Sameer Africa bets on rise in tyre price to boost earnings

Sameer Africa is betting on a 10 per cent rise in the price of tyres to boost its earnings in the second half of the year as rising input costs continue to slow down profits.

The firm announced a 16 per cent increase in pre-tax profits to Sh71.8 million on a 14 per cent increase in revenues to Sh1.76 billion — a pointer that it was spending more on very shilling it was earning.

The falling profit margins were attributed to a 54 per cent increase in the price of rubber, the main input in tyre manufacturing, and volatility in the currency market.

The firm increased its product pricing by 10 per cent in April to cushion it from the rally of raw material costs, but the full impact on earnings will be felt in the second half of the year.

“The 10 per cent adjustment across our tyre prices was done in the second quarter and we are likely to see its full impact in our full year results,” said Jomo Gatundu, the general manager – finance.

The move is likely to improve the company’s earnings, which only gave a dividend last year in the last four years.

The firm paid out Sh0.50 per share dividend for the year 2009, after a dividend dry spell since 2005.

It however did not recommend an interim dividend for the 2010 half year.

At the stock market, Sameer shares have been on an upwards trend since the year began, rising 49.56 per cent for the first six months of the year to trade at Sh8.45 at end of trade on Thursday.

“Sameer shares rose largely in the first quarter but stagnated in the second quarter in line with the general bullish market trend,” said Mr Francis Mwangi, an investment analyst at Africa Alliance Investment Bank, adding that being a ‘small cap’ counter the results are not likely to boost demand on the counter.

Over valued

Financial analysts said that with a price-earning ratio of 16.8 times, which is above the market average of 14.5 times, Sameer share price is likely to stagnate or drop slightly as the share is considered over valued.

About 80 per cent of the raw material used by Sameer in tyre manufacturing is imported, exposing the firm to vagaries of currency fluctuations.

The Kenyan shilling has depreciated over six per cent from an average of 76 in 2009 to 81 in the first six months of this year.

The tire manufacturer recorded a total comprehensive income of Sh37.6 million in the first half of the year from revenues of Sh1.7 billion compared to a total comprehensive income of Sh35.3 million in the first six months of 2009 from revenues of Sh1.5 billion.

This indicated that its profit margin had declined to 2.1 per cent from 2.2 per cent in the same period last year, which meaning that for each Shilling of sales that Sameer Africa generated, it only contributed less to its total comprehensive income.

Sameer Africa’s operating costs were up 19 per cent from Sh1.2 billion in the first half of last year to Sh1.4 billion within the same period this year.

Capital expenditure commitment of up to Sh35 million was not accounted for in the half year results, which means that it is likely to dent into the second half earnings.

Natural rubber, whose prices have been on the rise, from $141 per pound at the start of the year to a high of $166 per pound in May, constitutes about 30 per cent of the production material used in tyres.