Mwamba Foods: Growth, Capitalised Development and a Headline P/E That Flatters
Mwamba Foods Ltd reports FY revenue of KES 4,200m (prior year KES 3,559m), net profit KES 380m and operating cash flow KES 120m. Receivable days have risen from 62 to 95, inventory days from 70 to 88, and payable days have fallen from 52 to 45. The company capitalised KES 90m of product development this year, amortising it over five years, and describes the policy as 'normal industry practice'. Capex was KES 180m and the board has proposed a dividend of KES 200m. Net debt is KES 1,150m, EBITDA KES 640m, and the tightest covenant is net debt/EBITDA of 3.0x. The shares trade on a trailing P/E of 14x against a sector median of 16x, and management describes the stock as 'cheap'.
1. Compute the cash conversion cycle and quantify how much cash the working capital shift absorbed.
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Cycle:
- Current year: 95 + 88 - 45 = 138 days
- Prior year: 62 + 70 - 52 = 80 days
- Deterioration: 58 days
Cash absorbed: daily revenue = 4,200/365 = KES 11.51m, so 58 days x 11.51m = about KES 668m of additional funding tied up in the operating cycle.
Sanity check from the growth side: revenue rose KES 641m. Receivables alone rose from 62/365 x 3,559 = KES 604m to 95/365 x 4,200 = KES 1,093m, an increase of KES 489m - roughly three-quarters of the entire revenue increase landed in debtors. That is not a rounding error; it is the business model changing shape.
Interpretation: a company growing 18% should be absorbing working capital, but 58 extra days of cycle means the incremental revenue is being bought with balance-sheet cash, and the cash conversion cycle is now longer than the supplier terms can finance.
2. Assess the quality of earnings and whether the proposed dividend is funded. Show the adjustments.
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Quality of earnings
- Reported CFO/NP = 120/380 = 0.32 - poor; cash is a third of profit.
- Strip the capitalisation: if the KES 90m were expensed (ignore tax for simplicity), adjusted NP = 380 - 90 = KES 290m and adjusted CFO = 120 - 90 = KES 30m (the spend is real cash leaving the business, whatever the accounting label).
- Adjusted CFO/NP = 30/290 = 0.10.
Free cash flow and the dividend
- FCF = CFO 120 - capex 180 = -KES 60m
- After the KES 200m dividend: -KES 260m, funded by borrowing.
- Net debt/EBITDA = 1,150/640 = 1.80x. If the KES 260m is debt-funded at the same EBITDA, leverage becomes 1,410/640 = 2.20x. Covenant headroom falls from 1.7x of EBITDA (about KES 770m) to about KES 510m - roughly two more years at the current burn.
Conclusion: the dividend is being paid out of borrowed money while the operating business consumes cash. That is sustainable only if receivables and inventory reverse, and nothing in the numbers shows that reversal starting.
3. Management calls 14x 'cheap'. Test that claim and state what you would need to see before recommending the shares.
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The 14x is flattered by capitalised costs. Market cap = 14 x 380 = KES 5,320m. On adjusted earnings of KES 290m, the P/E is 5,320/290 = 18.3x - a premium of about 15% to the sector, not a discount. Growth in reported profit is partly an accounting choice, not a cash-generating improvement.
Honest basis of comparison:
- Free cash flow is negative; FCF yield on a KES 5,320m market cap is negative, so a DCF will not support 16x on trailing earnings.
- Adjusted EBITDA falls by the 90m expensed, pushing leverage and the covenant test the wrong way.
- If receivables include slow or related-party balances, even the 290m adjusted profit may be overstated.
Before recommending: receivables ageing and any concentration in the top ten debtors; the identity of the fastest-growing customers; the board's rationale and approval trail for the capitalisation policy; whether the dividend is a signal of confidence or a support for the share price ahead of a refinancing.
Verdict: the shares are not cheap on an economically adjusted basis. 'Cheap against sector' is not an argument when the earnings being multiplied are the ones least supported by cash.