Weakening shilling wipes out profits for most listed firms

Nairobi securities Exchange (NSE)trading floor.17/10/14-BEVERLYNE MUSIKLI

Major companies are reeling from the slump of the shilling as the strengthening of the US dollar takes its toll beyond individual households.

More than half of the 32 listed firms that have booked their earnings have reported slowdown in profits or even losses, including the record Sh29 billion loss announced by Kenya Airways.

Yesterday, transportation and warehousing firm, Express Kenya, warned of a significant drop in earnings, crowning a disastrous run for big Kenyan firms so far this year. “This (drop in earnings) has been influenced by the economic downturn that has generally affected the transport sector,” the logistics company said in a profit warning notification filed yesterday.

Soaring competition has in part shoved Express Kenya from the list of top freight firms, especially after it lost a critical contract to distribute beer to a rival, as its fortunes continue to dwindle.

The firm anticipates booking a trading loss for the financial year ended June, 2015. Express announcement came after Transcentury reported a Sh676 million loss that the management attributed partly to devaluation of the shilling, which led to increased finance costs.

Transcentury had also been exposed to the plant upgrade of East African Cables’ copper factory in Nairobi, where it has a controlling stake. EA Cables issued a profit warning on Tuesday citing the impact of the reduced production as a result of the plant upgrade that was compounded by foreign exchange losses.

“It is going to be a very tough year for firms, mainly those exposed to foreign exchange losses,” explained Sunil Sanger, the managing director of Orion Advisory Services.

The weak shilling in itself has led to a sharp rise on the cost of imported products, including petroleum whose impact is felt across the economy.

Firms with foreign currency-denominated loans like ARM Cement and Kenya Airways have seen their finance costs shoot through the roof, draining their revenues and wiping off operating profits.

Executives of oil marketer, Total Kenya, have also reported a drop in profits but were quick to caution that the ‘continued volatility of petroleum prices and depreciation of the local currency against the US Dollar’ is a risk they would be looking out for in the second half.

Crown Paints, the listed paint maker, has booked a huge slump in earnings to record Sh25 million profit the full year ended June, against Sh109 million posted last year.

“As a result of the decline in the shilling value, foreign exchange losses have also affected our performance for the period,” read in part a statement from Crown Paints.

Tri-cycle trader Car & General could be among the most affected by the strong dollar. Its managing director VV Gidoomal issued a profit warning at the start of the month, citing that the devaluation of the local currency resulted in substantial foreign exchange losses. The firm buys its inventories that also include machinery and motor cycles in dollar but retails the stock in the local currencies.

“Due to increasing competitive pressures in the regions, the company has been unable to sufficiently increase prices, particularly in the consumer business, to accommodate these increased costs and preserve full margins,” Gidoomal said in the profit notice to the Nairobi Securities Exchange.

Efforts by the Central Bank of Kenya to cushion the shilling from further losses have included raising lending rates, as a measure to discourage consumption. However, that measure is expected to result in higher loan default rates.

Already, Standard Chartered Bank has reported a drop in profits attributable a growing non-performing loan portfolio. Its first-half pre-tax net profits slumped 36 per cent owing to increased provisions for bad loans. Other big companies that have been exposed to the foreign exchange movements include UAP Holdings, which has in recent weeks been acquired by UK’s Old Mutual.

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