Why Sameer Africa stock fell 25% in January

A month can be a long time in the stock market. Ask Sameer Africa (SMER) investors. Sameer stock was investors top pick in 2019, with the stock gaining 85.5% that year. Equity Group Holdings (EQTY), the second-best performing stock that year, gained 54.4%.

But Sameer investors’ fortunes have dramatically flipped in a space of just one month. The stock plunged 25.2% in January to wrap up the month at the bottom of the table at Ksh2.58.

For a little bit of perspective there, Sameer switched positions with Kenya Airways (KQ) in January. Kenya Airways stock fell 76.9% in 2019 and close the year at the bottom of the table. However, as Sameer lost favour with investors, Kenya Airways emerged as investors’ top pick in January, gaining 22% in that month to finish at Ksh2.50.

Investors seem to be losing patience with Sameer as turnaround drags

Sameer is the company behind the YANA tyres brand. The company has been attempting to turn around its flagging business for several years. As part of the turnaround efforts, the company shut its tyre factory in Nairobi and outsourced tyre manufacturing to overseas companies in Asia in a bid to cut production costs.

Additionally, the company has been shrinking its workforce and closing local branches in cost-cutting efforts. But little has come from those measures – at least so far. The company’s revenue for the first half of 2019, the most recent reported period, fell to Ksh930.2 million from Ksh1.2 billion in the first half of 2018. Loss deepened to Ksh182.8 million from Ksh11.6 million in the first half of 2018.

Sameer is expected to report its full-year 2019 results in the coming months. For full-year 2018, the company reported revenue of Ksh2.1 billion, down from revenue of Ksh2.6 billion in 2017. It posted a loss of Ksh529.3 million, compared to a profit of Ksh13 million in 2017.

Besides shrinking sales, the costs tied to compensating retrenched workers following the closing of the Nairobi tyre factory and shut down of have also weighed on Sameer’s finances.

While shifting tyre manufacturing overseas promises to help Sameer cut operating costs and improve its profitability in the long run, the company is currently grappling with short-term effects of that shift.

For example, Sameer is struggling with supply chain problems that have caused tyre supply shortages, resulting in missed sales. That partly explains the falling revenue as the company isn’t able to meet demand.

The decline in Sameer stock in January followed a signal that the company’s turnaround may be far from complete and costs could continue piling. On January 5, the Business Daily reported that Sameer planned to cut more than four dozens jobs on top of more than 120 jobs it has eliminated since 2017.

The latest job cuts will start this month and end in April and will target both management and frontline staff. Sameer currently has about 168 employees.

Counterfeit products have also deepened Sameer’s woes even as it attempts to turn around its fortunes.

Sameer investors may be booking profits after bumper harvest 

After Sameer stock soared in 2019, some investors may be selling to take profit, which could also explain the pullback in the stock in January.

Sameer has tested investors’ patience for a long-term as it attempts a turnaround whose end looks far off. However, investors with a long-term view would still have a good reason to like the stock. For example, Sameer’s revenue has been declining not because of a lack of demand for its products but a shortage of enough supplies to meet the demand.

Therefore, fixing the supply chain hiccups caused by moving production offshore should allow Sameer to return to revenue growth. And the ongoing cost-cutting efforts coupled with revenue growth should also allow the company to return to profitability quickly.

However, counterfeit products remain a major challenge that Sameer may struggle with for a long time until regulators step up their game. BAT Kenya (BAT) is another company that has constantly complained about counterfeit cigarettes hurting its business.