Listed agricultural firm Kakuzi has recorded the largest share price gain in the past seven months on expectations that high tea prices will boost the firm’s profits, analysts say.
Kakuzi’s shares have risen from a low of Sh23 in February 2009 to trade at Sh33 last week, reflecting a 43 per cent increase, the highest at the Nairobi Stock Exchange over the period.
The share price rally has been driven by investors who are expecting high international tea prices to augur well for the firm, leading to rush for the shares.
A drop in tea production due to poor weather in some areas where the crop is grown has led to a surge in the commodity’s prices at the Mombasa tea auction.
The average prices for Kenyan tea stood at $2.49 per kg in May this year, up from $2.42 in April.
“Investors expect this year to be good for Kakuzi because tea prices are on the rise,” says Miriam Muhindi, an analyst at CFC Stanbic financial services.
Kakuzi reported a pre-tax profit of Sh309 million for the year ended December 2008 compared to Sh270 million the previous year.
Although tea prices are expected to remain high, agricultural economists say that the drop in supplies and the falling orders should translate to lower earnings for farmers.
But Kakuzi’s saving grace might be its diversification, which has seen the firm engage in growing and exporting avocados and other horticultural produce such as pineapples.
The firm is also engaged in Livestock and Forestry.
Other listed agricultural firms, especially focused on tea such as Williamson and Kapchorua Tea, have also recorded positive returns over the past six months, giving an indication of investor expectations on tea.
Williamson tea’s shares are up 33 per cent while Kapchorua’s shares have gained 6.45 per cent.
Across the board, share prices have been on the rebound following a silent entry of foreign investors especially in blue chip companies. The NSE 20 share index hit 3,000 points in June after languishing below this mark for the better half of the year.
Part of the attraction towards agricultural firms focused on growing tea is that they have been regarded as good dividend payers despite the vicious circle in the firm’s earnings where a year of profits is followed by a year of heavy losses.
But not all agricultural companies’ shares have recorded positive gains since January. Sasini and Rea Vipingo’s shares are down 19 and 7 per cent respectively.
This is because of the large dependence on rain-fed agriculture and volatility in earnings which has led to institutional investors shying away from the agriculture sector.
“When we look at the unpredictable weather and the increase in agricultural inputs, it immediately tells us this is not the sector we would like to be in,” says Isaac Njuguna, head of Investments at Zimele Asset Management.
The agricultural sector’s performance is heavily linked to the erratic rainfall pattern and this year has witnessed a drop in both cash and food crop production.
The bleak outlook is made worse by warning from the Meteorological Department that most parts of the country will experience dry conditions in the quarter to August, a forecast that came at time when country received less than normal rainfall during the long rainy season between March and May.
In spite of the gloomy weather projections, part of Kakuzi’s share price rally has been due to a demand by individual investors that is not being met by sufficient supply.
This means that any buy order will go through on the highest price on offer, stock market observers say. For instance, statistics indicate that on average only hundreds of shares of Kakuzi are traded on irregular days.
In most of the listed agricultural firms, a large portion of the shares are tightly held by a few shareholders.
In the case of Kakuzi, for example, 51 per cent is held by two shareholders; UK registered Bordure limited and Kenya registered company Lintak investments.
The top ten shareholders, a mix of institutional shareholders and high net worth investors, jointly control 69 per cent of the shares traded at the stock market.