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Malee Sampran
Plc, the Thai investor selected by President Yoweri Museveni to lease the
state-owned Dairy Corporation for US$1 for three years is financially
weak.
Its capability to meet its obligations to the Uganda
government is highly doubtful.
Using a qualified Chartered Accountant,
The Monitor carried out a professional analysis of the accounts published
by Malee on the internet.
The analysis reveals that while the
President may have the correct strategic goal of attracting a large
international investor to set up a dairy and fruit processing plant in the
country, the procedure of handpicking the investor on the basis of a
factory inspection was inadequate given as no due diligence was done to
establish the financial capability of Malee Sampran.
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ORDERED: President
Museveni |
Museveni
offered Dairy Corporation to Malee for a dollar for a three-year lease
"market testing period," following which he expects the Thais to invest in
a new multi-million dollar dairy and fruit processing factory.
The
company is active in the fruit and dairy processing sector in Thailand and
has large factories which have been visited by Museveni.
However
the company's financials reveal that Malee is clearly in no position to
make a multi-million dollar investment in a new project.
According to
the company's accounts, Malee's sales turnover in 2003 was US$42.2
million, falling to US$40.86 in 2004. While a drop in turnover of this
magnitude is neither abnormal nor unprecedented, the company's gross
profit margin in the two years was only US$8.2 to 8.4 million.
The
gross profit is therefore only 21% of turnover, compared to what The
Monitor's consulting accountant said was the normal range of
40-75%.
More troubling is the fact that the company's profit and loss
track record has been one of consistent loss making.
Malee Sampran
declared losses of US$ 3.8 million in 2002, $1.01 million in 2003 and
$0.247 million in 2004.
The balance sheet shows accumulated losses
of $30.137 million, which indicates that losses for earlier years have
been much higher and the company is only approaching break-even point for
its first time in 2005.
While this trend shows that Malee's profit
performance is improving steadily, it is not generating the kind of cash
profit it would need to finance a new venture and support the losses that
a new venture in Uganda would make for the first several years of the
project's life.
The company is only just coming above water as a
performer in the Thai market.
Further analysis of the accounts, by
The Monitor, show that Malee's loss-making history has left it with a very
weak working capital position. The company had only $320,000 in cash and
bank balances at the end of 2004.
Its ratio of current assets:current
liabilities is 0.6:1, far below the desired ratio of 2:1, which is
considered firm according to conventional accounting
analysis.
Accountants have a second ratio they consider to assess
working capital called the "Acid Test Ratio," which examines current
assets minus stock, compared to current liabilities. While the recommended
ratio is 1:1, Malee's ratio is 0.2:1.
What the above two ratios
assist in analysing is whether the company can pay off all its current
liabilities, such as supplier debts, utilities and bank overdrafts, on the
strength of its current assets, such as cash, bank balances and
collectable debts due to it, as well as production stocks. Malee's current
assets are US$25.15 million while its current liabilities are $45.6
million.
The recommended ratios take into account the likelihood
that considerable percentages of the current assets might not be
convertible into cash either because they are bad debts or because they
are production stocks, which could attract forced sale prices below their
book values.
Malee Sampran's low balance sheet ratios show that
the company is very low on working capital and is indebted to an unhealthy
degree. Malee does not have enough cash and liquidatable current assets to
pay off its short-term debts.
Malee's balance sheet also shows that
while its total equity is only US$ 2.159 million, its cumulative loss is
$30.137 million.
This means its equity is wiped out 14 times by the
losses the company has made since its inception.
The ratio of
total assets (including fixed assets) to total liabilities (including term
loans) is only 1:1, well below the recommended 2:1. The risk for the
company is that if it were to be wound up under these circumstances, the
forced sale value of its total assets would almost certainly result in
failure to meet its total liabilities, including long term loans.
The company has no sound capital base against which it can
diversify into the Ugandan market.
The conclusion of The Monitor's
consulting accountant was that Malee is in too weak a financial position
to make even a modest investment of a few million dollars into the Dairy
Corporation, which it is proposed to lease for a three-year period.
An investment into the proposed new milk and fruit processing
plant would require capital of several million dollars, which the company
lacks.
Malee would find it uphill securing debt-financing support for
a multi-million dollar investment in Uganda from most banks in its current
profit and loss, cash and balance sheet position.
Banks usually
require borrowers to put up a considerable percentage of the capital
required for a new project - often around 40-60% - to ensure the borrower
has enough risk at stake to secure their commitment to the project's
success.
President Museveni, who has discussed the affair with The
Monitor several times in the last two weeks, called The Monitor again
yesterday, cautioning the newspaper against judging Malee to be
financially weak.
