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East African Cables facing financial crisis

Saturday April 02 2016

Listed cable manufacturer East African Cables is sinking into a financial hole that has left shareholders with a dividend drought, and analysts projecting difficulties in financing the company’s day-to-day operations.

Given its current state of finances, analysts said the company will have to look for new capital and expand its revenue generating activities to stay afloat.

The company, which is owned 68.38 per cent by TransCentury Ltd, is facing insolvency after running out of cash to pay off its short-term debts for the year ended December 31, 2015.

It has emerged that 11 firms owed it a total of Ksh66.85 million ($648,085) as at September 30, 2015, for goods supplied but not paid for.

Interestingly, among the debtors, according to sources, are firms owned by individuals who are also directors of TransCentury and East African Cables in total breach of corporate governance principles.

Through its financial statements, the firm acknowledged that debt recovery had been facing challenges.

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“Though collection efforts are in place to recover these debts, the group found it prudent to carry a provision on these receivables,’ said company secretary, Virginia Ndunge.

The firm, which is listed on the Nairobi Securities Exchange is operating on a negative working capital of Ksh210 million ($2.03 million).

“I think the company seems to be in a precarious position based on economic dynamics,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa Asset Managers. “The company is not generating enough revenue and has a problem in funding short term obligations like paying salaries.”

East African Cables’ current assets and current liabilities stand at Ksh2.94 billion ($28.5 million)  and Ksh3.15 billion ($30.53 million) respectively, putting the company’s key liquidity ratio (current ratio) at 0.93.

“It means the company’s liabilities cannot be covered by its assets,” said Amish Gupta, director-in-charge of investment banking at Standard Investment Bank.

The working capital ratio is calculated by dividing short-term (current) assets by short-term (current) liabilities.

A ratio lower than one  implies that the company’s financial position is not stable and it will struggle to fund its daily operations and meet its short term debt obligations when they fall due.

East African Cables’ posted a loss of Ksh741.2 million ($7.18 million) last year from a profit of Ksh341.14 million ($3.3 million) in 2014. Its revenues dropped 26 per cent to Ksh3.72 billion ($36.06 million) from Ksh5.09 billion ($49.34 million) the previous year. Total impairment of receivables stood at Ksh329 million ($3.18 million). Loss per share stood at Ksh2.21 ($0.02)  compared with earnings per share of Ksh1.16 ($0.01) in 2014.

The company blamed the overall decline in profitability on non-payment by debtors, foreign exchange losses due to depreciation of regional currencies against the US dollar, low demand in regional export markets and a decline in London Metal Exchange prices.

EAC made a profit of Ksh398.2 million ($3.86 million) and Ksh522 million ($5.06 million) in 2013 and 2012 respectively. Last year the company did not declare dividends to shareholders.

Its stock on the NSE last week Wednesday has declined 8.05 per cent to Ksh6.85 ($0.06) per share from Ksh7.45 ($0.07) per share on Tuesday.

East African Cables is an electrical cables and conductors producer with two manufacturing facilities in Nairobi and one in Dar es Salaam. Its products include low voltage copper electrical cables for domestic and industrial use, aluminium conductors and cables for power transmission and distribution.

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