Crown Paints has written off Sh908 million its loss-making subsidiaries owe as part of efforts to keep the regional units afloat.
The move boosted the Uganda, Tanzania and Rwanda units’ capital position on paper while eroding the parent company’s current assets, according to the paint manufacturer’s latest annual report.
The Nairobi Securities Exchange-listed firm has committed to keep funding the regional units which have posted losses for years, weighing down the parent company’s bottom-line.
Crown Paints fully owns the subsidiaries and the transaction saw it acquire more shares in the units without a change in its percentage ownership.
“During the year ended December 31, 2018, an amount of Sh908.1 million, made up of Sh379.8 million, Sh355.7 million and Sh172.6 million owing from Regal Paints Uganda Limited, Crown Paints Tanzania Limited and Crown Paints Rwanda Limited, respectively, was capitalised,” the company says in the report.
The debt-to-equity transaction saw Crown Paints’ short term liabilities exceed its current assets by Sh601 million in the review period, the company said.
The paint manufacturer’s external auditor EY says the company risks weakening its financial position by maintaining support for the loss-making subsidiaries.
“As indicated in the note, the subsidiaries, which contribute significantly to the performance of the group have a history of making losses and during the year ended December 31, 2018, they reported a combined loss before tax of Sh275.4 million (2017: Sh109.7 million),” EY said in its report.
“These conditions, along with other matters as disclosed in note 33, indicate the existence of a material uncertainty that may cast significant doubt on both the company’s and the group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.”
The transaction saw Crown Paints’ investment in Regal Paints Uganda rise to Sh745.2 million last year from Sh365.3 million in 2017 while the capital commitment in the Tanzania subsidairy rose to Sh773.1 million from Sh417.4 million over the same period.
Investment in Crown Paints Rwanda increased to Sh173.9 million from Sh1.2 million.
The capital increase represents debt forgiveness, meaning that the subsidiaries may still require cash injection from the parent company to fund operations.