Going concern doubts over Sri Lankan cable firm’s Kenyan unit
ECONOMYNEXT- The Kenyan operations of Sri Lankan cable manufacturer Sierra Cables Plc were disrupted due to elections and constraints in acquiring raw materials, the company’s annual report said, with auditors raising doubts over the unit’s going concern.
“Our manufacturing operation in Kenya, while registering growth in the previous year, was adversely affected by political volatility caused by two presidential elections during the year under review,” Chairman Priyantha Perera told shareholders.
Managing Director Shamendra Panditha said demand in Kenya fell during the election season.
Kenya held its presidential elections in August 2017, which incumbent Uhuru Kenyatta won by 54.2 percent. Opposition leader Raila Odinga who got a 45 percent vote contested the results in the Supreme Court and won over irregularities in the elections.
A second presidential election was held in October, and Odinga pulled out of the race, saying that the electoral commission had not put in place required reforms to make the elections fairer.
Kenyatta won the second election with a 98 percent vote. Only 40 percent of the voters turned out for the second election due to opposition boycotting.
Due to the political uncertainty, Sierra Cables’ Kenyan subsidiary, Sierra Cables East Africa Limited, which manufactures power transmission cables, accumulated losses up to Rs. 17 million by end-December 2017.
The current liabilities of the company overtook its current assets by 91.5 million rupees, which the auditor flagged.
“A material uncertainty exists that may cast significant doubt on the (subsidiary’s) ability to continue as a going concern,” KPMG said in its independent audit report.
Sierra Cables had invested 2 million US dollars on the plant, beginning from 2015, and it came into operation in 2016.
Its first order was for the Kenyan Rural Electrification Authority, which has remained a big client since.
However, the lack of cash has restricted the Kenyan business, the annual report said.
“Even though Sierra Cables East Africa Limited was incorporated in 2015 and able to secure sufficient orders from Rural Electrification Authority of Kenya to run the factory profitably, the Company was unable to operate at optimum capacity and recover the fixed overhead,” it said.
“This was primary due to non-availability of sufficient funds to import required raw materials.”
It said with support from the parent, the Kenyan operations could be brought back to profitability.
Parent Sierra Cables has so far given a 990,000 US dollar corporate guarantee for a one-off letter of credit and term loan facility. Another 500,000 US dollar corporate guarantee has been given for letter of credit and import demand loan facilities.
Panditha said political stability has since returned to Kenya, which will support the business in the future.
“Political stability has since been established in the country and we hope that this will result in greater economic stimulus, which will benefit our manufacturing operation,” he said.
He said Kenya has entered into several free trade agreements with African countries during the past year, which will help Sierra get regional business and fill factory capacity. (COLOMBO, 3 September, 2018)