Poor Sales in Tanzania Push East African Cables Into Half-Year Loss

Mergers, Acquisitions and Financial Results

East African Cables (EAC) posted a loss in the six months to June due to poor performance of its Tanzanian unit.

The cable maker announced a loss of Sh56.9 million in the six months compared to a profit of Sh248 million in the same period last year -making it the only listed firm at the Nairobi Stock Exchange (NSE) to announce half year losses.

Growing optimism over the recovery of Kenya's economy has helped corporate Kenya announce double and triple digit profits, a departure from the flat earnings witnessed in 2008 and 2009.

The cable maker--which serves the regional market-- said its Kenyan unit was strong and profitable, but added that its Tanzanian unit is suffering from low sales to electricity supplier Tanzania Electric Company (Tanesco) and non-payment of deliveries that saw it write off debts.

"The significant decline in earnings for the group is attributable to poor results recorded by our Tanzanian subsidiary," the firm said in a notice on Tuesday.

"Though the company (Kenya) recorded growth in turnover and profit before tax of 59 per cent and 8 per cent respectively, the group recorded a 93 per cent drop in profitability." It announced a Sh23.8 million profit before tax on revenues of Sh1.8 billion, reflecting a 7.6 per cent growth.

The cable maker incurred a bill of Sh193 million on debt write-offs and restructuring of its Tanzanian unit. The announcement comes weeks after it issued a profit warning on July 17 for this year -- egging analysts to believe that the management is not expecting a swift recovery in the second half of the year.

This means that EAC will post reduced profits for the second year in a row--a departure from the double digit growth in profits that the firm witnessed since TransCentury bought a 75 per cent stake from investor Naushad Merali in 2003.

Profits dropped from Sh462 million in 2008 to Sh296 million in 2009 while revenues dropped from Sh3.9 billion to Sh2.8 billion over the same period. The 2010 outlook does not bode well for the firm's shareholders whose dividend growth curve has also remained stagnant since 2008 at Sh1. The firm's operating profits dropped 77.7 per cent to Sh238 million, an indicator that costs are rising faster than revenues. Analysts expect the firm to pay a lower dividend next year on the sluggish performance.

This will hurt TransCentury most at a time when some of its acquisitions have been posting sluggish returns -- slowing down its cash flow and returns.

Besides EAC, it's yet to make a return from the chaotic Rift Valley Railways, where it has pumped hundred of millions of shillings since 2007 and its portfolio at the NSE has also faced erosion over the past two years.

East African Cables' share has fallen by over 13 per cent in the last six months to the current price of 18.85, from Sh19.50 at the close of trading Monday.

Financial analysts reckon that the firm has trailed their expectations since the entry of the fibre optic cable, the regions vibrant construction sector and the push to connect more East Africans to the power grid was expected to power its profits. But this has not happened.