The Cipla plant in Luzira, Uganda. The company listed on the Uganda Securities Exchange last year. PHOTO | COURTESY
Cipla Quality Chemicals Ltd is facing a penalty for failure to
issue a profit warning to investors prior to the release of its
full-year results at the end of March, which showed a big drop in
profits.
The pharmaceutical firm, which makes
antiretroviral drugs, anti-malarial and hepatitis medicines, is majority
owned by Cipla Ltd of India, with the rest of its shares held by
Ugandan directors and retail and institutional investors.
Cipla’s
profit after tax fell by 84.8 per cent to Ush6.79 billion ($1.79
million) as at the end of March, according to its first full-year
results published last month. The company listed on the Uganda
Securities Exchange in September 2018.
Whereas USE
listing rules require companies to issue profit warnings in case their
earnings are projected to fall by more than 20 per cent over a 12-month
period, Cipla failed to provide any guidance to investors.
In
contrast, Uganda Clays Ltd and NIC Holdings Ltd issued profit warnings
on less than expected earnings that delayed publication of their
financial results for the end of December 2018.
Total
sales revenues posted by Cipla dropped from Ush227.3 billion ($59.9
million) at the end of March 2018 to Ush195.1 billion ($51.4 million) by
end of March 2019, a fall attributed to drastic declines in procurement
orders by the Global Fund, the firm’s largest client.
Policy shift
Cipla cited the
Global Fund’s policy shift from buying human drugs to funding disease
prevention activities as the biggest cause of the diminished procurement
volumes, but did not provide a clear forecast on the Fund’s demand
patterns.
The company’s total cost of sales dropped
from Ush130.9 billion ($34.5 million) at the end of March 2018, to
Ush125.5 billion ($33 million) by close of March 2019, while total
administration expenses rose from Ush17 billion ($4.48 million) to
Ush23.6 billion ($6.2 million) during the same period.
Cipla’s
total assets increased from Ush209.2 billion ($55 million) at the end
of March 2018 to Ush287.6 billion ($75.8 million) by close of March
2019.
The company declined to issue a dividend for end of March 2019 in light of the poor performance.
Fine
Local
capital markets regulators are now considering imposing a fine on the
firm for failure to provide a profit warning: The value of the penalty
could not be confirmed by press time.
The fine is
likely to dent the Cipla’s reputation after less than a year of listing
at the USE and could scare off potential investors, observers say.
“Cipla
should have issued a profit warning as provided for in the listing
rules, and we are going to take action on them. We had a discussion with
the USE over this issue, and we are willing to give a fair hearing to
all parties.
“Nevertheless, the disclosures made by
Cipla Quality Chemicals Ltd prior to the listing were clear and revealed
concentration risk faced by the company in its client pool. That means
failure by one of the top four clients to make procurement orders would
affect its sales revenue by more than 25 per cent during the year.
“We
also feel future IPOs should be supported by underwriters with enough
liquidity to buy all unsold shares and guarantee full subscription of
shares offered to the public,” said Keith Kalyegira, chief executive
officer of the Uganda’s Capital Markets Authority.
Last week, The EastAfrican sent questions to Cipla’s top management, but did not receive any response.
Besides
the looming regulatory fine, a two per cent undersubscription rate by
the company’s IPO, low transaction volumes recorded during the first
eight months of trading, a 33.7 per cent drop in its share price, and
little information available to investors on the firm’s business
outlook, have escalated uncertainty among the latter.
Complaint
“Cipla
Quality Chemicals Ltd has been opaque and has not released enough
information related to its performance in 2018. I’m still waiting for
its annual report before doing further analysis on the company,” said
Simon Mwebaze, general manager at UAP-Old Mutual Financial Services Ltd,
an asset management firm and stockbroker.
The company share price has held steady at Ush170 ($0.04) since April, down from the IPO price of Ush256.5 ($0.06).
“It
is not a temporary storm because the capital markets regulators
approved that public offering without understanding the company’s
underlying business model. The company failed to issue a profit warning
for their full year results for 2018/19 while some directors resigned
recently without giving clear reasons.
Some of their financial figures, particularly expenses, seem questionable,” said Andrew Muhimbise, a retail investor.
Cipla
signed memoranda of understanding with more than 10 African countries
to supply certain drugs, but debt management problems reported in some
of those countries became a stumbling block.
Countries with debt servicing backlogs include Kenya, Zambia, Mozambique, Angola and South Sudan.
Uganda,
for instance, has budgeted Ush10.6 trillion ($2.79 billion) for debt
servicing costs during 2019/2020, a figure higher than the combined
allocation of Ush6.7 trillion ($1.77 billion) set aside for the
education, healthcare, water and environment sectors, according to
latest government data.
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