This letter will layout the sham of leadership and management that has been going on at Centum Investment Company. You will need to carefully analyze the audited financial statements going back the last 5 years to verify the facts that will be laid out in this letter. If it were a privately limited company, then there would be no need for this. However, it isn’t. The management in charge of this public limited company has gone rogue and needs to stopped.
Before we go into details, we would like to state why we are doing this. First, we love the company as former employees, we and our families have been forced to pay for the sins of leader who has gone rogue. Over 40 staff members have been made redundant this year and many more have been forced to leave due to a toxic work environment. The Group CEO blames everyone for the failures of the business, especially employees, instead of taking responsibility (as a real leader should). In this, crusade against employees, the company will have saved a mere KES 100 million annually, in staff expenses while it bleeds a whooping KES 2.7 BILLION shillings annually in interest expense (which is growing fast, because of the compounding nature of interest). Secondly, we are doing this because we have no other choice, we did not have an avenue for whistleblowing in the business that is independent and objective. If this was possible, we would have brought it to the board’s attention earlier. So, we have chosen to take accountability of the firm to higher authorities than the Group CEO, who is a feared demi-god in the organization. Therefore, we invite you dear reader to review the contents of this letter and make your own objective conclusions.
Your review may lead you to the conclusion that there is more than an 80% chance that the asset values of the Company’s real estate portfolio are inflated. If you are aware with the Evergrande Crisis in China, then you will be able to see the similarities between that real estate company and Centum Real Estate’s business model.
In your detailed assessment, we hope you see that the Company is operating on a ‘spend now and think later’ model where all money is spent in advance of income being realized. Additionally, you will also discover (only if you do a detailed review) the intricate web of debt that the company’s management has secured over the same period of time that currently stands at a staggering KES 34 billion shillings from 3 major banks and the commercial paper’s investors (over 120 retail investors). The collateral structure of the debt is completely convoluted and intertwined, such that if all the debt investors were to call in their collateral, the company would go into immediate insolvency. And a fun fact, is that, all the debt is set to mature in the same financial year, FY24/FY25. Such a coincidence in public funds mismanagement.
In your review you will also discover that the Company’s investment model is not appropriate for a publicly traded company where a large number of its shares are held by small scale investors. You will discover that the Group CEO has created a well-guarded eco-system of selfish gain as the ultimate beneficiary that has exposed 33,000 small investors in Centum to complete erosion of shareholder value. The consistent decline the share price of the company at the securities exchange reflects the poor business model that the company has been running on. The market cap of the company at the NSE of KES 12 BILLION is actually a true reflection of the company’s actual net asset value as opposed to the book NAV indicated in the company’s financials of KES 60 BILLION.
As you do your review, take note of the aggressive valuation of the (sur)real estate portfolio, that has allowed management to incur debt beyond the Company’s sustainable ability to repay. While the company has audited financial statements, the auditors have been complicit in this scheme in prior years, by choosing to earn fees and not keep the management honest. However, in the last two years, as things have gotten dire and the auditors have been implicitly complicit.
The web of deceit is so complex that if you do a keen review, you will discover that the distribution of dividends and bonuses (from which the Group CEO personal net worth has grown more than ( now KES 2 billion shillings) was funded through borrowing in some cases and in all cases was based on paper income driven by unrealized gains hence the reference to the ‘credit card’ spending of the company.
As whistle blowers, it is our hope that as shareholders, media firms and as a regulator you will do your own independent assessment of the company and come to the same conclusion as we have. Centum, the listed entity, is on the edge bankruptcy, and the Group CEO is the culprit who has run the company to the ground. His management team has been complicit due to their inability to speak truth to power and have also benefited in the process, through bonuses. However, the madness must stop, and the company needs to get back to the path of sustainable performance and it can only happen if there is a radical change in leadership and business strategy.
The additional conclusion, you may draw, is that company should make the required accounting write offs of asset values and settle majority of its debt, because currently the firm is not in a position to honor its capital commitments and has been surviving on the luck-driven land sales of Vipingo Development and customer deposits that have been mobilized through the sale of residential units.
