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Boom then burst at agriculture counters


Listed agriculture companies made losses last year and expect revenues to dip lower than 25 per cent of what they reported in 2015.

The agricultural counters were the top five gainers at the Nairobi bourse in 2015 led by Kakuzi, Williamson Tea, Sasini, Kapchorua Tea and Limuru Tea.

Today though, these top performers are issuing profit warnings for 2016 in a major reversal of fortunes for the agricultural stocks. Kenya’s agriculture counters at the stock exchange had benefited from favorable rainfall and a foreign exchange windfall in 2015 sending them to the top.

Stability of the exchange rate and a new accounting law by the International Accounting Standards Board (IASB) – Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) – issued on June, 30, 2014 wiped out the profits last year.

“The profit warnings already issued relate to 2016. There were accounting changes made to reporting requirements for bearer plants which was effective January 2016,” Standard Investment Bank researcher Eric Musau said.

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When the shilling lost ground against the dollar, Kenyan farm produce exported outside the country in dollars meant more money for investors when converted back to shillings. This was not repeated last year as the shilling held steady at 101 against the greenback for the better part of the year.

“I am confident that the shilling (which has been an SSA out-performer for quite a while now) will remain close to where we are now for the foreseeable future, so no super-normal FX related gains, I am afraid,” Aly Khan-Satchu, CEO of Rich Management said.

The counters were also hit by changes in valuation of their biological assets requiring bearer plants (including tea bushes, grape vines, rubber trees and oil palms) to be presented as non-current assets while agricultural produce are now classified as current asset, unless it takes more than a year to mature, according to Ernst and Young.

This means that while last year a tea farmer had classified both his bush and leaves as a current asset, he had to revalue his books since only his tea leaves are considered current assets under the new regulations. “In the dynamic is the Net Asset Value discount. Most of these counters are carrying their land bank in their books at the acquisition cost. In most cases, the discounts to NAV are very very wide,” Mr Satchu said.

The firms, which are facing a drought period, seem to be headed to the guillotine this year which may further shrink their values. Production has hit Unga Group and Mumias Sugar even as tea experts predict a dip in production this year. The Kenya Tea Industry Performance Report estimates that the total production for 2017 is expected to drop to about 416 million kilogrammes, a 12 per cent decrease from yield realized in 2016 crop season.

Analysts however say the drought may even be good for agriculture given the shortage will drive up prices and hedge against lower production. “I think it is too early to tell what the impact of the ongoing drought is going to have on profitability for 2017. In addition, we have to consider impact on any potential shortage on price too, as well as the FX change impact,” Mr Musau said.

Mr Satchu said whilst prices are not 100 per cent correlated price increase in these situations in the case of tea, where Kenya is like Saudi Arabia in OPEC, the swing producer will drive up the global prices which will tend to mitigate some but not all production related losses.

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The analysts added that although the agricultural counters may perform poorly, they may not affect the Nairobi Securities Exchange much since they make up a small component of the market capitalization at the bourse with only one agricultural company (Sasini) in the indicative NSE 20 Share Index. Following below is how the companies performed. 

Mumias Sugar
The listed sugar producer issued a profit warning after reporting a half year net loss of Sh2.92 billion in the period to December 2016 compared to Sh1.56 billion the previous year. The troubled firm attributes the losses to an acute shortage of raw materials that led to factory under-utilisation, resulting in high unit cost of production. Mumias Sugar also issued a profit warning two years ago citing sugarcane shortages and closure of its factory for two and a half months.

Unga Group
The flour milling and manufacturer of human nutrition products and animal feeds issued a profit warning due to adverse climatic conditions during the period and lack of availability of quality maize grains that made it difficult to produce flour meal and animal feeds at full capacity and at competitive prices. High raw material costs and lower volumes led to squeezed margins. Unga Group’s half year revenues for the six months to December 2016 decreased from Sh10.5 billion in 2015 to Sh10.2 billion in 2016. Profits before tax declined drastically by half from Sh463.8 million in 2015 to Sh191.4 million in 2016.

Sasini
The listed tea and coffee producer issued a profit warning for the year ending September 2016, attributing the drop to the effect of the one-off gain on a land sale made in 2015. Sasini’s profit in the year ending September 2015 had been boosted massively by the sale of 513.7 acres of its land in Nyeri for Sh1 billion. The sale pushed the firm’s net earnings to Sh1.1 billion, from Sh45.4 million in 2014.

Limuru Tea
The tea company has issued a profit warning for the year ending December 2016 due to the biological assets valuation, effected in January 2016, which largely impacted the decline in earnings.

Eaagads Limited
The coffee firm made an after tax loss of Sh7.7 million, as compared to an after tax profit of Sh9.5 million in the previous year due to deferred tax and unrealised Sh30.2 million fair value loss on revaluation of biological assets. Revenue was up Sh72.5 million from Sh44.7 million in spite of the turbulence in the international coffee prices. There was a significant improvement in coffee sales revenue due to higher coffee volumes and hence operating profits.

Kakuzi Ltd
The Kenyan agricultural cultivation and manufacturing company which produces tea, avocados, pineapples and livestock reported a Sh35.2 million loss after tax for the period to June 2016 down from Sh2.4 million in profit the previous year due to lower tea prices, lower livestock sales and the delay of macadamia sales due to awaiting completion of the cracking facility construction. The company also adopted the International Accounting Standard.

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Williamson Tea Kenya Ltd
Made a loss of Sh263.1 million after taxes from a profit of Sh380.6 million as a result of weak prices through the year due to large unsold tea stocks from other producers within Kenya as well as a decrease in fair value of biological assets of Sh200.4 million versus an increase of Sh159.2 million a year earlier.
The company is also uncertain over the award of 50 per cent wage and benefit increases to its workers for the years 2014 and 2015 granted by an industrial court in June 2016. The award was challenged by the tea industry and is awaiting judgement by the Court of Appeal.

Kapchorua Tea Company Ltd
The firm, which issued a profit warning back in March 2014, say the outlook is gloomy having posted Sh89.6million loss to June last year down from Sh100.4 million in after tax profit in a similar period in 2015. —[email protected]

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