Unga: Is it safe to hold shares of the troubled group?

Last week, Unga Group made a surprise announcement of price warning for the period ended June 2006. The gist of the message is that the profit the the period is likely to be less than the projected by as much as Kshs. 30m.

The first section did not come as a surprise as it involved the recognition of the loss likely to be incured following the collapse of uchumi supermarkets. This was indeed a prudent action to take.
However, the other factors mentioned as having contributed to the the failure to hit earnings target are unconvincing. the reasons are as follows:

• the avian flu scare which has affected the paultry feed business
• the power unreliability in uganda and the appreciation of the kenya shilling against the uganda unit.
• the shortage of animal feeds raw material due to draught which led to increase in production costs. apparently, this increment could not be passed on to consumers.

These are all issues that the management should have picked out by the time they released the half year results for the period up to Dec 2005. It there fore looks like Unga's recovery is being adversely affected by factors other than they are wiling to admit. Its important to note that Unga, Like Uchumi is faced with very inovative competition from other millleers. Despite the consolidation, unga still carries with it an expensive cost structure from its days as a monopoly. The competition on the other side are small, family owned outfits that are able to operate with minimal costs in niche markets and regions. they are able to effectively undercut the ailing giant. These to me are the main reasons why Unga is slipping on its expectations.

Is it therefore wise to hold on to this investment?

The price of Unga has since fallen by a hefty Khs. 3 or 15%. There may be additional fall in the price as investors are likely to be more cautionus in short term after the Uchmi saga. Again most investors have stuck with thier lot for more than 8 years without dividends and they rightly felt that it's their turn to be rewarded. These disapointed investors will most likely offload thier holdings and take on companies with better returns such as Mumias. For me, it makes sense to offload the holding s now at 17/=. if the price comes doown to as low as 12/=, then one can buy their stake back again and anticipate the inevitable up climb.

Buying cheap....

When the stocks hits kshs., it will a advisable to buy as it may not remain subdued for long. earnings for the first half the next financial year should be strong enough to necessitate a rebound. investors who will have taken advantage of the slide in share price will thus benefit.