Kestrel says below expectations:
o Uchumi plans to open an additional 9 branches this year (5 in Kenya and 4 in Tanzania) and an additional 2 branches in Rwanda in the medium term, which will bring its total branch network to 42. To aid the expansion plan and support working capital requirements, the company plans to conduct a Rights Issue in 2H14 subject to CMA approval. A total of 100,000,000 shares will be offered to add on to the existing 265,424,636 ordinary shares.
o Opportunities for retail companies in the East African region remain high given the fact that, save for the major cities, most of the region remains underserved with shoppers mainly carrying out their shopping in informal outlets. However, poor infrastructure in upcountry areas coupled with low income levels continue to be a hindrance to growth of retail stores in such areas. As such, competition has been quite strong with the major players targeting developed towns including Nairobi, Nakuru, Mombasa, Kisumu and Eldoret in Kenya, Kampala in Uganda and Dar es Salaam in Tanzania. We see rising competition continuing to significantly affect Uchumi’s earnings growth in the medium term.
o Uchumi is currently trading at a P/E of 32.1x compared to its African and Middle East peer comparables average of 22.8x and median of 20.1x. Its ROE at 5.0% is significantly lower than the 21.9% African and Middle East peer comparables average and median of 22.4%. We feel that the company is quite expensive at the current multiples and therefore issue a LIGHTEN recommendation on the counter.