More listed firms foresee profit drop as FKE warns of job losses

Federation Of Kenya Employers National President Habil Olaka and Executive Director Jacqueline Mugo during a press briefing in Nairobi on November 24 on the high cost of living and increased cost of doing business. [Wilberforce Okwiri, Standard]

Listed firms are continuing to issue profit warnings signalling the worsening economic conditions that have constrained demand.

Firms listed at the Nairobi Securities Exchange are required to issue warnings when their profits are projected to fall by at least 25 per cent against the previous similar period.

Corporate Kenya may face additional obstacles in light of the recent profit warnings issued by leading companies.  

In response, affected firms may consider implementing measures such as reducing costs, halting expansion and hiring, discontinuing or reducing dividend payments, and potentially even resorting to significant layoffs, which could have a detrimental impact on the overall economy.

The Federation of Kenya Employers (FKE), a national organisation that represents employers in Kenya, has expressed serious concerns about the state of the economy.  

On Friday, it issued a warning, stating that the Kenyan economy is in a critical condition and could potentially result in widespread business closures and subsequent job losses.

“The employers’ view is that the changes have had an overall negative impact on cash flows and the financial positions of enterprises in
various ways,” said FKE Chief Executive Jacqueline Mugo and national president Habil Olaka at a press conference in Nairobi.

“There is risk of business closure and increased laying off employees.”

FKE said business expenses have become unmanageable since the introduction and execution of the Finance Act 2023, which brought in a series of taxes as the Kenya Kwanza government intensifies its revenue raising strategies.

Paint maker Crown Paints and marketing and communication group WPP Scangroup became the latest top firms to issue an earnings caution yesterday as the cost of doing business in the country soars.

Crown Paints said in a public notice to shareholders it projects that based on the preliminary assessment of its unaudited consolidated accounts, its 2023 full-year earnings are expected to decrease by more than 25 per cent compared with the year ended December 31, 2022.

“The drop in the group’s performance is mainly attributed to the increased cost of raw materials, increase in transportation costs, volatility in foreign exchange rates and the slowdown in economic activities during the year,’ said the company.

“Whilst the challenging market conditions persist, the board remains optimistic that, despite macro-economic challenges, the group’s performance will improve in 2024 given the diversity of our businesses both in Kenya and across the region.”

WPP Scangroup separately told its shareholders that based on the preliminary assessment of its projected consolidated financial results for the financial year ending December 31, 2023, net consolidated earnings for the company and its subsidiaries will be at least 25 per cent lower than that reported in the financial year ended December 31, 2022.

“The reason for the lower expected earnings in 2023 is due to a number of reasons including the continued subdued economic environment in our markets of operations that has led to cautious spending by our clients on advertising, marketing and communications,” it said. 

It also linked the fall in earnings to a restructuring programme to right-size the cost base and reshape the staff structure.

“This led to a one-off severance cost of Sh178 million (included in operating and administrative expenses),” the company said.

Other listed companies that had earlier cautioned about their earnings include agricultural firm Sasini, automotive dealer Car and General, and Nation Media Group.

“Based on our un-audited end-year financial results and taking into consideration the information currently at the Board’s disposal, we anticipate that our projected net earnings for the year to 30th September 2023 will be 25 per cent lower than the reported earnings for the year ended 30th September 2022,” Sasini Board chairman James Boyd McFie said in a public notice to shareholders.

The company said it had encountered a difficult business environment, saying the major challenges during the year were occasioned by the “very high cost of production due to unplanned escalation of input costs, (and) the severe drought witnessed in the first six months of the financial year which affected production volumes negatively.”

FKE on Friday pointed out that the weakening of the shilling has aggravated the country’s economic situation further, adversely affecting businesses that rely on imports, including imports of machinery and equipment necessary for our manufacturing industries.

“The employment state is still very fragile. We are not yet back on track since Covid-19. Every day we receive notifications from employers on their intent to declare redundancy,” said FKE.

The earnings trend could heighten caution among investors as the stock market continues to decline, according to analysts.

Additionally, analysts have noted that investors are increasingly factoring in a potential economic downturn in Kenya next year.

Central Bank of Kenya (CBK) has responded to inflation concerns by implementing a significant increase in interest rates, a move that the National Treasury has acknowledged could potentially push the economy into a recession.  

Consequently, concerns regarding earnings have been mounting as companies grapple with rising inflation and the possibility of weakening demand.

“On June 26, 2023, the Central Bank of Kenya raised its benchmark rate by 100 basis points to 10.5 per cent 2023, bringing borrowing costs to their highest since August 2016,” said FKE. 

“This has made the cost of credit to businesses to go beyond reach thus affecting business growth.”

The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.  

In September, the Parliamentary Budget Office (PBO) cautioned that President William Ruto’s ambitious revenue-raising measures could work against his objective of cutting the country’s debt.

The team noted that the higher tax measures contained in the Finance Act 2023 as well as other planned reforms in tax administration might shock consumers into spending less, resulting in less tax revenue.

The new taxes that include a higher value-added tax (VAT) on fuel, the 1.5 per cent housing levy fund, taxation of digital assets and increasing turnover tax for small businesses to three per cent from one per cent have been criticised as too steep and could hinder economic growth.

Other measures that came into force with the Act include taxation of digital content monetisation, limiting the deduction of foreign exchange losses, change of the threshold and rate for turnover tax, enforcement of the use of Electronic Tax Invoice Management System, expansion of the pay as you earn bands and withholding of tax on advertising.

These measures are expected to enable the Kenya Revenue Authority to increase ordinary tax revenue to Sh2.57 trillion or 15.8 per cent of gross domestic product (GDP) from Sh2.04 trillion collected in the 2022/23 financial year, which was 14.1 per cent of GDP.

“The highlighted revenue-raising measures and others contained in the Finance Act 2023 are expected to enhance revenue collection and expand the tax base,” said the PBO in a new report.

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