NAIROBI, Kenya, Jan 8 – Eight companies issued profit warnings to investors in 2018 compared to six companies in 2017, despite the improving macro-economic environment in 2018.
Financial services, manufacturing and trade sector companies have dominated profit warnings by listed companies over the last economic cycle.
The companies include Deacons, UAP Holdings, Bamburi Cement, Sameer Africa, HF Group, Britam Holdings, Kenya Power Company and Sanlam.
According to analysts at ICEA LION Asset management, direct costs, operating expenses /admin costs and credit defaults appear to be key drivers of major declines in profitability of listed companies.
“In contrast to private sector credit growth and election years, GDP growth has a more consistent relationship with company profitability trends,” said ICEA LION Asset management Head of Research Judd Murigi.
Bamburi attributed the shortfall in profits to difficult market conditions and escalating energy prices in Kenya and Uganda, as well as increasing costs of power in the country while UAP Holdings attributed the drop to dwindling investment income due to the poor performance of the equities market in the first half of 2018 coupled with low rental yields and occupancy rates on property in Kenya and South Sudan, leading to adverse valuations on property.
Sameer Africa on the other hand was affected by severe stock shortages due to production bottlenecks experienced by some its major offshore trading partners.
In HF Group’s case, downward revisions of the Central Bank Rate (CBR) affected interest income, while a tough operating environment in 2017 occasioned a deterioration in asset quality, hence affecting business performance.
The Group also undertook a redundancy exercise in tandem with implementation of its Digital Strategy, in which it incurred a one-off redundancy cost.
Deacons, a fashion retailer, attributes its expected loss to reduced traffic to malls where 98% of its stores, due to non-performance of major anchor tenants such as Nakumatt, coupled with the loss of revenue arising from discontinued operations and diminished operating margins which have contributed to cash flow constraints,
Britam’s expected decline is attributable to the downward equity markets trend that reduced returns from equity investments, and a challenging operating environment.
KPLC attributed the expected decline in profits to a challenging economic environment, poor hydrological conditions and the protracted electioneering period in 2017.
Sanlam attributes the expected decline in profits to the 100 percent impairment of Sh1.1 billion corporate bonds placed in currently distressed local enterprises as well as effects of the interest rate capping such as restricted access to bank credit Companies are required to issue profit warnings if they project a more than 25 percent decline in profits year-on-year.
According to ICEA LION, Quarterly trends in agriculture and manufacturing indicate that overall GDP growth in fourth quarter of 2018 could be lower than previous three quarters that had an average growth of 6 percent.
“Biennal trends and base effects in agriculture and manufacturing indicate that 2019 GDP growth could normalize back to between 5.7 percent – 5.8 percent, which is a pullback from 2018 growth but still robust,” Murigi said.
During the year, the Kenyan equities market was on a downward trend, with NASI, NSE 25 and NSE 20 declining by 18 percent, 17.1 percent and 23.7 percent, respectively according to the latest research by Cytonn Investment.
Since the peak in February 2015, NASI and NSE 20 are down 20.9 percent and 48.4 percent, respectively.
Equity turnover during the year rose by 2.3 percent to USD1.72 billion from USD1.68 billion in FY’2017.
Foreign investors turned net sellers with a net outflow of USD425.6 million compared to net outflows of USD113.7 million recorded in FY’2017.