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Kenya’s TransCentury tries to steady the ship

By By Honoré Banda in Nairobi and Mark Anderson
Posted on Wednesday, 14 September 2016 09:43

Chief executive Gachao Kiuna resigned in January before the company reported a 2015 loss of KSh2.4bn ($23.8m) in May. The company blamed East Africa’s currency depreciations for part of its losses and pointed to the impact of lower copper prices on its cable business. The 12% depreciation of the Kenya shilling against the US dollar in 2015 raised the cost of repaying foreign-denominated debt due to be repaid this year.

TransCentury has yet to surmount its problems linked to a $80m bond that it issued in 2011. The company was due to pay the bondholders about $75m on 25 March or convert the debt into equity. The company did not have the cash and shareholders refused to have their stakes diluted. The capital market authority then warned that TransCentury could default. US-based Kuramo Capital Management came to the firm’s aid with a $20m capital injection, though terms of that deal have yet to be made public.

Aly-Khan Satchu, the investment analyst and founder of Rich Management, explains that the lack of clarity is not good for business: “It’s not clear now who’s really in control. You’ve had a private-equity company come in. It’s difficult to do the maths at this point and work out who’s holding the biggest stake.”

But the senior management has negotiated a six-month reprieve for bondholder payments. Satchu says the bond “was priced to the moon. Once that started to fall apart, it started to put pressure on the business.” Afreximbank, a development finance institution, announced in early July that it would help to turn TransCentury’s finances around by buying some of its outstanding bonds.

CABLES NEED SCRUTINY

Eric Musau, an analyst at Nairobi-based Standard Investment Bank, says TransCentury will take some time to recover but its fundamentals are strong. “The core business is actually quite good – it’s just the financing bit they have to worry about,” he explains. He adds that managers need to look into the performance of East African Cables (EAC), of which TransCentury holds a 64.3% share. Musau says that the copper cable business is “doing exceptionally well,” but that the aluminium cable business is foundering and EAC’s factory may be operating at just 20% capacity.

In August Transcentury posted a first half pretax profit of 1.19bn shillings up from a loss of 646.34m shillings over the same period in 2015. It said it had more than halved its financing costs from nearly 500m shillings last year to just 200m this year.

Satchu argues that TransCentury’s new chief executive – Nganga Njiinu, who was its former finance director – needs to be careful about his choice of direction, as previous takeovers have been problematic. He explains: “I suspect their acquisition of the road construction company Civicon [in 2011], which was very big in South Sudan, slowed them down. They took a hit on Rift Valley Railways (RVR). I think it was a perfect storm. There was a lack of focus as well.” TransCentury lost money on its investment in RVR, which runs a metre-gauge railway line linking the Kenyan port of Mombasa to the Ugandan capital, Kampala. It bought an initial stake in 2006 and sold off its shares in 2014.

TransCentury has been a home-grown success story. It was founded as a vehicle to invest the savings of a group of entrepreneurs and produced a record level of annual revenue – $158m – in 2012. The company listed on the Kenyan stock exchange in 2011, but its shares are now trading at less than 10% of their initial listing price of KSh60. TransCentury won a raft of government contracts when President Mwai Kibaki was in office – 2002 to 2013 – but is now finding it difficult to snag tenders under President Uhuru Kenyatta. Nairobi’s chattering classes point out that TransCentury bosses used to play golf with powerful people during the Kibaki days.

Now, TransCentury has been losing out on bids and has sought the intervention of the local courts to get government concessions overturned. Standard Investment Bank’s Musau argues that TransCentury has been too rosy-eyed in its annual reports about its ability to win government tenders. He explains: “I think their reporting was probably quite optimistic in terms of their outlook.”

BAD LOSERS

After TransCentury and its partners failed to win the rights to develop a 50MW geothermal project at Olkaria in August 2015, the company filed a case at the Nairobi high court. The court ruled TransCentury’s argument that it made the best offer was baseless and confirmed the award to Rentco East Africa and its partners. The company was also in court in 2015 over the bidding process for a contract to build a fuel depot at Jomo Kenyatta airport in Nairobi. TransCentury also crafted a losing bid to develop coal mines in the Mui Basin in 2014 and ended up in court and arbitration proceedings after falling out with US company ContourGlobal, which had subcontracted Civicon to help develop generation plants powered by the methane gas in Rwanda’s side of Lake Kivu in 2015.

One of the company’s recent focuses has been on renewable energy. TransCentury and its consortium partners, including US-based Aperture Green Power, signed a contract to develop a 50MW wind farm at Limuru in central Kenya in November 2014. They were due to break ground in 2015 but since have not made any announcements about the project’s progress. On a brighter note, the 35MW geothermal plant at Menengai that Civicon and its partners have developed was due to come online in July.

TransCentury has been a big proponent of East Africa’s economic potential, while also recognising that it lags in terms of electricity and other infrastructure development. But economic game-changers like the Lamu transport corridor and the exploitation of East Africa’s oil and gas reserves have been slow to materialise. Civicon had signed a two-year deal with Ireland’s Tullow, which holds oil acreage in Uganda, to help the oil company to build infrastructure in 2013. Although that deal has now expired and oil prices remain low, Uganda’s government has relaunched talks with investors seeking to build a refinery, which is a lynch pin to getting the country’s oil reserves developed. If TransCentury can sort out its current problems, it could be in a position to profit from the region’s continued growth and governments’ spending on infrastructure.

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