Cocoa Processing Company Limited: the road ahead

Cocoa Processing Company Limited was established in Tema in 1965. The company currently has three factories comprising a confectionery factory and two Cocoa Factories. It was incorporated in Ghana on November 30, 1981.It has been listed on the Ghana Stock Exchange for the past decade but has seen some financial challenges which have hampered its growth over time. In the wake of these challenges, management closed down the two cocoa processing plants-operational. Staff totaling a thousand plus were as of January 25, 2016 asked to stay at home as part of their annual leave while management resolve the “operational challenges.”
How did the company with so much potential arrive here? In the 2011-2012 operational years, Cocoa Processing Company shut down for several months due to interruptions in supply of utilities (water and electricity) which affected the company’s operations in that operational year.
Global Chocolate manufacturing giants are raking in big revenues for shareholders but the story here at CPC is the opposite.
The table below is an extract from this list, giving the top ten global confectionery companies that manufacture some form of chocolate, by net confectionery sales value in 2015:

Reference:
Candy Industry, January 2016
* This includes production of non-confectionery items

The Ghana Cocoa Board the majority shareholder together with the Government of Ghana with some 62% stake has come out to announce it does not intend to pump extra funds into the operations of CPC. Is the local economic challenge the cause of CPC woes? What should shareholders do at this moment when the share price of CPC has fallen to 1 pesewa?
Ghana Talks Business’s Paa Swanzy-Essuman had a chat with Mr. David Tetteh, Chief Executive Officer of Cal brokers Ghana Limited on the effects of CPC’s shut down on the local economy and what it holds for shareholders.
In this chat;
Ghana Talks Business = GTB
David Tetteh, C.E.O Cal Brokers Gh. Ltd= DT

GTB: Give us a brief overview of how long CPC has been on the stock market and its performance until the crisis.
DT: Cocoa Processing Company Limited has been listed on the market for over ten years; it got listed as a result of government’s divestiture program to raise funding for state-owned institutions to be semi-autonomous and also to generate some profitability for these State-Owned Enterprises. Cocoboard was the majority shareholder in CPC back then, but sold off some of its shares to the public.  It was a well marketed and patronized Initial Public Offering (IPO). The performance of the company has not been that good and the return to shareholders has been negative over the years. I am sure the shareholders who bought the shares of CPC won’t be very pleased with its performance.

GTB: In your view what reasons could be attributed to the poor performance of their share price in recent times?
DT: Well it has to do with the company, for stock market listings, the better a company performs the more likely you are to seek demand for your company’s shares which will lead to an increase in the company’s share price. CPC has been struggling for a long time; it installed additional capacity; borrowing about 22 million Euros through syndication for its factories. The long-term effect of that loan on the company’s books has been negative. The exchange rate has affected the company’s ability to generate enough cash to repay the loan, their own production challenges, management challenges and product challenges has resulted in year after year declining financial performance which has led to decline in share price.

GTB: Can CPC’s woes be attributed to difficulties in the economy?
DT: I wouldn’t attribute the performance of the local economy directly to the challenges CPC is facing. I think that CPC’s challenge could be down to management; the influence positively or negatively of its majority shareholders being Cocoboard and government of Ghana. It has not been fully run as a private entity and of course between these two entities they have 69% majority shareholding in the company, hence it has not been fully autonomous as was planned. So I wouldn’t say CPC’s woes are due to the performance of the local economy. There are other entities coming up, upcoming start-ups like Niche and others that are doing quite a good job in the same industry in the same local economy facing the same challenges.

GTB: How beneficial has CPC been to the economy of Ghana?
DT: Well yes, you know the cocoa sector is one of the strategic sectors for Ghana and CPC also exports a lot of its products and semi processed products like cocoa butter paste, which brings us some much needed foreign exchange. The decline in the production of CPC does affect the ability of company to bring in foreign exchange which of course has an impact on our balance of payments. I am sure it’s one of the sectors you would like the country to promote in terms of exports because it’s an area we have a comparative advantage. So yes, in the long term the shutdown would have a negative effect on the local economy. Not forgetting the thousands of employees who rely on CPC for their living and the dependents on these employees, so yes, it does have a negative effect on the economy.

GTB: … effects on the economy in the short-term?
DT:…well in the short- term the company has shutdown factory and it has sent one thousand people home and if the livelihoods of the people are going to be affected then the local economy will be affected. Of course it is a small percentage and this is not going to slowdown GDP growth but if you have companies strategically positioned in the country facing these challenges then definitely the economy is going to be affected.

GTB: Do you have any advice for shareholders who are considering selling their shares?
DT:Right now CPC is trading at 1pesewa per share on the Ghana Stock Exchange and which is the lowest possible price on the market. It depends on the appetite of the investors (shareholders), the school of thought which says you should buy CPC share now would belong to an investor who is long-term oriented, believes that the majority shareholders would have to find a solution to the low price, then they will sell out, believes in the industry that CPC is operating in, believes in the power of cocoa, value added cocoa processing, and also believes in the long-term viability of the sector and can see a turn-around happening. Such an investor should be on the buy-side if not buying additional shares, they should be holding shares.

GTB: Could there be a solution to this crisis soon?
DT:If you are a short-term investor who probably bought and was hoping for returns for retirement funding or you were looking to receive some income from it in your old age, I don’t think it would be advisable to be holding on because you need to have a long-term perspective if you are holding CPC shares now. So if you are short-term oriented and an income seeking investor I think you should be cashing out whatever losses you’ve made, cut your losses and move your money probably into some money market  instruments which you can make some income.

GTB: … If so what do you suggest?
DT:For me, the first thing is that the government must move to full divestiture-privatize the company entirely and get in some much needed capital. If you get in the much needed capital and the company is fully privatized, the decisions that are taken by the new shareholders will be in line with the new capital, I think CPC should be able to turnaround. There’s no doubt in my mind that the sector that they operate in and their products do have the market. Maybe some management decisions, some retooling of the factories, if you give it a major push CPC should bounce back.

GTB: What is your view on privatizing CPC?
DT: Yes. I think the company should be privatized, I think the government should own a minority stake for strategic reasons because it’s obviously intertwined with our cocoa sector. But the government should hold minority position, should be interested in the business of CPC but should not be involved in managing and taking strategic decisions for the company. That should turn the company around.

Seeing through David’s lenses;
•   CPC should be privatized
•   Get in the needed capital
•   Long-term investors should hold on to their shares
•   Short-term investors should sell and look elsewhere on the capital markets to invest to recoup to make up for short-term investment expectations
• The problem of CPC is managerial, privatize and you will have the right management in place to make it attractive
•   Government should only hold a minority stake in CPC for strategic reasons

Author:  Paa Swanzy-Essuman || p.swanzy@ghanatalksbusiness.com