MANAGEMENT COMMENTARY

OVERVIEW
East African economies performed well in 2012 despite a few challenges. The GDP growth in Kenya, Uganda and Tanzania was 4.2%, while in previous year 4.4%, 4.4% and 7% respectively. Kenya’s economy continued to record slow growth in 2012, primarily driven by tourism,construction and agriculture. Uganda’s economy stabilized in 2012 though the 4.4% growth was the lowest in over a decade. Inflation fell to 14.6% from 18.7% in 2011. The overall macroeconomic performance in Tanzania was strong with inflation declining to single digits with the main drivers of growth being telecommunications, transport, manufacturing,construction and trade.

Though there was a general decline in inflation in the East African economies, the rate was still high and this translated in to lower unit consumption.

GROWTH
Uchumi continued actualizing the Growth phase of the then Rescue Plan. During the 2012/13 financial year , we opened the Ongata Rongai in August 2012, Natete in Kampala and the Eldoret Sugarland Plaza branches in December 2012. Between July 2013 and December 2013, we plan to open the Kisii branch (already open), Mombasa Island, Juja, Maua and Kisumu branches to increase traffic and grow sales revenue to cushion against the decreased per capita consumption while positioning our retail networks competitively. By the close of the financial year 2012/13, our total branch network stood at 28 (i.e 22 in Kenya, 1 in Tanzania and 5 in Uganda).

PERFORMANCE
The Uchumi Group has continued to record growth and profits for the seventh consecutive year since reopening. While the economic and social environments were negatively impacted by challenges like the Euro debt crisis, general elections (effect in Uganda and Kenya), freezing of public spending and effect of devolution in Kenya, high cost of living and borrowing affecting infrastructural development and customer propensity to spend among others, sales revenue and gross profits grew by 3.2% (or Kshs 450 million, ie from Kshs.13.918 billion to Kshs 14.369) and 17.2% (or Kshs.539 million, ie from Kshs 3.139 billion to Kshs 3.679 billion) respectively compared to 2011/12. Annual customer numbers increased by 10% to 24 million relative to the 2011/ 12 levels of 22 million. Operating costs also grew in line with operations as well as a result of runaway inflation caused by the increasing cost of global fuel prices. Trade margins improved from 18% in 2011/12 to 19.26% in 2012/13 as a result of continued focus on management of cost of sales. Finance costs dropped by 64% due to reduction in outstanding loans. Consequently, profits before tax during the year (Kshs486 million improved by 20.6% from the 2011/12 level of Kshs 403 million. Earnings per Share also grew to Kshs 1.35, up from Kshs 1.03 per in the last financial year.

The balance sheet grew by 12.8% (or Kshs.632 million), from Kshs.4,942 Million in 2011/12 to Kshs. 5,574 Million in the year 2012/13.Term loans principal of Kshs.104 million was settled during the year.

DIVIDENDS
Due to the expected sustained future growth in profits, the Board of Directors is recommending for approval by the shareholders a first and final dividend of Kshs 0.30 per ordinary share.

CLOSURE OF REGISTER AND DATE OF PAYMENTThe register of members will be closed on Friday ,29th November 2013.If approved , the dividend will be paid, net of with-holding tax where applicable, on or about Friday 10th January 2014 to the shareholders whose names appear in the Register of Members at the close of business on Thursday 28th November 2013.

OUTLOOK
The Uchumi Group is expected to continue to grow in performance and business base with maturity of the growing new retail networks and the adopted cautious strategic approach in the Eastern African region, an initiative that will be fully supported by the Rights Issue and the positive effect of Cross Listing in the EAC countries.

By order of the Board.

