Top corporate bosses are not breathing easy as they face the axe over financial hemorrhage


Dozens of Kenyan corporate chiefs are staring at job losses this year in the wake of continued financial hemorrhage, poor performance and botched up business decisions.

A growing number of big firms are sinking into loss-making while others are posting sharp profit declines, largely as a result of a harsh economic environment and a prolonged electioneering period late last year, a detailed analysis by the Nairobi Business Monthly show.

As the 2017 full year corporate scorecard continues to emerge following the end of the March reporting season, top bosses, who are usually employed on performance based contracts are no longer sitting pretty with boards demanding better results.

At the same time, investors in the underperforming firms continued to face a massive squeeze at the Nairobi Securities Exchange (NSE) over depressed share price performance.

Over a dozen firms listed on the bourse have issued profit warnings on their 2017 results, indicating their earnings are expected to fall by over 25% from the previous year.

Financial services firms HF Group, Standard Chartered Bank and Family Bank, insurer Britam, investment giant TransCentury, cement makers Bamburi and ARM Cement and gas manufacturer BOC have all indicated that their 2017 earnings would be lower.  Other manufacturing firms on the red are Flame Tree Group, Mumias Sugar, Unga Group and East African Cables. Apparels dealers Nairobi Business Ventures (NBV) and Deacons are also on the list.

Those in the loss-making territory include among others Kenya Airways, Mumias, Uchumi, ARM, East African Portland Cement, TransCentury and human and animal feed miller Unga Group, which slipped into a Sh32.2 million loss in 2017.

It is the sorry state of retail chain Nakumatt that has sent shockwaves on the state of Kenya’s corporate scene. Nakumatt, which is under administration is said to have lost at least Sh18 billion worth of stock in the year to December 2017. An audit report that uncovered the loss details significant discrepancies in the books of account.  The report shows in the year to February 2017, Nakumatt made a net loss of Sh3.2 billion.

A larger group of companies has posted a significant decline in profitability among them Cigarette maker BAT which saw revenues slip on the effects of increased excise duty. Others are several listed Banks among them Barclays and Cooperative Bank.

Most of the firms have attributed the decrease in net earnings to slower than expected government spending, delayed payments for contractors by county governments and uncertainties arising from the prolonged electioneering period.

How did we get here?

The macro-economic conditions have been quite unforgiving for the past one year. In 2017, all indicators were relatively unfavorable. However, while many currencies in East Africa have been under pressure in recent years, the Kenyan shilling has been one of the most stable. This is arguably surprising given that the Kenyan economy continues to run significant twin – fiscal and current account – deficits and even experienced considerable political uncertainty around its presidential elections last year. Usually in the African economic context, this sort of economic and political cocktail is enough to weaken a currency significantly without the central bank running a very tight monetary policy. However, there is some optimism that growth could potentially re-bound quite strongly in 2018. The International Monetary Fund (IMF) forecasts growth of 5.5% in 2018. In January, the Central Bank Governor, Patrick Njoroge, told reporters in Nairobi that the economy would grow by 6.2% this year. Headline inflation has remained below the mid-point CBK target in the last two months coupled with core inflation – a proxy to demand pressure in the economy – which although on an uptrend, is subdued

A worker inspects beer bottles on a conveyor belt at the East African Breweries Ruaraka factory in Kenya’s capital Nairobi in this February 17, 2010 file photo. Kenya’s East African Breweries Ltd (EABL) expects a hike in beer excise duty to hit demand in its home market in the coming months and will raise output of a lower-taxed cheap brand in an attempt to offset the impact, its CEO said on January 29, 2016. REUTERS/Thomas Mukoya/Files

TransCentury: Is the shine gone on Kenya’s once most successful company?

TransCentury, which was a few years back an excellent case study of a successful indigenous Kenyan firm is expected to report a bigger loss in the coming months. At the beginning of March, the firm announced its earnings would fall by not less than 25%. In 2016, the firm associated with some of Kenya’s top billionaires posted a net loss of Sh864 million, a commendable improvement from the Sh2.4 billion reported in 2015. The continued hemorrhage in the firm puts Ng’ang’a Njiinu, its chief executive officer on the spot. . Insurance giant Britam has turned to job cuts to ring-fence its growth agenda, after it issued a profit warning early this year. The Benson Wairegi-led outfit, which reported a Sh2.4 bilion profit in 2016 will shed at least 100 jobs this year in a cost-cutting initiative.

Cement makers find the going tough

Loss-making Athi River Mining (ARM) Ltd said its losses for the full year 2017 would grow further on the back of a tough business environment across East Africa, a turn of events that places Pradeep Paunrana, its chief executive officer on the spot. In 2016, the firm made a Sh2.8 billion loss, a similar amount it had made the previous year.

“…Performance has been adversely affected by difficult market conditions and import ban for coal in Tanzania, by the prolonged and disruptive election period in Kenya, as well as a strain on the Group’s working capital. …We anticipate negative year-end provisions for contingencies and impairments of inventories and assets,” the firm said in a note to the NSE.

