Tough Operating Environment as Listed Companies Issue Profit Warnings
Staff Writer  |  Dec 23, 2019
       

Listed companies CIC Insurance, Kenya Airways, Standard Media Group and the Nairobi Stock Exchange (NSE) issued profit warnings, expecting earnings for the financial year 2019 to decline by more than 25.0% compared to 2018, attributable to a tough operating environment, which affected the top-line revenue, coupled with rising inefficiencies, consequently leading to declines in net income. Over the last few years, companies have continued to face economic


challenges that has seen firms restructure their staffing, with others declaring redundancies, and others opting for outright closure. The table below shows some of the listed companies that undertook restructuring in 2019: Kenya Listed Companies Restructuring 2019 Company Staff Retrenchment East Africa Portland Cement 800* Stanbic Bank of Kenya 88 East Africa Breweries Limited 100 Sanlam Kenya 19 Mumias Sugar** All staff *EAPC declared
all its staff redundant and required them to reapply under new terms **Mumias Sugar was placed in receivership on 20th September 2019 The decline in performance is attributable to dynamics including low spending power among consumers coupled with delayed disbursement of public funds to government agencies, which in turn leads delayed payments of bills owed to suppliers. So far in 2019, 10 listed companies have issued profits warnings to investors, compared to 8 that did in 2018, with Kenya Power and Lighting Company issuing consecutive warnings over the last 2-years. The table below shows companies that have issued profit warnings in 2019 and those that issued profit warnings in 2018, Companies that have issued profit warnings No 2019 No 2018 1 Kenya Power and Lighting Company 1 Kenya Power and Lighting Company 2 BOC Kenya Plc 2 Britam Holdings 3 UAP Holdings Limited 3 HF Group 4 Nairobi Stock Exchange 4 Deacons East Africa Plc 5 Eaagads 5 Bamburi Cement 6 Williamson Tea Kenya 6 Sanlam 7 Standard Group Plc 7 UAP-Old Mutual 8 CIC Insurance 8 Sameer Africa 9 Kenya Airways     10 Kapchorua Tea     In terms of sector-specific challenges, listed companies in the insurance sector such as CIC Insurance have witnessed a declining trend in profitability attributed to the capping of interest rates in 2016, which resulted in a ripple effect on business, owing to the fact that lending to insurable investment projects and assets remained constrained. Further, diminishing disposable income on account of tough economic times has slowed down the uptake of insurance products, evidenced by the drop of insurance penetration rate to a 15-year low of 2.4% of GDP in 2019 from a high of 3.4% recorded in 2013. In the energy and petroleum sector, Kenya Power and Lighting Company, despite controlling power supply in the country, continues to face operating challenges stemming from an increase in non-fuel costs as the company implements its long-term strategy of growing cheaper and cleaner renewable energy to cut cost of energy to consumers. Challenges in the agricultural sector, on the other hand, has seen listed companies such as Eaagads, Kapchorua Tea and Williamson Tea, issue profit warning statements this year citing uneven and unpredictable weather patterns coupled with lack of control over the aggressive and rising labour costs, amid depressed prices for tea and coffee. We expect listed companies to continue issuing profit warnings in the coming financial year on account of an increasingly challenging macro-economic environment, with World Bank’s 2020 GDP projections for the country expected to grow marginally by 0.1% points to 5.9%, from 2019’s projection of a 5.8% growth. Furthermore, with public spending expected to tighten in 2020 in line with the government’s target to narrow the fiscal deficit to 6.2%, we expect the performance of companies in key sectors such as commercial, agriculture and manufacturing to be affected.

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