Failure to hedge hurts Kenyan shareholders

Shareholders in Kenyan firms are losing billions of shillings each year due to directors’ failure to shop for appropriate hedging instruments.

Hedging against foreign currency exposure is increasingly becoming important because of volatile exchange rates that in one swing turn profit into loss and vice versa as companies settle financing and purchase obligations incurred in various hard currencies.

The AccessKenya Group is the latest firm to report a Sh50 million knock on its profit, which left only Sh40 million at the disposal of shareholders.

Without the knock, shareholders would have earned a higher dividend and, critically, lowered the price-to earnings ratio that is used as a price guide in the share market.

The losses stem from some of the firm’s liabilities denominated in US dollars.

AccessKenya group borrowed $3.5 million from two local banks to finance the importation and installation of the fibre optic cable equipment.

With the shilling losing ground against the dollar, AccessKenya had to use more shillings to purchase dollars to pay its dollar denominated loans.

AccessKenya’s executive director David Somen said that while the group’s management took some steps to minimise exposure, it did not foresee the depreciation of the shilling to the current levels.

“The group was not expecting the large swings in the shilling and apart from some natural hedging as some of our billings are in dollars, was not fully hedged,” said Mr Somen.

Since January, the shilling has dropped from Sh75.75 against the dollar to Sh81.20/50.

Sutra Investment Bank research analyst Johnson Nderi said failure to hedge, minimising risk through products such as swaps and forward contracts, is hurting shareholders.

“Inaction against hedging is causing shareholders to lose money,” said Johnson Nderi, a research analyst from Sutra Investment Bank.

Gains ground

The only reprieve for shareholders would be if the shilling gains ground against the dollar.

Mr Nderi said that since dividends come from earnings, lower earnings mean less dividends.

Earning also affect the price-to earnings ratio which measures the value of stock price, lower earning means share prices should go down.

AccessKenya management said it was investigating various hedging instruments to ensure that there is no recurrence of the forex loss.

More firms are dedicating departments to deal with forex trading as they try to reduce their foreign risk exposure.