THE HOUSE OF CARDS
There is a series – House of Cards, it is an American political thriller on the story of Frank Underwood (acted by Kevin Spacey). Frank, a Democrat, rises from being South Carolina’s 5th congressional district representative to the president of United States. Very similar story to the rise of an intern to the Group CEO. Much like House of Cards, the Centum story has revolved around themes of ruthless pragmatism when dealing with employees, board manipulation and monetary gain.
At the height of the Company’s success in 2015, the share price was KES 70 and since then, the share price has spiraled down to KES 15. One of the basic principles people learn in finance, is that the market is never wrong. The market is an aggregation of investor expectations, and the share price is largely a reflection of investors sentiment about the future earnings prospect of the company.
The decline in Centum’s share price is a reflection of the business’s illiquid real estate assets after exit the cash rich private equity assets (majority of which are legacy assets from the government). The company has exited its legacy private equity businesses that have unlocked lumpy and once off cash events, little of which have trickled to the shareholders.
The business model of building businesses of (to) scale has run its course within the company given that the private equity business does not have a pipeline of realizable assets.
To put it into perspective, between the 2014 and 2020, the private equity business recorded exit proceeds of a staggering KES 40 billion (UAP, Almasi, AON, KWAL, Platinum Credit etc). (Verify this from FY19 investor presentation). A little assignment for you dear reader, go and research how much of that money went back to the shareholders pocket versus management bonuses versus how much went to businesses that have been written off. The story will lay itself bare. PS its less than 4 billion shillings.
Now, we invite you to look at the current private equity assets, Sidian Bank, Isuzu, NAS, Longhorn Publishers, Greenblade Growers and Akiira, Amu Power and Zohari. All these assets have a combined book value of KES 20 billion. Note that inside of those valuations are the power assets of Akiira and Amu power with a total of value of KES 4 billion which are white elephants and have no cash generative value to the business.
That is KES 4 billion is shareholders money that will never be recovered.
Conclusion: The actual value of the PE business is KES 16 billion with no new capital deployment in sight. The recent media announcement that Centum is purchasing 3 companies was publicity stunt. DO YOUR OWN INVESTIGATION.
In summary, the PE business has exited KES 40 billion of assets and is now remaining with KES 16 billion of realizable cash assets. On paper nothing looks wrong, but the subtle strategy has been asset stripping the PE business over a period of time because there has not been a purchase or redeployment of any of those asset proceeds back into the PE business. Most of the proceeds have gone to the real estate portfolio, failed green opportunities such as King Beverage, Greenblade Growers, Akiira, Amu power and management bonuses, which have costed the business over KES 15 Billion shillings in the last 6 years.
3 years into the current strategy period, the PE side of the business has not been able to secure any acquisitions and are unlikely to secure any acquisitions because there is no cash to acquire the assets.
Real Estate or Fake Estate
Before diving into the real estate strategy, let us lay out the debt structure of the business 90% being in real estate:
- Centum Investment Plc Bank overdraft fully drawn: KES 4 billion
- Centum RE Limited Bond: KES 3 billion
- Uhuru Heights Limited Bank Loan: KES 2 billion
- Vipingo Development Bank Loan: KES 5 billion
- Two Rivers Development Bank Loan: KES 7 billion
- Two Rivers Development Commercial Papers: KES 4 billion
- Two Rivers Mall Bank Loan: KES 9 billion
The total debt in the Centum group is KES 34 billion all these debts have a coincidental maturity year(s) of between FY 24 and FY 25. THIS IS THE REAL HOLE IN THE BUSINESS. The banks at this point should be getting jittery. In order to [a] secure all this debt and [b] maintain all the debt covenants and put a ‘show’ that all is well, management has adopted aggressive accounting policies in valuation of the real estate investments. The shocking thing about the business, is that it does not have any immediate cash coming into the business.
