Firms created warchests against poll shocks

Saturday March 23 2013

A virtually empty street in a Kenyan town as people stayed at home fearing violence could erupt after voting day. Photo/FILE

A virtually empty street in a Kenyan town as people stayed at home fearing violence could erupt after voting day. Photo/FILE Nation Media Group

By JOINT REPORT The EastAfrican

Companies listed at the Nairobi Securities Exchange have created a warchest of cash to help them weather any election-related shocks as they seek a balance between expansion, appeasing shareholders and paying off debt.

A survey by The EastAfrican of 28 listed companies that have so far released their financial results for the full and half year ending December 2012, shows that more than half of them held more cash compared with the previous year.

This, analysts said, was partly to cushion them against any shocks as the country headed for elections on March 4.

Data shows the 28 companies, some of which had negative cash balances, held a combined over Ksh130 billion ($1.52 billion) as at the end of 2012 compared with Ksh110 billion ($1.29 billion) as at the end of 2011.

The other companies, which cut their cash positions, were banking on expanding outside Kenya, diversifying their revenues and reaching for opportunities across the continent, business executives said.

Many of the firms banking on the cash for expansion are hoping that their investments will pay off in the medium to long term and that this will help reward shareholders in the future with improved dividend payouts.

Those that reported huge increases in their cash positions include four banks — Standard Chartered, NIC, CfC Stanbic Holdings and Diamond Trust Bank (DTB) — that raised a combined Ksh10.27 billion ($119.47 million) from rights issues floated last year.

The analysis showed banks were leading in cash accumulation before the elections, boosting their cash position and improving their liquidity ratios as at the end of last year.

“The rights issue cash helped improve our ratios and this has helped grow our loan book,” said Alkarim Jiwa, the chief financial officer at DTB. The bank’s cash position also dropped by 25.98 per cent to Ksh10.46 billion ($121.69 million) in 2012 from Ksh14.13 billion ($166.13 million) in 2011, as the lender put money into a new head office on Mombasa Road and 16 branches in Kenya, Tanzania and Uganda.

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Cash stockpiles have traditionally been seen as a key arsenal for companies keen on smoothening income volatility in times of economic uncertainty.

In public, business executives are cautiously optimistic on the business environment in Kenya in the coming months but in private, some are worried about a possible degeneration of the fragile macroeconomic environment that could significantly hurt businesses, especially if the country remains in election mode for a longer period.

“Some companies were not investing as much because of the elections, but they have been building cash to take advantage of coming prospects,” said Vimal Parmar, head of equity research and trading at Burbidge Capital.

Following the election, which has seen Prime Minister Raila Odinga move to the Supreme Court to contest the announcement of Uhuru Kenyatta as the president-elect in the March 4 poll, anxiety has engulfed the country and the region. This has thrown a spanner in the works for business leaders who had planned to invest in the first and second quarter of the year.

Should the Supreme Court dismiss the petition, whose prayers are that the presidential elections were not validly conducted and tallied, and therefore should be nullified, then Mr Kenyatta, who was declared the winner by the Independent Electoral and Boundaries Commission, will be sworn in on the first Tuesday after 14 days from the day the electoral body declared the results.

Conversely, the Supreme Court could decide the vote was invalid, in which case the country will have to go for another election in 60 days. It is this potential for further uncertainty that has business executives worried.

The Central Bank, in a survey released last week that polled 60 firms in Nairobi, said insecurity and slow recovery of the global economy are the biggest risks to growth. But some executives are optimistic.

“The worries could have been before the elections, but since they were peaceful, the private sector is confident that even in the event that there is a rerun, the peace will hold,” said Patrick Obath, chairman of the Kenya Private Sector Alliance (Kepsa).

CBK said there was increased optimism for higher growth in 2013 on account of enhanced confidence, with an expected increase in foreign direct inflows, macroeconomic stability, expected pick-up in credit growth, and prospects for increased regional trade.

The survey showed inflation is expected to increase slightly in the remainder of 2013 by one to two per cent.

“The reasons cited are a likely increase in demand in the economy after elections due to expected pick-up in economic activity; rise in international oil prices; and a likely rise in government spending with the adoption of the devolved government system,” said CBK in the survey. Kenya’s inflation rate rose for the second month in a row to 4.45 per cent in February from 3.67 per cent in January.

Companies such as AccessKenya, Uchumi Supermarkets and ARM Cement closed the year with positive cash balances compared with negative cash balances in 2011 as some of their investments began paying off.

“I think most of these listed firms have been more liquid as they wait to take advantage of future investment opportunities,” said Mr Parmar.

Analysts from Standard Investment Bank said although liquidity ratios — the proportion of cash held by a bank as a proportion of deposits — are not as high as in 2008, Kenya’s banking sector is still liquid. It means with the current low and stable interest rates, banks may aggressively look at lending opportunities in the second half of 2013.

“High cash balances, particularly for banks that did rights issues last year, were not necessarily related to the election period because they had put in place strategic plans to use the money over a period of time” said Habil Olaka, the chief executive officer at Kenya Bankers Association, the bankers’ lobby.

Published financial statements show that CfC Stanbic Holdings, whose main subsidiary is CfC Stanbic Bank, grew its cash more than 12 times to Ksh5.8 billion ($67.58 million) as at the end of last year, compared with Ksh472.9 million ($5.55 million) at the end of 2011. For CFC Stanbic, this is important because having lagged behind its peers in giving loans to retail clients, it now has the cash to go big in this segment of the market.

Increasing the cash position could also be a defensive move. Beer manufacturer EABL’s cash position rose from Ksh1.9 billion ($22 million) to Ksh2.9 billion ($33.7 million). But the hoard of cash could be under attack because of the need to balance finance costs, increased capital expenditure and paying out dividends, analysts say.

“The brewer is repaying the loan using cash flow and since it is growing its investment, the only way it can boost its cash flow is through short-term borrowing or cutting down on dividends,” said Kuria Kamau, an analyst at Kestrel Securities.

Analysts say the region’s largest brewer is seeking to retain cash to boost its cash position, which has been eroded by interest repayment on a Ksh20 billion ($232 million) loan it took from its parent firm, Diageo, to buy out SABMiller’s shareholding in Kenya Breweries and Serengeti Breweries of Tanzania.

Kenya Power’s cash position fell dramatically, pushing the company to suspend dividend payments.

“The directors have resolved not to pay any interim dividends for the period in view of the temporary cash flow constraints that had affected the company… in order to sustain the continuation of the project implementation, medium term funding was arranged with local banks but disbursements were delayed,” said Joseph Njoroge, the company’s CEO.

By David Mugwe, Peterson Thiong’o, Emmanuel Were and Mwaura Kimani.