BOC Kenya retains dividend despite profit drop

BOC Kenya’s earnings slumped by 21 per cent in 2009, signalling the agency with which the firm needs to enter the lucrative carbon dioxide market.

BOC announced a Sh231 million in pre-tax profit compared to Sh295 million in 2008 in a slow year that also saw the firm’s three-year bid to enter the carbon dioxide market fail after its botched acquisition of Carbacid Investment — which is the largest maker of the gas.

While 2009 was a difficult year for business, BOC’s performance vindicates analysts’ observations that the firm’s core business is headed for maturity amid fresh pressure from new competitors, hence the need to diversify its business further.

For BOC carbon dioxide provides an opportunity to rev up its revenues and create shareholder value at a time when its industrial and medical gases businesses seem to be stagnating.

Earnings decline

“The year was a challenging one and demand was lower than expected,” said John Kariuki, BOC’s managing director.

The firm has seen its earnings decline in the last two years, which BOC’s management attributes to the challenges of increased operating costs driven by higher transport and energy prices. Mr Kariuki said BOC would seek to reduce costs while upgrading existing facilities to rev up revenues.

Despite the fall in earnings, the firm’s final dividend payout remained unchanged at Sh6.80 per share which still places BOC among Nairobi Stock Exchange (NSE’s) favoured picks for investors seeking high returns.

The firm’s share prices closed the week at Sh155.

BOC will however have to grapple with cutthroat competition in the industrial gases market as new entrants into the business raise stakes.

With recent technological advancements, smaller and more efficient plants mainly from India and China have entered the market.

Other players include Nairobi’s Chemigas, Noble Gases, Welgas, Carbacid, Crown Gases and Mombasa’s Synergy Gas.

Twiga Chemicals deals in one product line, Ammonia, while Kisumu’s Spectre International has the capacity to produce carbon dioxide as a by-product.

“It may be wise for BOC to concentrate on its core business, where it is currently facing increasing competition by improving service delivery to key customers,” reckons Martin Nyanjom, a management consultant with Gem Consultants in a recent opinion piece in the Business Daily.

Heavy consumers such as hospitals have installed production units and may be considered competitors, especially in bulk oxygen and nitrogen supply.

According to Mr Nyanjom, some of heavy consumers who produce the gasses on their own may be considered direct competitors if they start selling to end users.

Indirect competitors

In Mr Nyanjoma’s opinion, such institutions are indirect competitors to BOC since they are major producers and consumers of the gas products.

Examples of institutions that own oxygen production units are Steel Makers in Mombasa, Prime Steel, MP Shah and Nairobi Hospital.

Others are the Central Artificial Insemination Station which has installed a nitrogen plant.

BOC may find the going tough as it seeks to wrest a stake off Carbacid’s 95 per cent market share in the carbon dioxide market.

This is not the first time the firm will be attempting to venture into the carbon dioxide business.

After an earlier unsuccessful attempt to manufacture and sell carbon dioxide BOC saw the strategic importance of a stake in Carbacid.

In carbon dioxide, business that’s primarily dependent on strong ties and allegiances, BOC found that clinching contracts from both East Africa Breweries Ltd and Coca Cola which are among the largest buyers of the gas was a tall order.

It is while chairman of East Africa Breweries Ltd that former majority shareholder in Carbacid, Kenneth Matiba, acquired a 22 per cent stake in the plant cementing the ties between the two firms.

Carbacid has built a strong customer loyalty which includes soft drinks companies in Kenya, Uganda, Rwanda and Tanzania and a number of brewing entities in the East African region.

Even after a revenue increase of four per cent in the first half of the year to stand at Sh641 million, a rise in the cost of raw materials led to a 20 per cent fall in half year profits to Sh108 million.

Since its return to the stock exchange in November last year, BOC’s share price has fallen by 3.1 per cent to stand at the Sh155 at the close of trading last Friday.