ARM said it is on track in executing its turn-around strategy with disposal of its non-cement activities and strengthening its balance sheet through equity injection and debt restructure initiatives that are at an advanced stage. ARM is in positive discussions with its lenders and has concluded an agreement with its two major shareholders for certain financial support, with the Board optimistic that the business of the Group will improve in 2018.

East African Portland Cement Company saw its net loss for the six months to December 2017 grow three-folds to Sh969.6 million on depressed revenues. The struggling cement giant saw its CEO Kepha Tande exit the company in August last year after holding the position for nine years. He was replaced by Simon ole Nkeri, who is expected to drive the business back into profitability. 

“The Kenyan cement sector is more fragmented and exposed to cheap imports from within East Africa…we expect earnings to be weighed down by lower prices, weaker volumes, higher imported clinker and coal costs, higher interest expenses and forex losses on foreign currency liabilities for ARM Cement and EAPCC, ” said UK-based investment bank Exotix Partners.

BOC’s shaky 2018 Start

BOC Gases, which is off to a shaky start in 2018 following the resignation of its managing director Millicent Onyonyi has seen a significant fall in sales, blamed on cheaper imports, putting pressure on its bottom-line. Its profits for 2017 are expected to decline by at least 25% from the Sh126 million reported in 2016. It’s not clear if Ms Onyonyi’s abrupt departure—after two years at the helm—was related to BOC’s performance.  Clearly, her replacement, who was yet to be announced by the time of going to press, has a job cut out.

Little known NBV in stormy waters

Fashion retailer Nairobi Business Ventures (NBV) which in January said it is seeking fresh capital in form of debt is also set to report a higher loss—of more than 25% — blaming the poor show on delays in securing fresh capital and weaker than expected consumer spending.  NBV reported a net loss of Sh14.9 million in the half-year ended September.

EABL: weak margins, uninspiring results

Beer maker East African Breweries (EABL) reported an uninspiring set of results for the first half of 2018 —revenues were up 4.7%, but gross margins declined from 47.2% a year ago to 43.4%, while margins declined below 30% for the first time in 2 years. The company reported a 4% volume growth, driven by bottled beer and spirits.

Growth in spirits and mainstream is also at odds with the gross margin weakness, suggesting a challenging pricing environment across its portfolio, with the beer maker still bedeviled by tax volatility in its various markets. The company cited election-related uncertainty in Kenya as dampening consumer demand.  EABL shares have underperformed Kenyan large capitalization peers significantly in recent months.

Banks: A rough terrain 

For Bank’s, the story hasn’t been rosy for the past year—a majority of the banks have reported declined profits for the full year 2017. Executives have been making tough decisions on staff rationalization, branch closures and investments in technology. These actions, they reckon, are meant to trim the excess fat, making banks leaner and more efficient to face the future.

Barclays Bank of Kenya posted Sh6.93 billion after-tax profits for last year, a 6.4% drop in year-on-year profitability that resulted from lower income. Similarly, Co-op Bank announced a 10.24% drop in net profit to Sh11.4 billion for the period, citing lower interest income, pressures from the interest rate caps and slowed economic activity. On the IFRS 9 implementation, all banks are expected to have commenced implementation, with effect from the quarter one 2018 results which will start coming through at the beginning of May. Capital depletion will be an important aspect for investors to watch out for, analysts said.

As per the Credit Officer Survey for the quarter ending December 2017, NPL ratio increased by 12bps quarter on quarter to 10.56% – a 10-year high. The status quo is expected to remain or worsen in the first half before a retraction in subsequent half.

“We expect an improvement in liquidity conditions during 2018, especially in the second half, as the government rumps up payments to the private sector as well as spending,” said Standard Investment Bank in a research note.

Data shows there was a significant upsurge in the Central Bank of Kenya intervention in the market, especially in the months of September and October, as a result of a liquidity crunch. Tier 1 banks were not immune to the liquidity ‘drought’ – an indication that the crunch was felt across the industry. Growth in private sector remained under pressure and further weakness in credit markets may stem from the banking sector’s adjustment to credit risk treatment under the IFRS 9 regulatory framework.

During the latest Monetary Policy Committee meeting in March, the CBK indicated room for policy easing citing a favorable inflation outlook and broader currency stability. That said, it lowered the Central Bank rate, the benchmark rate for the first time in 18 months, from 10% to 9.5%. Evidence from bank balance sheets, however, suggests that lower interest rates may not necessarily boost credit growth in the controlled interest rate environment.

“Inflation could still remain in the lower band of the Central Bank’s target through the first quarter underpinned by higher base effects. However, the key risk to this outlook lies in rising global crude oil prices, which should feed into the cost of fuel, transport and electricity. Meanwhile, demand side pressures are expected to remain mute, underscored by weak private sector credit expansion,” said Stephanie Kimani, the research economist at CBA Group.

In February, rating agency Moody’s Investors Service downgraded three Kenyan banks – KCB Group, Equity and Co-operative Banks – following the weakening of the credit profile of the government.

