Clays posts Shs2bn profit

Lack of major growth in sales remains an issue

Kampala, Uganda | ISAAC KHISA | Uganda Clays Limited has recorded a 70% growth in net profit to Shs2.17 billion for the six months ending June 30. The stellar performance comes on the back of its majority shareholder, the National Social Security Fund (NSSF) deciding to stop collecting interest on the loan advanced the clay construction material manufacturer.

NSSF which owns 32.5% of Uganda Clays extended Shs11 billion loan to UCL in 2010 to purchase machinery for increasing kiln output at Kamonkoli factory and purchase spares for the Kajjansi factory. The loan which attracted a 13-15% annual interest has swollen to Shs23.2 billion and become a strangle-hold on the ailing company. Considering UCL’s difficulties, NSSF decided to forego further interest on the loan and plans to convert its debts into equity.

George Inholo, the managing director of UCL said another fact that contributed to the surge in profits was reduction in operational costs.

“Control of costs of production continues to be a priority area in the business to ensure that there is consistent improvement in the gross margin,” he said.

The company’s financial numbers show that its costs of sales stood at Shs6.55 billion compared with Shs7.96 billion incurred during the same period in 2016. Lowering costs of production is a major achievement considering the overall rising costs in the economy.

In terms of total turnover, however, UCL recorded a mere 4% growth in revenue from Shs12.38 billion to Shs12.9 billion. Management blamed the lackluster market performance on the general tough operating environment in the economy including low liquidity, heightened food inflation due to long drought period, and the continued civil conflict in South Sudan that made the realisation of the revenue projections difficult. However, observers say the company’s lack of innovations in products offer since steel products encroached on the high-end construction materials that UCL had previously occupied remain a major cause of its poor market figures.

South Sudan, which was said to be UCL’s second largest market contributing 35 % of the company’s revenue descended into conflict in December 2013 and is unlike to offer positive turn-over any time soon.

Another factor to keep an eye on is UCL’s failure to learn from past mistakes and continued to raise the pay-cheques of its managers. Barely two months ago in July the company doubled the pay rise for the Board of Directors last July in fulfillment of the latter’s request citing improved profitability.

In 2016, UCL recorded a Shs2.3 billion net profit, up from a loss of Shs1.2 billion recorded in the previous year due to improved efficiency.

But revenue growth, which should be a major factor in the analysis of UCL’s long term profitability, grew by only 8% to Shs26 billion for the same period under review.

Going forward

Financial analysts says UCL has  tried to minimise operational costs especially with the switch from imported oil to fire its furnaces to coffee husks in 2015 but it still has more to do to maintain profit growth.

“Now that UCL is no longer on pressure to pay interest on the loan it acquired from NSSF, still it has to work harder to lower the operational costs further,” Salima Nakiboneka, a financial analyst at the South African-based firm, Stanlib said,  “ This is because it still faces stiff competition especially from the steel producing companies.”

Executives at UCL said management has intensified the marketing activities in the second half of the year in order to improve the revenue performance.

Earlier, the company executives said they also plan to establish a new plant in Rwanda to tap into the country’s construction industry and also venture into northern Tanzania, Democratic Republic of Congo, and Burundi.

Listed on the Uganda Stock Exchange in 2000, UCL registered a persistence growth in profits until 2009 when it registered a Shs707 million loss from a profit of Shs2.15 billion in 2008. It blamed the shift in performance on the effects of the global financial crisis. It has never recovered since.

Its woes were worsened with the timing of the establishment of the second plant at Kamonkoli, in eastern Uganda. The plant hiked the company’s operating expenses; especially for procurement of the heavy fuel used to dry the clay, at a time when the economy was slowing down dramatically.

The plunge into red led to negative investor sentiments on the USE which led to a drop in share price from Shs60 in 2009 to Shs12 at the moment.

The fortunes of UCL now lie majorly on the financial muscle of its main shareholders, including the National Insurance Corporation with 17.86 %, Central Bank of Kenya Employee Pension Fund,  Bank of Uganda Staff Retirement Plan, and  of course NSSF.

Others are Kenya Power and Lighting Company, Uganda Communications Employees Contribution Plan, Kenya Airways Staff Provident Fund, Uganda Development Bank, National Social Security Fund Staff Investment Plan, Joseph and Ketrah Tukuratiire and minority shareholders.