Profit warnings return as firms struggle with costs, competition

Economic slowdown, high costs of raw materials, foreign exchange, stiff competition, and a sharp increase in import costs have wickedly combined this year to hand local firms a slump in earnings forcing several listed firms to issue profit warnings.

Nairobi Securities Exchange(NSE)-listed Crown Paints and Bamburi Cement Company have in recent weeks issued profit warnings—marking a return of such alerts in a subdued economic environment.

Profit alerts hit a peak in 2020 following the outbreak of the Covid-19 pandemic that decimated businesses across most sectors, and the pandemic’s aftershocks – in addition to new threats such as the ongoing war between Russia and Ukraine and runaway inflation – have continued to wreak havoc on economies across the globe.

Kenya’s economy slowed down its growth by 5.8 percentage points in the quarter to June compared to a similar period last year amid drought and high food and energy costs that pushed up commodity prices.
The gross domestic product (GDP) grew by 5.2 per cent in the second quarter, a much slower pace compared to the 11 per cent growth last year.

The growth for the first time slipped below the higher growth rates of 6.1 per cent and 6 per cent recorded in similar quarters in 2018 and 2019 respectively before the pandemic.

Inflation has also persisted and hit 9.5 per cent last month further constraining households even as the Central Bank of Kenya (CBK) pulled levers to raise the cost of loans in a bid to slow down consumption.

This, coupled with the periodic slowdown in the economy in the period just before and after general elections, has heavily hit firms as demand has dropped forcing some to trim their workforce and cut other costs, according to Stanbic Bank Kenya’s Purchasing Managers Index (PMI).

A weakening shilling – the US dollar was trading at a mean of Sh123.04 on Monday compared to a mean of Sh113.17 at the start of the year, an increase of 8.7 per cent – has also increased forex costs for local firms. 
Firms rely on forex to settle external transactions such as making imports, paying workers, and settling foreign currency-based loans.

These issues have sharply cut the earnings of firms forcing them to issue profit alerts to shareholders and the investing public.

Crown Paints became the latest NSE-listed firm to issue a profit warning as it anticipates a significant slump in its earnings for the financial year to December 2022.

Listed firms are required by the Capital Markets Authority (CMA) to notify investors and the public should they expect their after-tax full-year earnings to fall by at least 25 per cent.

This means its profit after tax will be at least 25 percent lower than the Sh731 million net profit recorded last year.

The company said the drop in its performance was mainly driven by an increased cost of raw materials, volatility in foreign exchange rates, and the slowdown in economic activities during the year.
The company was this year forced to raise paint prices after the cost of Titanium Dioxide, a core raw material for making paint, went up as well as shipping costs.
“The Board is optimistic that the business of the Group will improve in 2023 as the world economies are improving,” said the company.
Bamburi Cement in November also issued a profit warning after it was hit with stiff competition in the cement market amid timid demand for cement and high energy costs that increased its operational costs.
Bamburi made a net profit of Sh1.38 billion in 2021, up from Sh1.1 billion in the previous year.

“The expected decline in earnings is largely attributable to a slowdown in market demand for cement, high energy costs coupled with high raw materials costs due to global disruption of the supply chain,” it said.
The firm had already taken a massive hit to its earnings for the half-year to June earning a net profit of just Sh95 million, an 87.7 per cent decline from Sh776 million reported in the same period in 2021.

“Significant inflation of the fuel prices, logistics costs, and imported clinker prices in both Kenya and Uganda adversely impacted the operating profit. This was also adversely impacted by forex losses of the Kenya shilling and Uganda shilling against other major currencies,” said the company in its half-year earnings.
Sameer Africa also issued a profit alert citing the weak shilling and high import costs which it said it was unwilling to pass on to consumers.

This means the firm will earn significantly less than the sh217.3 million net profits it earned last year. The company had significantly cut costs due to the pandemic which helped it grow its earnings by five times from Sh43.3 million in 2020.

“Global disruption in the supply chain as a result of the Covid-19 pandemic and the Eastern Europe conflict continues to impact the availability of key products in our tyre business. The weakening of the Kenya shilling impacts margins adversely as the full effect of price changes cannot be passed to consumers,” it said.
The NSE in November also issued a profit alert which it blamed on reduced trading across equities and debt securities due to the economic slowdown.

The NSE earns a commission on transactions, and its earnings are influenced by the volume and value of trades at the bourse.

The company earned a net profit of Sh132.5 million in 2021 indicating that its earnings will be less than Sh99.4 million this year.

“Over the course of 2022, the company’s performance was impacted by reduced trading in the equity and debt markets occasioned by continued economic challenges both locally and internationally,” it said in a statement.
Companies are however putting on a brave face amidst the chaos and expect external factors to swing in their favour in 2023 including the amelioration of the Russia-Ukraine war to ease lower import costs.