Job cut fears amid growing list of firms issuing profit warnings

TransCentury board of directors chairman Zephaniah Mbugua (centre) with acting CEO Ng’ang’a Njiinu and company secretary Virginia Ndunge during a meeting. TransCentury has blamed poor performance on delayed spending on infrastructure projects. FILE PHOTO | NMG 

In Summary

• Some of the companies affected are Britam, Deacons, Standard Chartered Bank, Family Bank and BOC Kenya, which have said they expect lower earnings.
• Profit warnings mirror economic performance. In the last two years, most corporates have reported facing harsh business operating environment.
• Market analysts say when profit warnings are issued, investors tend to lose their wealth while jobs stand at risk.
• This is compounded by the fact that the share prices of listed companies which have issued profit warnings hardly excite new investors.

By JAMES NGUNJIRI
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Kenya’s unemployment crisis is set to worsen in the near term as the fallout from a protracted
electioneering period and the increasing number of companies warning of profit declines spell hard times.

In 2017, thousands of jobs went down the drain in the banking and manufacturing sectors and it is feared the private sector could freeze hiring and, worse still, embark on a new round of retrenchments to survive the lean times.

In one of the worst corporate earnings season, over a dozen Nairobi Securities Exchange-listed firms have issued profit warnings. They have joined a growing list of firms that are expected to report lower earnings attributed to last year’s tough operating environment and other internal challenges.

They include HF Group, Britam, TransCentury, ARM Cement, Bamburi Cement, Standard Chartered Bank (Kenya), Family Bank, Standard Group and BOC Kenya all of which have announced that their earnings for the full year ending December 31 will be lower by at least a quarter compared to the year before.

Others are fashion retailer Deacons, manufacturing firm Flame Tree Group, Mumias Sugar, Unga Group, East African Cables, and shoe and leather accessories vendor, Nairobi Business Ventures (NBV). The firms have variously cited the 2017 prolonged election cycle, the interest rate cap Act and drought experienced early last year.

“In a market where there are more speculators, the impact of a profit warning is intense as investors with a holding in a firm which issues a profit warning might sell off if their intention was to make capital gains,” said analysts from Genghis Capital last week.

Profit warnings mirror economic performance. In the last two years, most corporates have reported facing harsh business operating environment.

Market analysts who spoke to Sunday Nation said when profit warnings are issued, investors tend to lose their wealth while jobs stand at risk.

This is compounded by the fact that the share prices of listed companies which have issued profit warnings hardly excite new investors.

Since some shareholders might want to exit, the market experiences excess supply pushing the share price downwards.

Those that hold for growth and dividends might also sell off due to lack of dividends and if a company issues a profit warning for three years in a row, management and strategy changes are inevitable which might raise the going concern issue of the company causing a panic sell-off which could decrease the company’s share value, Genghis analysts added.

Investors are now setting up for a potential dividend cut or freeze, and the companies have been forced to take aggressive measures such as restructuring in a bid to survive, with most of the measures aimed at cutting wage costs inevitably sending many home.

And those that prefer to retain some of their earnings to fund new investments are likely to reduce the allocations.

In Kenya, listed companies are required to issue profit warnings if their projected earnings are expected to be lower by over 25 per cent compared to the previous year. Many investors rely on this information to determine whether to buy, hold or sell shares of a particular company.

ARM blamed unfriendly business environment in Tanzania, election paralysis in Kenya and overall depressing company for the lower performance.

“The board anticipates that the firm will sink further into the red by at least 25 per cent,” said the company secretary R R Vora in a statement earlier in the week.

Investment firm, TransCentury issued a profit warning early this month, and informed its shareholders that the decrease in net earnings was attributed to poor performance in the operating units due to delayed spending on infrastructure projects.

READ: Britam now ninth NSE-listed firm to issue profit warning

This, they said, affected their customers as a result of uncertainties brought about by the prolonged electioneering period in 2017.

Insurance company Britam, during the first week of January, warned of declined earnings for the year ended December 2017, attributing to change in 2016 of the valuation method of the long term liabilities to gross premium valuation (GPV) methodology from the previously applied net premium valuation (NPV).

Mortgage lender HF Group blamed the weaker earnings forecast on slow property transactions and the capping of interest rates.

“HF Group Plc projects that the net earnings for the year ended December 31, 2017 will be potentially 25 per cent lower than that reported for the year ended December 31, 2016, the company said in an earlier statement.

Official statistics show that employment momentum loses steam at electoral cycles, underlining the pernicious effect of combative politics and the attendant private sector risk aversion.

Banks, reeling from a rising tide of bad debt and narrower lending margins thanks to the capping of interest rates, have let go of at least 1,000 employees.