A quick example for the 2019 reporting cycle, the valuers engaged to value Vipingo land submitted a report that the senior management disagreed with. The values were thereafter ‘pursuaded’ to revise the valuation upwards. Another example in the 2020 reporting cycle, the valuers of Two Rivers Development were also ‘persuaded’ to increase the valuation of TRDL’s development rights. A development which has been booking valuation losses in 2018 and 2019, was revalued upwards in a pandemic year! We believe the auditors raised a concern with valuation methodologies, it is sad they were not able to get to the bottom of it and the board was managed.
You see the difficulty with the unrealized gains of real estate, is that they go to the revaluation reserves in the balance sheet. The movement from the revaluation reserves to cash, will depend on the actual selling of those assets. So, if the selling price of those assets is within market prices, it will be easy for management to sell. However, if the selling price of those assets is way above market prices, then management will not be able to sell. The company will therefore be stuck with revaluation reserves in its balance sheet and zero income or cash coming into the business. Then they will not be able to pay the debt because of zero cash.
We would also want to call on the Kenya Revenue Authority to investigate the tax payable due the aggressive land valuation. The Group CEO has hidden from the board and KRA that Centum has a current tax exposure of KES 3 BILLION shillings due the revaluation gains it has been booking and has not remitted a single shilling to KRA of that amount. Fancy accounting tactics have kept this exposure hidden.
An example of the aggressive valuations is as follows:
- Centum RE Limited Bond: KES 3 billion
- Vipingo Development Land was bought at circa KES 200,000 per acre in 2016. In the last 5 years, the valuation of the land has increased 10 TIMES. (Highest appreciating land in Kenya!). Now the argument typically, is that the company has invested in infrastructure and secured approvals to make the place a mixed used development. But all infrastructure on the land, including the desalination plant, comes to a total of KES 1 billion. Even for argument’s sake, lets increase that figure to KES 3 billion, and say KES 3 billion has been invested in the land (not a chance in hell), if you divide that by the total number of acres originally bought (10,000 acres), you will get a figure close to KES 300,000 per acre. That would mean that out of prudence, perhaps the land should be worth KES 500,000 and even for good measure double that amount to KES 1 million. Now, how on earth is the Vipingo land now worth a staggering KES 2 million per acre? What sort of justification can be practically given for holding land so expensively? In fact, for the reader to know the hubris that is in this aggressive valuation, the bank discounted the value of the land KES 5 billion and hence why they advance an equity release loan of such an amount and charged the entire 10,000 acres of land.
- To add further insult to injury, the last 3 major transactions carried out at Vipingo Development for sale of over 2,000 acres have been at below the book value of KES 2 million per acre, meaning a loss on disposal (proving the over valuation of the land).
- Two Rivers Development is the straw that will break the Centum’s back. We will not dwell on the circular referencing behind driving valuation of land up to secure bank and commercial paper debt, that is ancient history. The company is where it is, with a total debt of KES 10 BILLION and additional liabilities of KES 2 BILLION. If you take the total sellable land at two rivers (50 acres) and divide with the liabilities the company has (KES 12 billion – if you forgot) then you will find that value per acre in order for the company to meet its liabilities is about KES 240 million. This is the floor valuation to be able to remedy this problem.
- Breaking down the debt further: The commercial papers are expensive (total of KES 4 billion); the average pricing is c. 20% per annum. The bank debt (KES 7 billion) is also not cheap either, at c. 12% per annum, meaning that on average two rivers incurs KES 1.5 billion shillings of interest expense as it. That is equivalent to 6 acres per year, taken out by interest. In 3 years’ time when the debt matures, the interest plus principal repayment would have eaten away all the sellable land. Shareholders will NOT receive a single shilling from Two Rivers. At best maybe the mall, but remember a bank already has a claim on that of KES 9 BILLION.
- Pearl Marina: For a litmus test, try buy land adjacent to the development. It will be one third of the book value that it is being held at. Only decent thing about this development is that it does not have debt, but again, management is in advanced stages of securing a similar debt structure to Vipingo (equity release), and at some point, you just wonder, when will this madness stop? At this point, pause and picture how much debt management has taken to enrich themselves, after stripping the private equity business.
