How strong shilling benefitted indebted firms listed on NSE (2024)

The strengthening of the Kenya shilling in the six months to June lifted earnings for Nairobi Securities Exchange (NSE)-listed firms with dollar-denominated loans.

For instance, data shows that five companies with such facilities including TPS Eastern Africa, Car and General, Kenya Airways, Umeme, and Sameer Africa booked a combined Sh6.2 billion in unrealised exchange gains from foreign currency loans held, contrasting to losses of Sh15.9 billion from a weaker local unit at the same time last year.

Indebted firms customarily declare forex gains or losses based on changes in the exchange rate at the reporting stage. In this arrangement, a firm revalues its foreign currency liabilities at the current exchange rate in a record acknowledging gains or losses that would result if the outstanding loan balances were to be settled at the prevailing rate.

The forex movements are subsequently posted on the income statement, impacting a company’s profitability.

A depreciation in the shilling against major world currencies such as the dollar for instance sees a firm record an unrealised loss from its outstanding foreign currency loans. The vice-versa is true.

National carrier Kenya Airways (KQ), whose shares remain listed on the NSE despite a trading freeze, marked the most significant gains from a stronger shilling in the period that ended June 30 as it booked a Sh5.39 billion gain to inverse a loss of Sh15.3 billion from a weaker local unit last year.

The unrealised Forex gain anchored the struggling airline to a half-year profit of Sh513 million, a first in 11 years since 2013.

“Total operating costs rose by 22 percent, aligning with the expansion of our operations as we continue to recover from the effects of Covid-19. Direct operating costs were up 36 percent; fleet ownership costs increased by 11 percent whereas overheads decreased by 22 percent, partly due to strengthening of the shilling against major world currencies,” Kenya Airways said last Monday.

KQ liabilities in the six months stood at Sh297.8 billion from Sh312.7 billion including dollar-denominated facilities acquired to fund the purchase of new aircraft and related machinery such as engines.

TPS Eastern Africa, the operator of the Serena branded hotels saw the second-highest unrealised exchange gain at Sh452.8 million after booking a loss of Sh361.8 million from a weaker shilling last year.

The company disclosed borrowings of Sh438.1 million under its current liabilities in the period compared to higher arrears of Sh780.5 million previously.

Manufacturer Sameer Africa on its part disclosed gains of Sh56.7 million from the foreign exchange revaluations compared to a loss of Sh69.2 million previously.

“Appreciation of the shilling against the US dollar over the period resulted in a significant unrealised foreign exchange gain on translation of the USD-denominated liabilities, reported under finance costs,” Sameer said in a trading statement on August 16.

Motorcycle dealer Car and General reported a Sh171.8 million net foreign exchange gain over the same period compared to a loss of Sh155.6 million last June while Uganda’s utility Umeme which is cross-listed at the NSE marked gains equivalent to Sh200 million (UGX 5.78 billion) compared to losses of Sh17.18 million (UGX 495 million) previously.

The Kenya shilling turned the corner in early February to rally against the US dollar following the end of speculation over a potential default event by the government which related to the maturity of its debut Eurobond in June 2024.

Last Thursday, the CBK quoted the local unit at 129.05 against the US dollar representing a year-to-date return of 17.79 percent for the shilling.

Gains by the local unit are set to yield gains for other NSE firms with foreign currency-denominated debt including alcoholic beverages manufacturer EABL and telco Safaricom.

Safaricom in its latest annual report notes that it is exposed to foreign exchange risk arising from various currency exposures, particularly the US dollar and the Euro.

“If there was a 20 percent change in the shilling against the US dollar during the year, with all other variables being constant, the consolidated pre and post-tax profit for the group would change by Sh1.56 billion and by Sh1.09 billion respectively,” the telecoms operator observes.

The firm has been managing foreign exchange risk arising from future commercial transactions by holding adequate foreign currency reserves to meet future cash flow requirements.