Ms KHADIJA MIRE DR. JONATHAN CIANO, MBS
CHAIRPERSON CHIEF EXECUTIVE OFFICER

Results Note:

Uchumi Supermarkets Limited (Uchumi) this morning announced FY13 earnings (year end June) recording a 30.3% y/y rise in net earnings to KES 357.0m, a marked improvement from the previous year’s 29.8% y/y decline. The positive performance was driven by improved macroeconomic environment in the East African region where the company operates (Kenya, Uganda, Tanzania) which saw an improvement in gross and operating profit margins.. The Board of Directors recommended a Full and Final DPS of KES 0.30 (stable compared to last year). We highlight the key earnings drivers below:

• Slow growth in revenue on account of lower unit consumption – Despite the marked improvement in inflation and interest rates in the East African region, the rates were still high translating into lower unit consumption. Net sales recorded a 3.2% y/y rise to KES 14.4bn.

• Gross margin improves 300bps to 25.6% - The much better operating environment resulted in cost of sales declining by 80bps y/y to KES 10.7bn which drove a 300bps improvement in the gross margin to 25.6%.

• Operating expenses rise 17.2% y/y attributable to runway inflation as well as expansion of the business- During the year, Uchumi opened three branches in Kampala (Uganda), Rongai (Kenya) and Eldoret (Kenya) bringing the total branch network to 28 (22 in Kenya, 1 in Tanzania and 5 in Uganda). This pushed operating expenses upwards, and as a result, operating profit margin grew slower than anticipated, at 40bps y/y to 3.5%.

• Finance costs ease 36.0% y/y - The 30.3% y/y growth in PAT was also boosted by a 36.0% y/y decline in finance costs to KES 16.1bn as the company settled KES 104.0m of its outstanding loans.

• Outlook:

o Uchumi plans on conducting a Rights Issue before the end of the year with a bid to raise over KES 2.0bn to finance its regional expansion plan. The targeted amount will however depend on the market price at the time of the issue. The company plans on cross listing in Uganda, Tanzania and Rwanda before the end of this year which will enable all four countries to participate in the Rights Issue. Uchumi is targeting on opening at least five new branches in Kenya in 1H14 (with one having been opened so far) which will see the total branch network grow to 33 by the end of the year. As part of its medium term regional expansion plan, the company plans to move to South Sudan and Rwanda.

o With a better outlook projected for the East African economies (World bank GDP forecasts of 5.7% in Kenya, 6.2% in Uganda, 6.5% in Tanzania and 6.9% in Rwanda in 2013) and a stable macro economic environment, we anticipate increased disposable income to drive retail companies sales growth. Given its wide network in the region, Uchumi is well positioned to take advantage of the benefits expected to be derived as a result of the recent oil and gas discoveries in Kenya, Uganda and Tanzania.

• Valuation: Trading at a P/E and P/B of 14.6x and 1.7x respectively compared to Middle East and Africa peer comparables of 17.0x and 5.1x respectively, we recommend an ACCUMULATE with a target price of KES 21.00 representing a 6.8% upside from market price.

Courtesy of Kestrel Capital

looks like a tough business year for retail, common man has no money to spend. Looking at the financials I can see bank overdrafts so it makes no sense why Uchumi is so eager to dish out a dividend when it would make more sense to issue bonus shares and retain the cash in the company. In my view around 2016 retail will experience a boom from increased disposable income and it's important for uchumi to keep liquid cash. Suresh Shah used to understand this very well when uchumi used to buy t-bills. Ciano also needs to improve on the appearance of the supermarkets buy new modern shelves, brighten up the aisles. uchumi looks very dull and dirty compared to its competitors

Management needs to convince me that they have a good strategy in the rights issue.

I believe Ciano was meant to be a turnaround manager, not a growth and expansion manager. I like the guy but lets call a succeed a probox, Ciano has done his job at Uchumi, time to move on.

Just for kicks, Ciano should be sent to Mumias Company to sort the mess there.

Uchumi misses sales target on lower spending

The retailer’s turnover increased by Sh450 million to Sh14.3 billion attributed to reduced spending by households due to high cost of goods and depressed disposable incomes, hence missing the Sh18 billion target. #Inflation to continue reducing spending power by households

This supermarket needs to style up, in terms of infrastructure and customer experience its behind Nakumatt, Naivas and Tuskys. They do not upgrade or renovate their facilities enough, they are stuck in the 90's.
As a stock, mkonomtupu normally gets it right