible assets to offload (similarly to financial year 2017 announcement on the sale of non-cement assets).
It is also strengthening the current management structure with an eye toward bringing in new talent to assist in turnaround efforts. The company is counting on new financial and turnaround experts expected on board.
The group anticipates providing shareholders with an interim update of its efforts within 90 days
The cement maker is positive on the Kenyan market which has begun to grow again driven by the stability of the government and investments into infrastructure and housing.
“The power supply in Kenya has been stable and volumes as well as prices have stabilized on the back of growing markets,” the management noted.
In Tanzania, the group is engaging the government and stakeholders to resolve the coal situation and improve availability.
“The coal production at the existing mine and the supply position has improved. In the meanwhile, the prices have firmed and stabilized as demand has started growing driven mainly by the investments into the infrastructure segment and start of construction on the new SGR,” it said.
The company confirmed it has started supplying clinker to several cement manufacturers in Tanzania and into Kenya, Rwanda,Burindi and DR Congo. The group hopes to significantly improve the capacity utilization in Tanzania this year.
“The directors have embarked on a financial restructuring plan for the company which includes equity injection and replacement of expensive short-term loans by long-term loan facilities. They are confident that post restructure the company will be well capitalized to operate its plants to capacity and bring the operations back to profitability”.