‘We were victims of our own success’, ARM’s Pradeep on sell of non cement business

Regional cement maker ARM Cement PLC (NSE: ARM) says the firm was a victim of its own success that led to the sale of its non-cement business in an effort of raising cash to grow its core business.

Chief executive Pradeep Paunrana in an exclusive interview with Mr Steve Biko, CEO Soko Directory said the firm did not have the capital to continue putting the product (fertiliser) in the market.

“The balance sheet of the company under one group was stretched, either we invest in cement or fertilizer. There was no way we could continue to grow in fertiliser business,” said Paunrana.

ARM Cement PLC subsidiaries that deal in fertiliser blending, processing of industrial minerals and chemicals, and building products include  Mavuno Fertilizer, ARM Minerals and Chemicals.

“We grew a phenomenally successful brand and product in Mavuno fertiliser, but we did not have the balance sheet to continue putting the product in the market. We were victims of own success. We were inviting competition to continue what we did,” he added.

Paunrana notes the board of directors realised it was better to the sell the business and whatever would be realized, put into the cement business.

“The cement business is long term which is capital intensive. We want to focus solely with that. That is what we did,” says Paunrana.

Below are the key reasons why the company resolved to sell their subsidiaries:

“The strategy of the company was to build a very strong company. What we found, the growth of the fertiliser business required strong balance sheets of its own.

Most of the fertiliser business arise from government business and also it varies year to year because the government has such a big intervention in the market and the pricing.

Farmers do not buy fertiliser until they see the first rain drops. They need 3 to 4 weeks of rain to make use of the fertiliser.

Ideally, you need to have all the types of fertilisers required during the planting season countrywide on delivered on the same day.

What it meant, you have to prepare your product 4 months in advance, manufacture and have it in the distribution value chain where people could buy, use and wait for about 90 to 100 days to get paid.

The working capital required is enormous and you still do not get paid for over 120 days. it takes a long cycle.”

From the company’s 43rd Annual Report and Financial Statements 2016, Rick Ashley, the Chairman  then (has stepped down from board chairman position to take up an executive role in the firm) said, “These divisions require investment to grow capacity and meet their market demand and the Board had been considering several strategic alternatives.”

“In order to remain focused on the cement business, the Company has decided to exit all of our non-cement businesses.”

Currently, the company has entered into an agreement with Omya (Schweiz) AG of Switzerland and Pinner Heights limited of Mauritius for the sale of 100 percent of the shares in the subsidiaries.

The company said 2017 was a year of financial and operational consolidation for the Company.

“The Company has decided to complete the expansion of the Athi River cement grinding plant, thereby increasing the Kenya capacity by 650,000 tons per year.

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This will be the first increase of capacity in Kenya since the company commissioned its Athi River plant in 2010,” said Ashley.

The non-cement unit made a pre-tax profit of KSh 499.2 million in the financial year ending December 2016, rising 5.7 times from KSh 86.5 million in 2015.

In the first 3 months of 2017, net debt was reduced by Ksh 200 million and net working capital by Ksh 300 million.

The company has initiated a process to secure a fresh equity injection from a strategic, long-term minded investor.

“Once completed, the Company’s balance sheet will have the right maturity and interest expense profiles,” as per the unaudited Group results for the Half Year ended 30th June 2017.