Mumias Sugar is Kenya’s largest sugar producer.
It’s also its most prominent penny stock.
With a price that currently hovers around KES1.00 per share, no other Kenyan stock is as accessible to individual investors. If you have KES100.00 in your pocket, you can open a brokerage account and buy 100 shares of the company.
This low barrier to entry makes Mumias the subject of an inordinate amount of ill-advised speculation.
The stock has plunged 79.0% since February 2013. And the company’s latest earnings report suggests that buying its shares continues to be a recipe for indigestion.
Reasons to Sell Mumias
Here are four red flags investors would be wise to heed.
1. A KES1.9 billion earnings loss
And that’s just for the first six months of the 2018 fiscal year. Granted, the company shuttered its milling operation for three months during the period due to a shortage of sugar cane, but the loss is far from an anomaly. Mumias hasn’t posted a profit since June 2012.
Obviously, this is an unsustainable trend.Unfavorable weather conditions, cane poaching, and a deteriorating relationship with its suppliers have made the acquisition of raw material a continual challenge.
The company has branched into ethanol, electricity production, and drinking water, but thus far it hasn’t done much to stem the firm’s decline.
2. Negative free cash flow
I’m willing to overlook an occasional earnings loss if the company in question is generating cash. Depreciation and other non-cash charges can sometimes mask a strong operation in the midst of a turnaround.
Alas, Mumias hasn’t enjoyed positive free cash flow since its 2014 fiscal year. The company may as well have used wads of shillings to fuel its cogeneration plants.
3. A crippling debt burden
Because Mumias burns through so much cash, it’s forced to rely on loans and government bailouts just to keep the lights on.
The company is now hobbled with nearly KES10 billion worth of non-current liabilities. Much of this figure is comprised of borrowings that came at a cost of KES781 million in the first half of the year alone.
What’s more, Mumias’ lenders aren’t happy. Three banks have just recalled KES2.0 billion worth of loans to the company.
4. Negative equity
An investor that buys Mumias today is buying a company that is worth less than zero. It’s worth negative KES0.78 oer share to be exact.
A reasonable investor might buy a stock whose liabilities outweigh its assets if it believes a massive turnaround is imminent or if the company’s assets are understated. Neither appears to be the case.
In short, Mumias looks headed for liquidation, and when it goes, there likely won’t be anything left to compensate the company’s long-suffering shareholders.
Have I missed something about Mumias? Let’s hear your thoughts on the stock in the comments.
Disclosure: At time of publication, I held no shares of any company mentioned above.
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