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A perfect storm for Kenyan firms at NSE



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Businesses in Kenya are going through a rough patch. A number of listed companies have missed the financial reporting deadlines and some have gone into administration for a number of reasons, some internal, but for the most part, external.

This has sent mixed signals to investors, coming after the World Bank released its Ease of Doing Business Index ranking Kenya ahead of its regional peers.

In recent months, companies in Kenya retrenched about 10,000 employees in efforts to ease the pressure on their bottom lines.

Banks have blamed the introduction of interest rate capping, coupled with a slowdown in economic growth in recent years and competition from mobile-based lenders, leaving them with little choice but to cut staff to maintain profitability.

A majority of private firms are also struggling to remain in business, with most recently, Telkom Kenya announcing it will be letting go of some 500 employees.

Kenya is trailing its East African peers in attracting foreign direct investment, an indication that foreign investors no longer consider the country the best investment destination.

The companies that have slid into loss-making blame last year’s prolonged electioneering, the interest rate capping in 2016, credit squeeze, an increase in taxes, rising operating costs due to high fuel and energy costs, unfavourable government policies and unfair competition due to an influx of cheap imports for their woes.

Worse still, the failure by the government to pay private sector suppliers and contractors’ bills amounting to over $270 million has impacted cash flow and profitability, leaving many of them heavily-indebted, having borrowed to execute government contracts.

The effect has been a spike in bad loans, which have remained above 10 per cent in recent times, and a credit freeze by lenders.

But, even as these companies blame a tough business environment, internal administrative flaws have also played a part in this state of affairs.

Fashion retailer Deacons has joined a growing list of Nairobi Securities Exchange-listed companies that have gone into administration due to financial difficulties, according to Muchiri Wahome, its CEO.

“The board of directors has resolved that it is in the best interests of the company and its creditors to place the company in administration,” Mr Wahome said in a statement.

The company’s shares were suspended from trading on the Nairobi Securities Exchange as the board appointed Peter Kahi and Atul Shah of PKF Consulting as joint administrators.

Deacons is the second listed company after ARM Cement to invoke the Insolvency Act, which allows companies going through financial distress to appoint administrators to explore the possibilities of restoring them to probability.

Analysts say that Deacons fell victim to slow sales blamed the spending power of its customers declined due to the tough economic times, and lost revenue after selling its Mr Price stores to the franchise owner, Mr Price Group of South Africa.

The company’s loss rose to Ksh229.5 million ($2.29 million) in the six months ended June, compared with Ksh180.4 million ($1.8 million) last year, as its revenues fell by more than half to Ksh378 million ($3.78 million) from Ksh1 billion ($10 million) in the first half of 2017.

The company issued a profit warning for the year ending December, and its share price plummeted, almost wiping out its shareholders’ investment.

According to our sister publication Business Daily, Deacons’ top 10 owners, who collectively held 82.2 million shares valued at listing at Ksh1.23 billion ($12.3 million) now have just Ksh36.8 million ($368,000) in hand.

Also on this list are East Africa Portland Cement, Mumias Sugar, Uchumi Supermarkets, Kenya Airways, Eveready East Africa and Kenya Power.

With companies like Uchumi Supermarkets and Nakumatt Holdings, unbridled expansion has been their undoing.

The cement firms ARM and Portland have been struggling with massive debt and a shrinking market share due to competition from new entrants.

This week, French energy solutions provider Schneider Electric Kenya also announced plans to retrench some 50 employees, citing poor market conditions, a government freeze on projects, challenging investor conditions due to the high price of resources and mounting pressure to optimise costs to justify the sackings.

Analysts say that while most indicators show that the business environment is still positive, there is a disconnect when you analyse the performance of individual companies.

Willis Nalwenge, research analyst at AIB Capital, also noted that while many companies are feeling the pressure of external factors, internally some have been caught out by unsound management strategies, excessive absorption of debt and misadvised expansion.

According to the Kenya National Bureau of Statistics producer index for the second quarter of 2018, production of consumer goods increased, with overall prices rising by 0.67 per cent from 119.38 points in March 2018 to 120.20 points in June.

The Stanbic Bank Purchasing Managers’ Index, which measures activity in the private sector has remained above the 50.0 mark that denotes growth. In October, the index increased to 54.0 up from 52.7 in September.

“Higher output levels were driven by a sharp increase in new business as a number of companies reported new client wins,” said Jibran Qureishi, Stanbic Bank’s regional economist.

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Kenyan Digest