On the sale of residential units. We will invite you to review the business cases for all the project, the average profit margin per project is 10-15%, now even assume that the land will be additional profit (because it is owned by Centum RE), it will increase the total project profit margin to between 20-25%. The two key project risks are market risk (how quickly management can sell) and construction risk (how quickly management can build). The selling side is the trickiest and more importantly collecting the sales revenue. Even the best performing and completely built projects have 60% of sales revenue collected 6 months after completion; meaning that management reasonably needs at least 2 years after construction to collect sales revenue.
The catch is here, that the profit or shareholder return is 20-25%, to collect this final portion, it will come at least one year after all projects are completed. So, what is the issue here? If the company’s real estate assets were not financed by debt, then one would have the luxury of collecting the sale revenue without any hurry. But that is not the case. The chocking nature of interest expense has applied pressure on management to collect sales revenue from project, pay bank debt and pay contractors to deliver the project. EVERGRANDE CRISIS, BUT IN KENYA.
It gets more complicated dear reader, stay with us. There are two level of debt in real estate, debt at the corporate entity level, for example Two Rivers and Vipingo as shown in the chart above. And there is debt at the project level, because as per the project business cases, they are financed by portions of equity, debt and sales deposits. Examples of projects are Awali, Palm Ridge, Riverbank, Loft etc. Now, since the corporate entities have debt, the projects have been struggling to secure debt and have mainly been financed by sales deposits. The challenge comes in when customer deposits are used to balance between to paying corporate entity level and continue construction. It is by some form of luck that the balancing act has not gone south. In fact, on several occasions, residential deposit money has been used to been used to pay bank and commercial bank debt interest at Two Rivers. It is a very dicey game management is playing.
In summary, the company employed a private equity strategy in the real estate portfolio. But instead of asset stripping as in the private equity portfolio, it triggered a different set of actions:
- Overstated gains in value of land which then supported unfunded staff bonus payments and unfunded dividend payouts.
- The overstated gains also encouraged excessive borrowing with some of the funds
The conclusion is that the real estate ‘pie’ has already been eaten. Any additional funds spent on real estate developments are not likely to create any meaningful value. Real estate has now become an avenue through which funds can be illegally extracted from the business as will be captured in the allegations below, which we will invite you dear reader to investigate since hard proof is not available at the present moment but we are certain of them being true.
INSTANCES OF PUBLIC MONIES FRAUD THAT WE INVITE THE CMA, EACC, DCI, AND PARLIAMENT TO INVESTIGATE THAT ARE HIGHLY CREDIBLE
- There is secrecy around TRDL and CICL’s dealings with Funscape Dubai Inc (the JV partner) and Funscape K Ltd (the “operators”). Funscape Dubai have never contributed monetary capital to the venture but are considered 50% shareholders. Any contributions by them through sweat equity have never been valued. Attempts by staff to question the special status enjoyed by Sanjay and Funscape are usually shut down by the Group CEO.
- The contractor ROKO construction who has failed to deliver the projects given to him, Cascadia and those in Uganda, was brought in by the Group CEO. The contractor submitted bids that were 30% below the board approved business cases, a fact that group CEO has gloated on several occasions that he was able to secure on behalf of the business. The contractor has costed the real estate business in excess of KES 2 billion shillings in losses, cost variations, project delays and protests from subcontractors. Cascadia and Uganda projects are 5 months behind schedule.
- To replace the above Roko Contractor, the Group CEO again pushed a contractor, Sanjad Limited, who constructed projects in Nanyuki, owned by him and is constructing the Group CEO’s house in Nairobi. Again, against the warning of the employees regarding the ability of the newly appointed contractor to deliver Cascadia and other awarded projects in Uganda, the Group CEO pushed on with it. Again, verify these allegations. We are certain that you’ll find it to be true.
We did this anonymously because we are fearful for our lives, James has gone rogue and has gone to great lengths to silence voices of truth and reason in the organization and we hope action will be taken.
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