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KenolKobil blames Sh5b pretax loss on strengthening shilling

BUSINESS
By Morris Aron | September 9th 2012

By Morris Aron

Leading oil marketer, KenolKobil made the wrong bet on foreign exchange trends forecast in the first half of the year, that saw the company bear exchange losses of Sh4.2 billion.

Late on Friday, a statement from the largest regional oil marketer, said that as a result and in addition to the rising cost of sales, the firm registered a Sh5.68 billion loss before tax.

“Sharp falling international oil prices since the end of last year, exacerbated by the accelerated downward price adjustments by regulators...put gross margins under pressure in the period under review, particularly in the first quarter when high stock levels carrying high costs were being disposed off,” read the statement.

“The most significant impact was the losses from foreign exchange hedges taken in the latter part of last year and the first two months of this year.”

 KenolKobil had hedged against the shilling fall and had forecast that the shilling would continue to depreciate or stabilise at around Sh100 to the dollar.

Exposed

The contract protected KenolKobil during periods of depreciation of the shilling, but would have exposed it in times when the currency appreciated, as it is an agreement to buy foreign currency at a pre-determined rate.

So when the interventions by the Central Bank and the World Bank saw the shilling appreciate and stabilise at Sh84 to the dollar, the company lost out, analysts say.

Financial books released on Friday indicate that over a similar period last year, KenolKobil recorded a Sh3.27 billion as profits when a hedging positions taken against the exchange rate cost the company only Sh842 million.

Despite the rising cost of sales, price of buying or making an item that is sold, which stood at Sh101 billion in the first half of this year, KenolKobil registered an increase of 17 per cent of the volumes sold.

The previous year, KenolKobil sold products worth Sh103 billion compared to Sh83 billion the previous year.

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Over the same period, the company’s administration and operating costs grew by Sh400 million while the finance costs more than doubled to Sh1.1 billion compared to just under half a billion over a similar period the previous year.

Inflation

“Administration and operating costs increased by 33 per cent mainly due to inflation, increased expenses with the Tanzanian Terminal now fully operational and an increase in unrecoverable VAT.”

According to the financial report, finance costs rose by 253 per cent in the first half of the year compared to a similar period the previous year due to ‘extremely high levels of bank interest rates and high levels of borrowings.’

The result comes as no surprise after an analysis by Standard Investment Bank forecast it.

In a note to investors after KenolKobil issued a profit warning, the firm said that foreign exchange hedging contract that KenolKobil signed last year to guard itself against volatility of the shilling is likely to impact negatively on the oil marketing firm’s half-year results.

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