Agri-stocks flourish on strong market prices

Improved weather conditions and rising tea and coffee prices on the international market are boosting the profitability of agri-based firms listed on the Nairobi Stock Exchange.

Tea and coffee prices have been rising since late last year when a long spell of drought reduced output. Kenya is the world’s leading exporter of black tea.

This has fed the agri-based counters with profits, which is translating into improved dividends for shareholders and improved capital gains as investors rush for a piece of the firms.

High prices

Last week, Sasini said its first-half profit had increased 101 per cent to Sh473 million while Kakuzi announced a 38 per cent increase in 2009 profits to Sh390 million last month.

Similar results are expected from Williamson Tea, Kapchorua Tea and Limuru Tea which are yet to reveal their latest figures.

“The agricultural stocks have been outperforming the rest of the market and with the increase in productivity and prevailing high prices, the demand is expected to increase”, said Eric Musau an independent analyst.

Tea prices have risen 35 per cent to Sh177 per kilogramme from Sh130 per kilogramme since the start of the year while Coffee prices have almost doubled to Sh417 per kilogramme from Sh273.

Both Sasini and Kakuzi, which are listed on the main segment, have outperformed the Nairobi bourse by far over the past three months, making them the best performing counters at the NSE.

Sasini made a return of 98 per cent to close trading at Sh15.15 last Friday while Kakuzi made a return of 121 per cent to close at Sh77.5.

The benchmark NSE-20 Share index—which tracks the performance of blue chip firms—made a return of 19 per cent.

Besides the capital gains, investors have reaped from increased dividend payment.

Kakuzi paid a dividend of Sh2.50 up from Sh1 in 2009, while Sasini increased its payout by 20 per cent to Sh0.20.

Sasini has managed to ride on high global prices for tea and coffee to record a 29 per cent growth in the top line to Sh1.32 billion from Sh1.02 billion.

“The improved performance is due to the higher price realisations from tea and coffee sales and improved productivity for tea”, said Caesar Mwangi, the managing director for Sasini.

Mr Musau reckons that with rains expected to continue across the country, productivity especially for tea will increase leading to better returns especially if the high global prices hold.

According to the Central Bank of Kenya (CBK) tea and coffee production is expected to increase due to the prevailing wet conditions across the country.

“Tea production in January 2010 increased by 48 per cent to 12,229 metric tonnes from 7,968.4 metric tonnes in a similar period last year,” said CBK in its February Monthly Economic Review.

The report indicates that the increase in production, which began in September 2009, was attributed to wet weather conditions experienced in the tea growing areas in the regions east and west of the Rift Valley.

However, coffee which is a seasonal crop is yet to recover from the effect of the drought.

“Although coffee is usually resilient to changing weather conditions, it succumbed to the prolonged unfavourable weather conditions as output in January 2010 dipped by 29.8 per cent but it is expected that this trend may not persist as the high season approaches in the next few months,” said CBK.

Double capacity

Mr Mwangi said that the higher global coffee prices made up for the decrease in output.

In order to cushion its income from the cyclic returns due to changing weather pattern, Sasini has diversified into value addition and other businesses along the value chain.

Currently, Sasini is involved in coffee milling operations which involves processing and packaging coffee and tea. It plans to expand the coffee milling to double its current capacity.

In addition, the firm has launched a number of shops to sell brewed coffee.

“Going forward Sasini continues to enhance its marketing efforts, product quality initiatives and efficiency measures in tandem with our diversification strategy,” said Mr Mwangi.