Kakuzi Interim Financials

Kakuzi Ltd, a company that derives its income from tea processing, cattle rearing, forestry and other horticultural operations, 2008 half-year pretax profit declined by 39.1% to Ksh.32.9 million compared with Ksh.23.3 million in the same period last year. The group's sales for the six months ended June 2008 dropped by 37.5% from Ksh.736 million last year June to Ksh 460 million this year. The firm turnover went down mainly due to unfavorable tea crop prices last year and the winding down of a deal with Del Monte Kenya Limited.

Earlier this year a deal between Kakuzi and Del Monte Kenya Limited for a joint canned pineapple venture came to an end. Del Monte had planted 226 hectares of avocadoes and 61 hectares of pineapples on behalf of Kakuzi. This enabled Kakuzi to export a diversified portfolio of agricultural produce. Kakuzi is mainly involved in tea and horticulture with about 60% of its total revenue emanating from horticultural sales, while tea contributes 34% of the total.

An Industry of losses

The Agricultural sector has reported some of the biggest losses in their half year announcements. A review of the nine agricultural based companies listed at the NSE shows that most of them have reported profits in the red.

Williamson reported a Ksh.143 million pre-tax loss, while Kapchorua recorded Ksh.103 million in pre-tax loss, for their years ending March 31, 2008.

Unilever Tea Kenya Limited reported Ksh.104 million in losses for the financial year ended December 2007.

Sasini Limited profitability dropped by 117% from a pre-tax profit of Ksh.240 million in 2006 to a loss of Ksh.40 million for the year ending September 30 2007.

Management Commentary

During the first six months of the Kakuzi’s tea, pineapple and livestock operations made useful contributions. Turnover was down in relation to 2007 due to the exceptional tea crop last year and the winding down of the Del Monte Kenya Limited canned pineapple joint venture. We expect avocados to gain generate profits in 2008, but these profits will essentially accrue during the second half of the year.

In view of the loss we are reporting for the first six months of the year, the Directors do not recommend the payment of an interim dividend.

Dr. T R Fowkes
Chairman
26 August 2008.

Results

The financial results for the year ended 30 June 2008 are commendable given the extremely difficult operating and trading conditions experienced during the year. The post-election crisis resulted in two week of lost production (equivalent to about 14,000 tonnes of sugar). There was also severe limitation in transporting raw material from the farms to the factory, obtaining inputs for sugar manufacture and in transporting sugar throughout the country. This was further exacerbated by the high rate of inflation especially fuel and oil prices leading to very high production and transport costs. The displacement of people led to depressed demand for sugar.

The company made a profit before tax of ksh.1,589 million for the year, which is 17% below that achieved last year.

Operations

The company processed 2,408,141 tonnes (2007 – 2,118,563 tonnes) of cane, which is 14% higher than last year. This was a result of improved cane husbandry which improved the yields and quality of cane for crushing.

Sugar produces is 256,263 tonnes (2007 – 217,200 tonnes) which is 22% above that produced last year. The improved cane quality and higher factory availability and efficiency following factory expansion and modernization are bearing fruit. Production would have been higher had it not been for the disruption following the post election violence crisis and some teething problems in start up following the completion of the second phase of the factory expansion project. A strike by employees of the contracted cane transporters in March 2008 led to a loss of 10 days production.

Sales

Gross turnover is ksh.14,305,457,000 (2007 – Ksh.12,864,962,000) which is 11% above that achieved last year. The domestic selling prices were however much lower than last year’s for most of the year. This has been due to the high influx of cheap imported sugar and unfair trade practices with undeclared sugar finding its way into the market. The dumping of transit sugar to neighboring countries into the local Kenyan market has further depressed prices.

Exports markets in the region are being explored for greater market penetration. There were over 25,000 tonnes of sugar exported this year of which 2,000 tonnes were to the European Union.

Contribution to Government Revenue

The company’s contribution to the exchequer in taxes from Value Added Tax, Sugar Department Levy, Corporation Tax and other taxes was over ksh.3.2 billion in the year.

Profit After Tax

Profit after tax of Ksh.1,213,837,000 (2007 – Ksh.1,393,611,000) is a decrease of 12.9% from last year. Earnings per share is Ksh.0.79 (2007 – ksh.0.91) which is Ksh.0.12 per share lower than last year represent a 13.2% decrease.

Dividends

The Directors proposed a final dividend of 20% per ordinary share of ksh.2 each which is Ksh.0.40 per share. The register of members will be closed at 4:30 pm on 31 October 2008 up to 7 November 2008. Final dividend will be paid to shareholders on the register as at the close of business on 31 October 2008. The final proposed dividend is accounted for as part of equity until it has been ratified at the Annual General Meeting scheduled to be held on 5th December 2008.

Auditors

The accounts were audited by Delloite & Touché and received an unqualified opinion.

Outlook
a) Sugar Industry

The sugar prices have been on the rise and are in the range of $380 - $420 per tonne. With the higher oil prices, there is a likelihood of this being sustained as production shift from sugar to ethanol.

The COMESA safeguard measures were extended to 2012. However, this has allowed for a progressive increase in import duty free quota and decrease in custom duty. These will be eventually removed by 2012 making the market very competitive. The company will continue to improve on branding by increasing in volume of pre-packed sugar and expand on the product range offering. Sugar fortification by adding nutrients for improved health is being explored.

Local competition is still stiff which has depressed margins. Imported sugar needs to be properly controlled to ensure that there are no unfair trade practices. If this is achieved, then prices are expected to remain stable. However, the high operational cost such as cost of sugar cane, transport, spare parts and packaging are likely to lead to depressed margins. Cost reduction initiatives will be implemented to sustain profitability.

b) Electricity Generation

The company is in the process of increasing the power generated from the current 12MW to 38MW. This will increase the current export of power from 3MW to 26MW. The project which will cost USD.54 million is in progress and is expected to be completed by 31 December 2008. The company has obtained a loan of USD.35 million from Proparco, a leading international development finance institution for the con-generation project.

The company has entered into a Power Purchase Agreement with Kenya Power and Lighting Company (KPLC) for the power project. This will result in the increase revenue streams from electricity generation this year.

c) Greenfield Operations

The company in collaboration with Tana and Athi River Development Authority (TARDA) completed a feasibility study for an intergraded sugar project in the Tana River Delta. The study indicated that it was viable and would be a major step towards sugar self-sufficiency in Kenya, it would create employment, develop infrastructure, reduce poverty and improve the social and economic well-being of the community. The project has been approved by the National Environmental Management Authority (NEMA). The company will progress the project once the legal, financial, regulatory and operational issues have been satisfactorily concluded.

d) Ethanol

The major increase in the use of bio-fuels globally to replace fossil fuels as part of the reduction in environmental pollution and initiatives to stem the global warming has been further strengthened by the very high oil prices. This has made ethanol a more profitable product.

Ethanol will be produced from the molasses currently produced by the company as a by-product. The company has the capacity to produce up to 40 million liters of ethanol annually. The company is currently undertaking a feasibility study on the viability of setting up an ethanol plant in Mumias.

e) Future Outlook

the Board of Directors are cognizant of the challenges facing the sugar industry and will continue to implement strategies to sustain the profitability of the company. The board of Directors is cautiously optimistic of an improved performance in the coming years.

By Order of the Board
Meshak Guto
Company Secretary
28 August 2008