Half year results show strong recovery in corporate Kenya

A number of Kenya’s leading companies have reported stronger-than-expected earnings, underlining the strength of corporate recovery and signalling that the economy is on course to realising the target of 4.5 per cent growth.

Heavyweight names such as KCB, Nation Media Group, Athi River Mining and Uchumi have all reported double digit growth in half-year profits and backed it up with robust earnings expectations in the remaining part of the year, hinged on rising optimism in all sectors of the economy.

Analysts are expecting corporate earnings to rise about 25-35 per cent this year before rising to an average of 40 per cent next year.

The banking sector that is known to front-run the economy has led the recovery with the big players turning in billions of shillings in profits that only looked remote at the beginning of the year.

Equity, KCB , DTB and National Bank have all racked up double digit growth in their loan books with the easing of lending rates since May, pointing to an accelerated credit expansion in the economy.

Nation Media Group reported double digit growth in earnings to post Sh558 million for the first half of the year compared to Sh364 million in the same period last year.

NMG’s performance was underlined by corporate Kenya’s increased spending on brand visibility to recover lost ground after two years of muted economic growth.

Kenyan firms spent Sh20 billion on advertising in the six months to June —nearly as much as the annual spend for 2008 — signaling a rising optimism in the economy and the jostling for brand visibility in a market where consumers are regaining lost purchasing power.

Purchasing power

Uchumi, the country’s second largest and the only listed retail chain, nearly doubled its profits after chalking up Sh865 million in the first half of the year from Sh420 million last year, signalling a strong rebound of consumer purchasing power.

The retail chain recorded an 11 per cent rise in customer numbers to 18 million from 16 million last year – attesting to an increase in consumer spending with the ongoing recovery.

“This is the confidence that we have been looking forward to,” said Mr Jonathan Ciano, the chief executive officer of Uchumi Supermarkets, that emerged from statutory management in March.

Kenya’s third largest cement maker, Athi River Mining, returned a 16 per cent increase in pre-tax profit to Sh519 million for the first half of 2010 from the Sh449 million it recorded during a similar period last year.

Turnover rose from Sh2.4 billion to Sh2.8 billion, a 19 per cent jump, of which the cement business contributed 53 per cent.

This outcome has been linked to accelerated property development and infrastructure projects throughout East Africa that have continued to provide an impetus for earnings despite costly price wars in the marketplace.

The solid results and the peaceful conclusion of the Constitution vote last week are expected to pull back investors who fled Kenya in droves last month fearing a possible outbreak of electoral violence to think again.

“In general we should have a continued momentum but hopefully a sustainable one now that the Constitution-making is out of the way,” said Mr Eric Kimanthi, senior research analyst at African Alliance.

Agriculture and tourism remain the backbone of the economy, whose performance has had a cascading effect on the fortunes of fast moving consumer goods firms.

Improvement in rainfall - a crucial factor in Kenya’s agri-based economy that employs 60 per cent of Kenya’s work force – led to an easing of food inflation, while raising the purchasing power of ordinary folk.

That has in turn helped raise demand for goods and services, compelling companies that cut back their production since 2008 to jump start it and seek funds from the banks to finance expansion.

More recently, Kenyan households have reclaimed their place as the largest single segment of private sector credit, in what may be a build up to the 2007 situation in which huge consumer spending helped push the economy to the peak growth level of 7.1 per cent.

Commercial banks significantly cut their lending to households in 2008 and 2009, fearing high level of default as the economy reckoned with the effects of electoral violence and global recession marked by massive layoffs, lower corporate earnings and freeze salary increments.

Renewed activity

Key sectors such as telecommunications, building and construction are also expected to register robust growth as household incomes rise in tandem with renewed activity across the economy.

These positive signals have already eased nerves in corporate circles where capital raising activities have been on the ice for nearly two years.

A big wave of fundraising activities is expected in the next six months starting with Standard Chartered Bank’s Sh2.5 billion rights issue, Kenya Power and Lighting Company, Housing Finance and Safaricom.

Economists hope that aggressive business expansion will create more jobs and further improve household incomes, raising the level of demand for goods and services, and the unlocking of new investment in the economy.

Consumer market research firm, Synovate, reckons that corporate Kenya is realigning itself for the expected growth in demand to drive profits, grow cash flow and dividends to double digits that investors had become used to.

“Looking to the future, three quarters of adult Kenyans are optimistic that their economic conditions in the next twelve months will be better than in August 2010, now that the new constitution has been adopted,” says George Waititu, Synovate’s chief executive officer.

In an increasingly competitive environment and an aggressive push to grow market share, telecommunications firms have been amongst the biggest advertising spenders leading to a revival in media firms’ earnings

As an expanded East African Community opens up a gold mine of opportunities for firms operating in the region, local firms are now setting its horizons on a vibrant East African economy to rev up earnings.