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Why its hard for NSSF Uganda to find a buyer for their stake in UCL

A partial sale of shares held by the National Social Security Fund in Uganda Clays Ltd (UCL) has failed to materialise for nearly two years in a transaction complicated by scarcity of buyers and concerns over the company’s growth outlook.

The offer was floated by the NSSF — UCL’s majority shareholder — in mid-2016 in an attempt to cut losses linked to the struggling building materials manufacturer.

The firm has watched its share price drop from an average of Ush75 ($0.019) in 2011 to less than Ush35 ($0.009) today.

It is also yet to clear a loan of Ush11.5 billion ($3 million) obtained from NSSF seven years ago.

NSSF sought to convert the outstanding loan and accumulated interest into shares that would in turn, increase its shareholding in UCL from 32 per cent to 50 per cent.

Following the debt-to-equity conversion, NSSF would have proceeded to sell part of its expanded stake in the company to a new investor, thereby leaving it with a minority shareholding of around 20 per cent.

Though the Fund had set a deadline for conclusion of this transaction at the close of 2016/17, this was not to be; neither was the 2017/18 date observed. The fund’s financial year reporting date is June 30.

Lingering concerns about the company’s growth fundamentals have reportedly scared off potential buyers.

Whereas UCL’s clay building materials, comprising roofing tiles, carved blocks, bricks and maxpans — a clay brick used for laying floors in multistoreyed buildings — fierce competition from cheaper product substitutes such as iron sheets and cement bricks raise fears about the company’s future.

The substitutes have shorter delivery times compared with clay products, are easier to install at construction sites and also cost less to transport.

These are all critical competitive factors that have made them more popular in the construction industry.

Questions over the distribution model of UCL’s products upcountry have also dampened investor appetite.

Though the company maintains large outlets in some major towns and a limited network of smaller “next door” hardware agents, some customers worry over high transport costs they may have to incur.

Modest real-estate sector growth between 2016 and 2018 is partly blamed for the poor investor interest in the NSSF offer.

The sector grew by 6.4 per cent in 2017/18 compared with 5.6 per cent registered in 2016/17. This trend was driven by improved credit flows to the real estate and construction industry but the longer-term outlook remains unclear.

NSSF top management insist they have been contacted by some interested investors.

Financial results published last month show UCL’s total turnover increased from Ush12.86 billion ($3.39 million) in June 2017 to Ush14.45 billion ($3.81 million) in June 2018 while its cost of sales rose from Ush6.55 billion ($1.73 million) to Ush8.62 billion ($2.27 million).

Profit after tax fell from Ush2.17 billion ($571,660) in June 2017 to Ush1.27 billion ($334,874) in June 2018.

Total assets grew from Ush15.63 billion ($4.12 million) in June 2017 to Ush18.06 billion ($4.76 million) in June 2018. Whereas UCL’s share price hit a record high of Ush33 ($0.009) in the final quarter of 2017, it has since dropped to between Ush20 ($0.005) and Ush23 ($0.006) over the past two months.

“UCL is a fairly complex business that holds a virtual monopoly but operates in a fragmented market. This is why we need a sophisticated investor that is able to combine money and expertise to transform the business. We have been contacted by a few buyers, whose identity will remain confidential.

Though fierce competition from imported product substitutes has affected UCL’s performance, the products still hold a niche market that appeals to customers who prefer the long-lasting tiles,” said Richard Byarugaba, managing director at NSSF Uganda.

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