BS: Strong shilling lifts firms from foreign exchange loss
The strengthening of the shilling against the dollar has seen companies with dollar-denominated loans reverse unrealised losses declared at the end of September.
Depreciation of the shilling in the nine months to September had led companies to declare lower earnings based on the revaluation of their debt positions. As the shilling gains ground, the loan positions are now shrinking.
The shilling has gained from an average low of Sh100 to the dollar in September to Sh94 to the dollar yesterday following Central Bank’s move of raising the cost of credit with an aim of reducing the amount of cash in circulation .
“As the shilling to the dollar exchange rate went up from 100 to 94, we have reversed Sh288 million from an earlier forex loss of Sh681 million.
The unrealised forex loss now stands at Sh393 million, instead of Sh681 million as at September,” said Mr Pradeep Paunrana, the MD of Athi River Mining (ARM).
ARM reported a 63 per cent drop in net profits to Sh192 million in the nine months compared to Sh516 million in the same period last year in the wake of foreign exchange losses.
While releasing its half year results, Safaricom said that the devaluation of the shilling had led to a net forex loss and associated cost on revaluation of trading balances of Sh1.4 billion implying that the shilling gain would improve its position by approximately Sh500 million.
Debt stocks
East African Portland Cement which announced foreign currency losses of Sh656 million for year ended June due to a loan denominated in Japanese Yen is now transferring the liability to dollar-based which is seen to be less volatile.
The management has said that the firm has gained more than Sh100 million from swapping 50 per cent of its loan to dollar denomination.
Financial reporting standards require a company to declare gains or losses made from valuing its debt stocks at the prevailing rate in comparison to the rate at the beginning of the accounting period.
Other firms that have incurred a foreign currency loss and are expected to benefit include KenGen and Kenya Power. Traders expect the shilling to gain in the long run but see it losing in the short term owing to local demand of the dollar and the Euro crisis.
“In the long run it will be stronger with cash reserve ratio rising to five per cent beginning December 15 but in the short run we have seen the shilling weaken owing to corporates coming in the market and the Euro crisis which weakens the shilling,” said Mr Bernard Omenda a trader with KCB.
The market will also be eyeing the decisions that will come from the monetary policy committee scheduled to meet on December 2.
Further gains by the shilling will improve the company positions but analyst do not expect the gain to be sufficient to wipe out the current forex losses an issue that may impact on the firms earnings per share.
“Owing to the forex-loss we forecast earnings per share of ARM to decline 35 per cent to Sh5.27 per share in the full year of 2011,” said African Alliance Securities in a report. The companies holding the foreign currency denominated loans are also set to benefit from better interest rates as the local lenders raise their rates in response to the tight monetary stance taken by the CBK.
