alexa With profit warnings, be ready to revive collapsed companies - Daily Nation

With profit warnings, be ready to revive collapsed companies

Wednesday May 20 2020

An employee of the East African Breweries

An employee of the East African Breweries Limited checks on beer quality before labelling April 17, 2019 at the company's plant in Ruaraka, Nairobi. PHOTO | SIMON MAINA | AFP  

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Expect a flurry of profit warnings by companies listed on the Nairobi Securities Exchange.

East Africa Breweries Ltd (EABL), one of the blue chips of the local bourse, has sent out a profit warning to shareholders as it expects a decline in profit after tax of around 25 per cent in the year.

We are beginning to see how the Covid-19 pandemic is affecting consumer behaviour and business sentiment and how its containment measures are hurting businesses. In the alcoholics beverages industry, is has disrupted manufacturing, broken supply chains, with the closure of bars and restaurants hitting sales and flagging demand.

Expect more of the affected companies to announce reductions in capital spending and effect more layoffs, pay-cuts and furloughs.

What are other significant trends are we seeing in the corporate sector?



First, the pandemic has revealed that we are yet to build resilient companies with capacity to withstand shocks and catastrophes.

Secondly, it has made us see that a company must build big reserves and pile up cash in its books for a rainy day. The boardrooms of listed companies prefer to ship cash out in dividends to shareholders instead.

A friend of mine who calls himself a corporate historian attributes this mindset of boardrooms, shipping out dividends to shareholders instead of piling up cash and reserves to cover unexpected shocks to history.

In the old days of exchange controls and restrictions on repatriation of dividends, paying out dividends to overseas-based shareholders was regarded as an important job description for local directors. That is why multinationals would insist on signing opaque management agreements with their local subsidiaries allowing them to cream off revenues from the top line in the name of managements fees.

This explains why it is not uncommon to find big companies taking out expensive overdrafts to pay dividends. They even borrow to fund both working capital and small expansion projects. Clearly, old habits die hard.

Enough of theory and history. Let’s wait and see the trends and practices that will emerge when the coronavirus crisis ebbs and the corporate sector enters the expected post-pandemic bounce.

Will the pay cuts and layoffs be rescinded? Will companies hold on to the work-from-home practices to cut back on office costs? Or will they invest in high-tech virtual meeting rooms to obviate the need for office meetings?


What is clear is that the recession is going to hit strong and weak companies alike.

For the government, the pandemic may have presented the best opportunity to roll out a ‘Marshall Plan’ for dealing with declining profitability levels in private companies.

Inexplicably, the dire state of declining profitability of companies is not well captured in official statistics. But the evidence is everywhere to see — including in widespread distress across large department stores and supermarkets, a drop in the flow of credit to the private sector and a rise in the number of redundancies by even profitable companies

The signs include an upsurge of profit warnings by listed firms; a slump in electricity demand by large and industrial consumers; a spike in non-performing loans by banks; and declining profitability of even the largest and highly rated companies.

Even the usually bullish property sector is beginning to feel the heat, finding itself in the middle of an unprecedented fall in demand for office space and also rental incomes.

Capital markets have consistently remained in the middle of a bear.

When the pandemic subsides, President Uhuru Kenya must return to his original plan of restructuring parastatals.

For instance, he must restore the financial health of Kenya Power by restructuring its balance sheet and eliminating government-linked debts on its balance sheet.


The government should also deliver on resolving the problems of the following government-owned financial institutions: Post Bank, Consolidated Bank of Kenya and Development Bank of Kenya.

We need to go back to the idea of establishing the proposed Government Investment Corporation, setting up a sovereign wealth fund and establishing a single SME agency by amalgamating the large number of affirmative action funds.

The mountain of pending bills in the government’s books have impacted negatively on the health of commercial banks.

Capital markets have been in the middle of a bear run for months on end. When the pandemic dies down, the private sector must be made to bounce back.