The Rise and Fall of ARM Cement

ARM Cement Limited, formerly Athi River Mining Limited, was one of East and Central Africas largest cement producers boasting operations in Kenya, Tanzania, Rwanda and South Africa. ARM also owned the largest clinker plant in the region at the height of its existence, enabling the company to sell and export clinker to other countries.

ARM recorded significant growth from its Initial Public Offer (IPO) in 1997, with its revenue growing at a 10-year Compounded Annual Growth Rate (CAGR) of 21% from 2005 to 2015. Cement production also recorded significant growth, growing to 2.6 mn Tonnes Per Annum (TPA) in 2014, from 60,000 TPA in 1996, an 18-year CAGR of 23%. The significant growth in revenue and cement production points to the substantial investment made by the company over the years as it aimed to be the largest cement manufacturer in East and Central Africa.

In 2008, ARM broke ground on a 1.5 mn TPA cement plant in Tanga, Tanzania, intending to significantly increase the companys presence in East Africa and with the expectation that the plant, along with the operations in Kenya, would double the companys turnover and profitability. ARM acquired a USD 1.0 mn long term loan to finance the plant in 2008, which was secured against the plant. The Tanga cement plant was owned by Maweni Limestone Ltd, a 100% owned subsidiary of ARM Kenya.

Before the completion of the Tanga Cement, ARM had managed to double its turnover and profit by 2012, with its revenue increasing to Kshs 11.2 bn in 2012, from Kshs 4.6 bn in 2008, while Profit Before Tax (PBT) increased to Kshs 1.8 bn in 2012, from Kshs 0.7 bn in 2008. This growth instilled confidence in the management and spurred further investment in Tanzania.

The Tanga cement plant however experienced delays, and the plant was officially opened in 2014, compared to expectations that the plant would be up and running by 2012. By the time the plant was opened in 2014, ARMs Debt to Assets had increased to 0.74x from 0.67x in 2008, while the Debt to Equity rose to 2.9x, from 2.0x in 2008.

ARMs main challenges began in 2014, the same year the clinker plant in Tanga, Tanzania, was commissioned. Competition in the Tanzanian market was heating up, and the company found itself in a price war amid a battle for market share in the country. Tanzanias GDP and cement consumption had been growing faster than in Kenya, consequently attracting new players into the market. This also included imports from China and Pakistan. The company mandated a group of lead arrangers (Barclays Bank of Kenya, CFC Stanbic Bank and Standard Chartered Bank) to assist the Company in raising its medium to long term funding requirements and to refinance its short-term borrowing in 2014, the first sign of working capital distress. By this time, short term borrowings were 73% more than long term borrowings, with the Kshs 1.6 bn Equity linked note secured in 2010 maturing in 2015 and the Kshs 1.8 bn Aureos Income note also maturing in 2015. ARM was under pressure to refinance the short-term debt as well as settle Kshs 3.4 bn within a short period of time and amid a liquidity crunch.

In 2016, ARMs auditors raised concerns about the companys ability to operate as a going concern due to its negative working capital position. ARMs working capital had been deteriorating since 2013 to a negative position of Kshs 13.5 bn in 2017. CDCs investment assisted in reducing the deficit and repaying the outstanding debt, but ARMs negative capital position persisted.

In 2017, the firms financial distress continued, with the Loss After Tax growing to Kshs 6.5 bn, from a loss of Kshs 2.8 bn in 2016. The management attributed the loss to the tough market conditions following the 2017 elections in Kenya, the import ban for coal in Tanzania, and the groups deteriorating working capital. ARMs current liabilities during the period were Kshs 17.2 bn, with the current assets at Kshs 3.7 bn. To improve their capital position, the management proposed to sell their Non-Cement Business, i.e. Mavuno Fertilisers Limited to Omya (Schweiz) AG and Pinner Heights Kenya Limited (PHL), through a circular to shareholders dated 22nd December 2017. The sale was also expected to improve the firms debt position by approximately Kshs 1.7 bn. However, in September 2018, Omya and PHL cancelled the acquisition.

In August 2018, following ARMs default of approximately Kshs 500 mn overdraft facility from United Bank of Africa (UBA), ARM was put under administration, with Mr Muniu Thoiti and Mr George Weru being appointed as joint administrations. The administration process led to the suspension of trading of ARMs shares in the Nairobi Securities Exchange (NSE) for 6 months. In 23rd February 2019, NSE extended the suspension of trading of the shares on the bourse for a further 6 months.

In Q42019, the administrators successfully sold all ARM cement and non-cement assets to National Cement at a price of Kshs 5.6 bn. The Kenya Revenue Authority (KRA) however froze Kshs 4.3 mn of the proceeds as tax claims. In 2020, ARM completed the sale of all its shares in Maweni Limestone to Huaxin Cement for USD 116 mn, however, the Tanzania Revenue Authority imposed a USD 22 mn Capital Gain Tax. Therefore, the sale of these assets was not enough to pay off the Kshs 32.1 bn ARM owed its creditors.

ARM remained under administration for more than two years, and in 2021, following the completion of the sale of ARMs assets, the liquidation process began. ARMs creditors lost approximately Kshs 11.5 bn during the liquidation process, with Sayani Investments, an unsecured creditor, taking a 93.8% haircut of the amount claimed. BII, who held approximately 42% shares in the company, are also among the biggest losers in the firm.

Required

1. Download ARM Cement Limited 2016 annual report (https://africanfinancials.com/document/ke-arm-2016-ar-00/).

2. Calculate and analyze any five ratios that you can use to evaluate the case above. (20 marks)

Using Altman Z Score model, evaluate the business financial distress for years 2015 and 2016. (10 marks)