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Malcolm X

Wednesday, 6 April 2011

ANALYSING MUMIAS SUGAR COMPANY


One week ago it was reported that Kenya could gain temporary reprieve of COMESA safeguards against unlimited importation of sugar from the bloc's members if it shows tangible progress in privatizing its state-owned sugar companies by the time the safeguards expire in February 2012.
The Kenya Government has stated that it will request for an extension if the privatisations are not completed in time. It is hard seeing that request turned down as the Government is not likely to accept much cheaper sugar in its borders to the detriment of the local industry plus the thousand of jobs it provides both directly and indirectly. Kenyan sugar companies are also clearly not ready.

This has prompted me to cast my eye back onto the Mumias Sugar Company (MSC) share.

SWOT ANALYSIS

STRENGTHS
Diversification: Mumias has embarked on a major diversification project which includes ethanol production, electricity generation and production of bottled water. All these are a by-product of the sugar producing process. MSC intends to embark on producing ethanol by December 2011 and projects to be producing 22 million litres of ethanol annually. Half of this project will be funded by internal sources while the other half is funded through debt financing. The engineering, procurement and construction of the 46 million dollar facility in Mumias is being undertaken by Avant Garde of India.

Brand Name: MSC is the market leader in the sugar industry. Indeed it produces half of Kenyan sugar. The middle class are known to appreciate established brands. Kenya is currently experiencing a surge in the middle class population due to recent economic growth. This will mean a shift from unbranded to branded products. MSC has been in the sugar business for decades and is thus the premier brand around.

Global Sugar Prices: A sustained rise in global prices of sugar is favourable to MSC.
International prices of sugar have remained high. Granted, MSC does not export much of its sugar.But this price trend could help cushion Kenya from increased competition when all special safeguards are eventually lifted. This is so as suppliers from COMESA have been diverting their stocks to better paying European, American and Asian markets, bringing some relief to local producers highly disadvantaged by high cost of production and inefficient production systems.

WEAKNESSES
Poor Road Transport Network: This makes it impossible to transport cane to the factory during adverse weather and subsequently, depresses the amount of sugar produced.

Reliability on Rain-fed Growing: This is more expensive than irrigation. TARDA aims to address this.


OPPORTUNITIES
TARDA Project: Mumias has stated that it is the final stages of singing agreements after weathering a barrage of criticisms by nature conservationists. Growing of cane at the Coast offers many advantages:
Cane will be able to mature faster.
Sucrose content in the sugarcane will increase.
The cost will reduce considerably by growing cane via irrigation as opposed via rain-fed growing.

Consequently, the TARDA Project will result in an additional 38MW of electricity and 40 million litres of ethanol. MSC though needs to move fast to implement this project as it has been dragging for far to long.

Petrol Blending: Sometime last year, it was recommended that petrol sold in Kenya be blended with 10 percent ethanol. This is a huge opportunity for Mumias to find a local market for its ethanol production. Though exactly when this will take off has been shrouded in the secrecy that usually surrounds Kenya's Energy Ministry

Acquisitions: MSC has not hidden its desire to acquire 1 or 2 sugar companies in the recent privatisation of Kenyan sugar companies. It will tap into its vast experience in the sugar industry in order to restructure the companies and bolster their performance. This is part of a larger plan to spend more than $300 million on sugar mill acquisitions in Kenya, Uganda and Tanzania.

THREATS
COMESA: Even though the safeguards may be extended, they will ultimately be stopped. It is yet to be seen how MSC will fare with full throttle competition from sugar producing COMESA countries.

Labour disputes: MSC has been accused of underpaying its farmers. This prompted  some Members of Parliament (MP's) to call for its de-listing.

Disputes with KPLC: KPLC has at times defended itself that at night when demand goes down in Western Kenya power generation had to be lowered to achieve acceptable levels of voltages in the region.They have previously refused to buy all the power that MSC generates which goes against the Power Purchase Agreement. This particular issue was settled though, and it is hoped that it will not come up again.

VERDICT
It is my opinion that Mumias Sugar Company holds tremendous growth opportunities for the next couple of years. I would buy and hold for at least 3 years at the current price of below Kshs. 10.

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