He referred to the fact that Malee is part of a
group of companies and the accounts analysed by The Monitor might be those
of only one subsidiary in the group. He referred our reporter to
industrialist James Mulwana who is the Thai Consul in Uganda.
Mulwana repeatedly said he was in a long meeting and was
continuously unavailable for comment.
However The Monitor subsequently
confirmed that the accounts in question are, according to Malee's website,
"consolidated financial statements for Malee Sampran Plc and its
subsidiaries," meaning they are group accounts.
Museveni, who is
keen to set up a major agro processing plant in Mbarara, primarily to act
as a macro-economic stimulus, is trying to develop an export market for
dairy products and high value crops such as oranges and mangoes, which can
give Ugandan peasant farmers a higher price than low value crops such as
maize, which are grown across much of Uganda.
Such a project, if
successful, could reduce poverty for millions of rural Ugandans and turn
their collective incomes into markets for other Ugandan industries as well
as the service sector.
The President has vigorously argued that
leasing Dairy Corporation to Malee for three years for only one dollar is
justified on cost-benefit basis in macro-economic terms by the prospect
that the otherwise reluctant-to-come-to-Uganda Malee, having used the
three-year lease period to "test the market," would gain the necessary
confidence to invest in the larger agro processing plant.
The latter
could create new incomes worth tens or hundreds of millions of
dollars.
This decision is equally vigorously contested by MPs, who
say the handpicking of Malee lacked transparency because a competitive bid
process for the privatisation of the corporation was halted midway by the
President and no assessment of Malee's financial capability has been done.
The MPs criticised the one dollar lease fee as a pricing outrage
given as the Corporation was still a viable going concern. Museveni argues
that stimulating large scale demand for viable agricultural production is
strategic for the economy while charging a lease rental for an old factory
(Dairy Corporation) is not.
Parliament earlier this week voted to
suspend the lease of Dairy Corporation and demanded details of the lease
deal as well as a due diligence of the Thai investor's financial
capability.
Privatisation Minister Peter Kasenene has twice failed
to provide an acceptable report to Parliament on the matter. The House
proceeded to halt the lease inspite of meeting President Museveni and
hearing his explanation at the start of the week.
Reliable sources
told The Monitor that the President received information about Malee's
financial incapability from non-government sources last Saturday and that
he expressed deep dissatisfaction with the Privatisation Unit management,
who had not provided him with a due diligence on Malee for the entire
two-year period during which the lease has been under
consideration.
On a more troubling note, other reliable sources
told The Monitor that during his last visit to Uganda, Malee's Chairman,
Mr Chatchai Boonyarat made efforts to identify the firms that lost out in
the now scuttled Dairy Corporation privatisation bid with a view to
sub-contracting his lease obligations to one of them.
This raises
further questions about whether Malee, lacking financial capability to
meet its obligations to the government, infact ever had any interest
whatsoever in the deal.
Sub-contracting the lease to a third party
would have meant that the company would not have been on the ground to
"test the market" with a view to later investing in the Mbarara plant,
contrary to their promise to the President.
On the contrary, the
risk for Uganda would be the possibility of Dairy Corporation funds being
shifted to Thailand to support the company's weak financial position in
its home market.
Malee could also have charged the sub-lessee a
market rate of millions of dollars for using the assets of Dairy
Corporation, while itself paying the Ugandan taxpayer only one dollar in
lease fees, benefiting from a political offer which it appears to have
neither the capacity nor the interest to reciprocate.
The Monitor had
earlier given a private briefing to Museveni on the shakiness surrounding
Malee.
Uganda's privatisation process has been marred by a number
of transparency and investor capability scandals and disappointments,
Midroc, a Saudi-Ethiopian firm that controversially bought the Sheraton
Hotel, have been unable to complete the promised renovation of the hotel
several years later.
The sale of Uganda Commercial Bank to
Westmontland Asia Bank of Malaysia exploded into a huge scandal that
resulted in the closure of Greenland Bank.
The sale of Nile Hotel to a
Tunisian firm was later reversed by government after the deal went
sour.
What remains unclear is how Museveni intends to proceed with
his strategically correct agro-processing investment goals, given the
controversies surrounding Malee, who now stand almost no chance of
surviving the parliamentary freeze on the lease.
Analysts who have
followed the saga closely say the President has at least two options.
One is for the government to do a credible feasibility study, buy
land, build the infrastructure for the agro processing plant, attach
generous tax incentives to it and bid it out transparently for an
international investor who would only have to bring in machinery,
management, access to export markets and working capital.
Such an
incentive regime would still require parliamentary support and therefore a
formal policy initiative, as opposed to handpicking an investor.
The
second option would be to transparently re-tender the Dairy Corporation
but attach a condition that the successful bidder would be required to
make a larger investment in the new agro plant.
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