Should Kenya Railways sell shares to pay SGR debts?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

20 October 2019

Robin James says wants to know if the Kenya Railways Corporation can sell shares through an Initial Public Offering (IPO) in order to raise money to pay off the loans taken for the Standard Gauge Railway project (SGR). He writes:

“I know without a doubt that Kenya Railway Corporation (KRC) assets outstrip those of Safaricom. Liabilities are another case. That said, the latter has issued 40,000million shares which today are valued at Sh1.2trillion give or take.

“The question now is, why doesn't the KRC float a similar if not higher number of shares through an IPO and use the proceeds to offset its outstanding loans?”

This sounds like a good idea until we look at the numbers. First of all, Safaricom shares were sold for Sh5 during the IPO in 2008. Only 10 billion shares were offloaded and these raised Sh50 billion for the government. The total valuation of the company at that time was Sh200 billion.

Secondly, in 2008 IPO, Safaricom made a profit of Sh13 billion after taxes and had net assets valued at Sh43 billion (total assets were Sh74B and liabilities were Sh32B). Out of the Sh43B net assets, there was a figure of Sh37B in accumulated retained profits; that is, profits that were not paid out as dividends over the preceding years.

Kenya Railways is in a different position. To start with, current audited financial reports are not available. The latest one posted at the Auditor Generals website is for the year ending on 30th June 2016 – three years old. That doesn’t inspire much confidence to a potential investor.

Nevertheless, in 2016, KRC made a profit of SH575 million and had total assets valued at Sh306 billion – four times those of Safaricom in 2008. The liabilities were Sh256B, thus, it’s net worth was Sh53B.

But, unlike Safaricom, KRC had accumulated losses to the tune of Sh18 billion (Safaricom had Sh37B retained profits in 2008). Because of this, it is unlikely that KRC will pay any dividends even if it makes a profit.

Indeed, the only reason this corporation is solvent is that it has been getting government grants over the years – about Sh70B in total!

With such a state of affairs, it is difficult to attract investors to buy shares in KRC…unless they are sold at a through away price!

At the time of the Safaricom IPO, there was a claim by some politicians that the Sh5 per share was too low. Obviously, they had not looked at the books. Had they done so they would have realised that this was a very high price!

Finally, this question brings out one mistake that many people make when assessing the value of a company – they ignore the liabilities. I have observed this in discussions about Kenya Airways and Mumias Sugar Company.

Many commentators only look at the assets and claim that a company is valuable. However, any investor buying it will not just take over the assets, but the liabilities as well. If there are pending debts, the new owner will have to pay them off.