Stock Watch: Kakuzi Limited

Kakuzi Limited announced their unaudited results for the period ended 31st December 2014 on 25th March 2015.

Recommendation: HOLD

Varied Top Line: Sales Up 22.07% to KES 1.69 Bn

Kakuzi Limited (NSE: KUKZ) released their full year results indicating an increase in total revenues by 22.07% to KES 1.69 Bn from KES 1.38 Bn largely attributable to increased earnings from avocados​ which​ curtail​ed​ losses ​incurred from​ low ​tea ​earnings​. Tea auction prices were significantly lower in 2014 whereby average prices per kg fetched USD 1.82 in 2014, down from USD 2.26 in​ the previous year.  ​The company merited from economies of scale whereby p​roduction costs ​rose disproportionately to revenue ​up 16.47%​Vs ​ ​22.07%​; yielding a higher gross profit margin of 37.67% Vs 36.71%

Bottom Line: Pre-Tax Profits Dips 2.72% to KES 232.80 Mn, Profit after Tax (PAT) Down 2.92% to KES 160.21 Mn

This translated to a reduced 2.72% pre-tax profit margin and a subsequent 2.92% PAT margin. Total comprehensive income declined by 12.54% whilst Return on Equity (ROE) shed marginally to 5.37% vis-à-vis 5.68%- FY13. Despite there being an increment in volume of tea produced during the year, the squat prices of tea in the auction prices meant that returns were stymied, thereby affecting total profits for the period under review.

Outlook: Stymied growth is set to continue affecting tea sales as increased international production eats into traditional export destinations​; once ​a preserve for ​Kenyan tea producers. With menacing levels of drought affecting major tea growing parts of the country, production levels are set to lower as tea bushels produce less quality and quantity in leaves. ​

Heightened Avocado sales coupled with increased macadamia production levels will greatly assist in buffering effects of the drop in tea production – expected to prevail owing to poor weather conditions ​and portended low ​international ​prices.