E. A. Portland Cement (PORT) shares rose 3.37% to settle at Ks23 on Friday. The gain came on the back of the announcement of a major restructuring plan by the company that will take out more than two-thirds of its workforce.
E. A. Portland Cement, whose brands include Blue Triangle Cement, says it has nearly 2,000 employees, yet it only needs 500 workers. Therefore, the management has embarked on shedding the excess fat.
The restructuring move comes after the company reported Ks1.6 billion in operating loss for its fiscal 2016 (or FY2016), which ended June 30. The loss widened from Ks0.58 billion in the prior year.
But the company has been weighed down by ballooning labor costs, which is the problem the management is now looking to solve by announcing mass layoff of more than 1,000 workers. E. A. Portland Cement expects the restructuring to cost it Ks2 billion, but company chairman Bill Lay called that an investment that would be recouped in two years.
From an investor perspective, E. A. Portland Cement’s decision to lay off more than two-thirds of its workforce is a great move. It should save the company billions of shillings that could be reinvested in more growth to drive future profitability and dividends. That is why investors bullish on the company’s prospects pushed the stock up in the last trading day.
As E. A. Portland Cement enters restructuring phase, sharp rises in the stock are likely to be limited as a wait-and-see attitude enters some investors. However, some investors will still be looking to enter the stock in the dip as they look forward to a brighter future.
Sealing revenue leakages
In addition to sending home excess workers to save on operating costs and enter sustainable profitability, E. A. Portland Cement has also embarked on a process of auditing its system to see where loopholes for stealing exist so that it can seal them once and for all. Although the management didn’t say it outright, it seems part of E. A. Portland Cement’s woes stem from corrupt employees stealing from the company to attain quick riches. That is why the company has hired Ernst & Young to help it identify potential revenue leakages.
If the company succeeds in sealing the loopholes, it should see an uptick in sales that would in turn boost earnings. E. A. Portland Cement reported revenue of Ks8.87 billion for FY2016, up 5.4% from FY2015.
No debt here
E. A. Portland Cement is taking what seems to be a low-cost restructuring path. The company is not taking new debt to fund the restructuring program. Instead, E. A. Portland Cement is monetizing a portion of its 14,000 acres of land to raise money for employee severance, outstanding debt repayment and facility upgrade. As such, the company is selling 2,000 acres of its land holding to the government of Kenya to raise Ks10 billion.
E. A. Portland Cement is taking what seems to be a low-cost restructuring path. The company is not taking new debt to fund the restructuring program. Instead, E. A. Portland Cement is monetizing a portion of its 14,000 acres of land to raise money for employee severance, outstanding debt repayment and facility upgrade. As such, the company is selling 2,000 acres of its land holding to the government of Kenya to raise Ks10 billion.
E. A. Portland Cement intends to spend Ks2 billion from the land transaction to send home the more than 1,000 workers, Ks6 billion to repay debts and the remaining Ks2 billion to modernize and expand its factory.
If you read between the lines, the fact that E. A. Portland Cement is expanding its capacity instead of scaling it down seems to offer clue to the company’s bright prospects. The important question to ask is, if there is no demand for the company’s products why increase capacity? The answer seems to be that demand for cement is there but inefficiencies have held the company back from taking advantage of the favorable market conditions.
East Africa is still a developing region with more schools, colleges and universities to be built or upgraded. Newly affluent East Africans are also investing aggressively in real estate. All these activities require use of cement and that indicates a huge market potential for cement companies like E. A. Portland Cement.
The government of Kenya owns 25.3% equity stake in E. A. Portland Cement, while another state agency National Social Security Fund (NSSF) owns 27% of the company. LafargeHolcim, a multinational company with interest in building materials, owns 41.7% of E. A. Portland Cement.
LafargeHolcim is also a large investor in Bamburi Cement (BAMB), a competitor of E. A. Portland Cement.
As of Friday, November 17, E. A. Portland Cement stock was down 50% year-to-date. The stock has rallied between a low of Ks20.25 and a high of Ks56 over the last one year.
E. A. Portland Cement has a market cap of Ks2 billion.
Thanks for the explanation!
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