When Uchumi Supermarket was put under receivership and suspended from the bourse six years ago, nobody thought that we would one day see Uchumi's return to the Nairobi Stock Exchange (NSE). One can hardly count the number of firms that have gone under in Kenya and returned from jaws of bankruptcy to post a healthy profit in modern day Kenya. Such is the miraculous story of Uchumi, I must say Mr Jonathan Ciano is one hell of a good manager and congratulations for his revival of one of Kenya's most loved Supermarket's.

Six years ago when Uchumi was suspended from the NSE it had massive debts totaling Ksh 957 Million belonging to the Kenya Commercial Bank and PTA Bank. Since then under the leadership of Mr Ciano Uchumi has been able to repay those debts and grow shareholder funds to Ksh 1.5 Billion. Uchumi's return to the stock exchange will help unlock almost Ksh 2.6 Billion belonging to 19000 shareholders. Uchumi had 180 Million issued shares at the time of suspension, 86 million more shares after it's debts were converted to Equity.

Analysis of Uchumi's 2010-11 Results

Customer numbers up 4.5%
Net Sales: Ksh 5.8B vs 5.2B UP 11%
Profit after Tax: Ksh 0.162B vs Ksh 0.110B up 40%
Basic EPS: 0.9
Diluted EPS: 0.6

In End Year 2009-10 Basic EPS was Ksh 4.8 (Ksh 2.39 minus Tax Credit) after customer numbers grew by 11%

Net Average Value as at 31 December 2010=Ksh12.85

Projections

We project EPS will rise by 20% ( 1H PAT of 162X2 add Tax credit of 250=Ksh 574 Million) above 2009-10 EPS of Ksh 4.81 that will equate to an End Year (EY) EPS of Ksh 5.77 because the 1Q of the period June to December is always slow. At an opening price of Ksh 14.50 Uchumi would trade a projected PE of 2.5 which is quite cheap but the Price to Book Value will be 1.2 which is quite low too.

Challenges Ahead

1. Competition-Uchumi lost market share while it was in the doldrums, the Kenyan retail segment has seen the entrance of new players such as Naivas all fighting for the same cake. The expansion of Nakumatt and Tusky's has brought shopping closer to home. The T- Mall for example reduced dependence on Uchumi Langata Road which was for a long time the closest supermarket.

2. Super Inflation-Inflation reached a record high of 12% in April due to high oil prices, inflation will erode individuals disposable income which can lead to low sales for the supermarket chain.

3. Drought-can lead to supply disruptions

Opportunities Ahead

1.Expansion-with its return to profit making territory, Uchumi can easily receive new capital injection to go on a regional expansion in hunt of new customers

2. Brand-Uchumi can leverage on its brand loyalty to drive more sales

Recommendation

We rate Uchumi as a SPECULATIVE BUY owing to its low projected PER and Book Value but our PROJECTED EPS carry a HUGE TAX CREDIT of Ksh 250 Million ( it could be higher I dont know how its calculated) which has been offered to Uchumi until it posts profits of Ksh 1.9 Billion otherwise our earnings per share would have been low, other positives include GOOD operating margins of 4.2% which are in line with regional retailers such as Shoprite ( 5.2%) and a positive cash flow of Ksh 60 Million for year end 2009.

Written by Davis Mika read more on his blog here