Big NSE companies increase cash piles by Sh72bn

The Nairobi Securities Exchange’s (NSE) biggest companies raised their cash stockpiles by a combined Sh72 billion last year as part of the plan to build internal capacity and finance regional expansion that has become the new frontier of competition among Kenya’s corporate giants.

Financial statements of the NSE’s top 20 companies by capitalisation show that the firms held a total of Sh464.8 billion in cash and retained earnings last year compared to Sh392.6 billion in 2013.

The companies held Sh39.8 billion more in retained earnings for a total of Sh310.4 billion while cash holdings rose by Sh32.3 billion to Sh154.3 billion.

Banks and utility companies held the most cash, accounting for 74 per cent of the total cash pile held by the NSE’s top 20.

Utility companies KenGen and Kenya Power whose mega expansion plans require huge capital expenditure were among the leading cash retainers.

Retained earnings are hived off a company’s net profits and are mostly built up over time with the payment of modest dividends while the free float cash represents a company’s cash holdings in a bank, which can also be from borrowings.

Analysts said the growing cash pile is partly the result of organic growth which has not only increased the sizes of the companies but also the amount of money they generate.

“We must acknowledge that the companies have grown bigger over time while banks are keeping more money because of capital requirements that determine how much they are allowed to lend,” said Eric Musau, an analyst at Standard Investment Bank.

Mr Musau said that while utilities like Kenya Power and KenGen have borrowed huge amounts of money to finance expansion, large amounts of internally generated revenues have also been added to the cash pile.

Financial services firms such as banks and insurers have also relied on the their position as less intensive cash operators to retain more money.

Insurance firms, for instance, rarely go into huge capital expenditure unless they are making acquisitions that have been few and far between in the past couple of years.

Only financial services firm Britam has been active in the acquisitions market, having bought Equity Bank’s stake in mortgage financier Housing Finance and taken over Real Insurance.

Those two big acquisitions left Britam’s cash and retained earnings in 2014 at Sh6.8 billion compared to Jubilee Holdings’ Sh23.6 billion.

READ: Equity keeps rivals guessing as it exits Housing Finance

KCB, KenGen, Equity and Cooperative Bank closed the year with cash and retained earnings of Sh73.2 billion, Sh48.8 billion, Sh51.5 billion and Sh41.6 billion respectively.

Barclays with nearly Sh37 billion, StanChart (Sh24.6 billion), Bamburi (Sh24.8 billion), CfC Stanbic (Sh22.6 billion), NIC Bank (Sh16.8 billion), Safaricom (Sh15.5 billion) and Centum (Sh13 billion) also made it to the list of big cash holders.

KenGen has announced plans to spend about Sh500 billion in the expansion of its power generation capacity over the next three years, while electricity distributor Kenya Power — with Sh15.6 billion in reserve — has embarked on a grid modernisation and expansion work that is expected to cost billions of shillings.

Equity Bank recently announced a Sh200 billion plan to establish a foothold in 10 African countries up from the current five in what is expected to be a capital-intensive exercise that could see the lender offer a rights issue in addition to taking up loans.

These expansions are expected to eat up the large amounts of money that the companies have accumulated over the years.

ABC Capital’s corporate finance manager Johnson Nderi reckons that the ambitious expansion plans could take most of the companies with large cash piles down the path that East African Breweries Limited (EABL) walked a few years ago.

“EABL’s big cash holdings, for instance, dried up with their expansion in Tanzania. Companies that are looking to expand cannot therefore be said to have too much in cash holdings on their books,” he said.

EABL reported Sh16.8 billion cash and retained earnings for the six months ending December 2014 and the amount is expected to grow as the company scales back its expansion plans.

Many companies also retain earnings as a prudent financial management tool, especially when they are wary of a sharp increase in interest rates on loans.

Mr Musau reckons that debt levels affect the dividend payout policy of companies, meaning that expectation of higher interest rates often translates to increased retention of earnings.

“From an interest rate point of view, debt-free companies or those with low gearing can afford to pay out more as they are not affected much by an increase in interest rates,” said Mr Musau.

Interest rates have not come down as expected despite the coming into force of the Kenya Banks Reference Rate (KBRR).

A possible rise in US interest rates later this year may worsen the situation by causing an increase in Kenya’s base lending rate — meaning that expectations of a significant drop in interest rates may not come to pass.

Cash piles have been traditionally seen as necessary for the smoothening of income volatility in times of economic uncertainty but analysts warned that it often comes with the potential of fuelling unrest among investors demanding to be paid the cash as dividends.

Companies such as BAT, StanChart and Nation Media Group (NMG), which are seen as mature and carrying low debt loads are, however, able to issue higher dividends.

BAT last year paid out almost all its net earnings of Sh4.25 billion in dividends, translating to Sh42.50 per share, while StanChart paid out Sh17 per share.

BAT kept a relatively low Sh5.38 billion in retained earnings and cash, a Sh1 billion increase from 2013.

NMG paid out a dividend of Sh10 per share and has Sh10.2 billion in retained earnings and cash reserves. As part of its capital expenditure, NMG is spending more than Sh1.5 billion on a new printing press.