Listed firms called out over profit warnings

An employee makes notes in front of an electronic stock information screen inside the Nairobi Securities Exchange Ltd. (NSE), in Nairobi, Kenya. [Bloomberg]

An industry survey has blamed the sharp drop in the profit of publicly listed firms on poor management and not a slowdown in the economy last year. 

A new report by Investment Company ICEA Lion Asset Management released yesterday found little, if any, relationship between the state of the economy and profitability among listed firms, discrediting what has become the most common excuse for most struggling companies.

Instead, the January 2019 Investor Pulse report blamed the failure of the affected companies to manage their operational costs, notably raw materials and higher commodity prices, as the main reasons for the profit decline.

Kenya’s businesses had a good run in 2018, with the gross domestic product (GDP) in the first nine months averaging a growth of 5.8 per cent, which provided a healthy environment for companies to thrive, according to the report.

Stanbic Bank’s Purchasing Managers’ Index (PMI) - a reliable barometer of the health of the private sector - also showed that 2018 was the best for businesses in four years.

Several firms have so far issued profit warnings where they expect profit to decline by at least 25 per cent, with a good number of them blaming the economy for their drop in revenues.

These include Britam, Housing Finance, UAP Insurance, Mumias and Kenya Power. Others are Sanlaam, Sameer Africa, Bamburi Cement and Deacons.

“The main drivers of significant profit declines during the cycle were increase in direct costs (such as material prices increases due to international commodity prices or local shortages and energy costs), credit defaults by customers and borrowers and an increase in operating and administrative costs,” said head of research at ICEA Lion, Judd Murigi.

“This suggests that companies that undertake aggressive and creative cost management initiatives, as well as credit risk mitigation policies, are in a better position to withstand pressure on their profitability even in difficult market conditions.”

After looking at the effect of elections and credit to the private sector, two factors that tend to affect the state of Kenya’s economy, the report found no direct relationship between these variables and profitability in the recent past.

“The Stanbic PMI closed the year strongly, recording the highest average since 2014,” said Regional Economist East Africa at Stanbic Jibran Qureishi.

The economy recovered from a bleak year in 2017, which was characterised by drought, a protracted electioneering period and low credit to the private sector.

“There was no consistent relationship between notable profit declines and private sector credit or election years, factors which are often perceived as major influences on economic activity and hence business performance,” explained Mr Murigi.

He noted that the highest number of profit warnings at the NSE over the last economic cycle was recorded in 2015, which was not an election year and which also saw private sector credit growth exceed 20 per cent.