The fall of the media?

For the media sector, 2017 goes down as one of the worst, made so by perceived government suppression of the industry. Mid-march, the Standard Group announced disappointing set of FY17 numbers. Net earnings dropped sharply by 255.1% year-on-year to a loss per share of Sh3.32 from earnings per share of Sh2.14 in FY16. This was due to 12.1% growth in total operating expenses while revenue growth was bottlenecked by a 17% decline in the print business, which outweighed the 16% growth in broadcast division. In September last year, Mr Sam Shollei resigned as the Group CEO, after five years at the helm of the media house. The depressing results should be a big headache for Orlando Lyomu—the Group Finance Director and Chief Operating Officer— who is acting in the position pending the appointment of a substantive CEO.

Standard’s rival, Nation Media Group reported a drop in profitability for half year 2017 on lower than expected revenues. This also saw the exit of its CEO Joe Muganda, after a short stint at the media house. He will now head Vivo Energy Kenya. NMG is yet to announce a substantive chief executive.

BAT: Duty smokes out earnings

BAT Kenya has recently disclosed that further increases in excise duty could negatively impact the company’s profitability. The company is urging the government to have a much more stable tax environment so that both revenues and the operating environment can be predictable

In February the cigarette maker reported a 21.2% drop in net profit to Sh3.3 billion, citing unpredictable tax increases. BAT Kenya managing director Beverly Spencer-Obatoyinbo said: “We would encourage the government to have a much more stable tax environment so that their revenues can be more predictable and we can have a more predictable operating environment. Smaller increases in specific excise rates are easier for us to manage and easier for the consumer to handle and will give consistent revenue gains for the government.”

The sorry retail story

Kenya’s retail sector, especially in the supermarkets business, is at cross roads. Big retailers Uchumi and Nakumatt are on the red. Indigenous retail chain Uchumi Supermarket posted a wider net loss for the half year ended December 2017 by 63.5% to Sh895.1 million on a sharp sales drop. The listed retailer made a net loss of Sh547.3 million in the same period in 2016, with the performance coming after turnover declined 71.4% to Sh526.9 million. Nakumatt was a few months ago placed under receivership after a streak of bad performance. So how did they get here? Years of mismanagement had left them with no internally sourced funds (retained earnings). As such, the only alternatives for funding new stores were internal cash flows (generated by delaying supplier payments), and bank debt. Delaying supplier payments was the preferable source of funding because late payments accrued no interest. However, because short-term funds were used to fund long-term capital expenditures (a duration mismatch), chains required adequate liquidity (either from new loans from banks or commercial paper) or from stores that quickly ramped up sales to remain liquid. The other solution to the liquidity problem was to reduce initial expenditure for new stores with operating leases.

According to Cytonn Investments, an Uchumi shareholder lost 88.0% of the amount they invested between 2004 and 2017 and was better off investing in the broader NSE 20 Index, which gained 37.0% during the period.

“There are still opportunities for success in Kenyan owned retail. However, the entry of international competition has made the industry less tolerant of poor governance and a poorly executed strategy. Kenyan retail is not dead; it is now maturing in the face of competition” said Cytonn in a note to investors. In December, Julius Kipngetich resigned as Uchumi CEO after two years of service, ushering in Mohamed Ahmed Mohamed who is serving in acting capacity.

2018 Outlook

There is hope for an improved business environment in 2018. According to the Stanbic Bank’s Monthly Purchasing Manager’s Index (PMI) released early March, the business environment in the country remains stable as political tension witnessed in the last half of 2017 continues to dissipate, despite the index declining marginally to 52.9 in January from 53.0 in December 2017, the 2nd highest PMI score since December 2016. A PMI reading of above the 50-point mark indicates improvements in the business environment, while a reading below 50 indicates a worsening outlook.

Firms reported growth in the value of output, new orders and new export business, despite rising labour and raw material costs that resulted in slightly higher input costs. Cytonn Investments says output is expected to continue rising this year, driven by recovery in agricultural produce, mainly horticulture, as the recovery by the Eurozone, which is Kenya’s main horticultural export destination, which continues to boost demand. Stanbic maintained their GDP growth projections for 2017 and 2018 at 4.8% and 5.6%, respectively. Fitch Ratings, a global credit rating and research firm, also released their 2018 GDP growth projection in February, expecting a 5.5% growth.

The CBK Private Sector Market Perception Survey conducted in March 2018 showed that inflation was expected to decline in the near term and reported stronger growth expectations for 2018. The Survey also showed almost unanimous optimism by the private sector for the domestic economic prospects in 2018.

Respondents attributed their optimism to a stable macroeconomic environment, favourable weather conditions, improved business environment and investor confidence, continued public investment in infrastructure, expected direct flights to the U.S. and political stability.

“There is increased optimism for growth prospects in the economy and economic output is below its potential level. Therefore, it was concluded that there was scope for easing monetary policy stance in order to support economic activity” the CBK said in a statement.

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