Low tea prices, dry weather hit shares of agriculture companies

Shares of listed agriculture firms have started showing effects of lower tea prices and the dry weather outlook that has seen five of them issue profit warnings in the past six months.

The segment was among the best performing at the Nairobi Securities Exchange (NSE) in 2013 with an annual sector gain of 25 per cent in capitalisation to Sh10.9 billion, and also opened the year strongly with price gains.

According to the latest market statistics from NSE, three of the counters’ prices declined over a three-month period.

The sector’s market capitalisation grew by only two per cent between March and June, compared to 22 per cent in the first three months of the year.

Share prices of Williamson Tea, Sasini, and Kapchorua Tea have declined by 6.7, 6.2 and 2.5 per cent respectively to Sh279, Sh15.90 and Sh156 over a three month period.

“The listed agriculture firms are cyclical in nature, and having performed well in the first quarter they are now being affected by the prevailing conditions in the sector, especially the low tea prices,” said Old Mutual Securities research analyst Geoffrey Maina.

He said the depression also reflected a relatively stable shilling since a weaker shilling increases earnings upon conversion from hard currencies.

Agricultural shares are, however, protected to a large extent from wider price swings by their low liquidity in the market due to the small number of issued shares.

Profit warning

Sasini has the largest number of issued shares in the segment with 228 million, while Limuru Tea has only 1.2 million issued shares.

The company last week issued a profit warning saying it expected a 25 per cent dip in profit for the current financial year should tea prices remain depressed in the world market.

Tea export earnings, Kenya’s top foreign exchange source, dipped below Sh100 billion last year following a sharp drop in prices despite a rise in production.

Williamson Tea, Kakuzi, Kapchorua Tea and Limuru Tea said the sharp drop in tea prices would see a drop in profits for the full year.

The warnings were coupled with an announcement that the Kenya Tea Development Agency (KTDA) would not pay a mini-bonus that usually falls in April.

The lower prices have affected the valuations of the assets of the companies, with Sasini saying that a reduction of Sh12.3 million in valuation of its biological assets in the six months to march 2014 was caused by lower tea prices.

In a May 28 statement accompanying the first half results, Sasini chairman James McFie also pointed at higher production costs due to the weaker shilling.

“It is projected that higher production costs will persist into the second half following the implementation of the new NSSF Act.

‘‘Other costs expected to increase include power and agricultural inputs,” said Dr McFie in the statement.

Analysts say that the firms are also contending with a threat to their coffee business as counties move towards direct marketing of the product, bypassing traditional intermediaries.

“They may struggle to get coffee supplies from farmers in a situation where they can’t produce internally all that they need,” said Mr Maina.

Listed firms dealing in horticulture are also watching keenly the progress of negotiations on the EAC-EU Economic Partnership Agreements (EPAs), which give Kenyan exporters some preferential access to the European market.

If no new agreements are reached, Kenyan horticultural exports would become more expensive on the EU market.