Unga Group issues profit warning as rising costs eat into earnings

KENYA – Unga Group Plc has issued a profit warning for the year ending June 2022, following a dip in revenues in the first six months ended December 31, 2021.

In a statement, the flour milling giant revealed that its interim revenue dropped from Ksh 9.7 billion (US$85m) registered the previous corresponding period to Ksh 8.8 billion (US$77.3m).

The 9% dip in top-line performance is due to reduced sales volumes in both human and animal nutrition segments.

Meanwhile, the company’s profit slumped by 90% from Ksh 83 million (US$729,000) to Ksh8.4 million (US$73,000), impacted by revenue decline and depressed margins due to a surge in cost of key raw materials attributable to global shortages.

It attributes the dip in profits to an increase in the cost of raw materials triggered by global shortages, an upsurge of freight costs and a weakened Kenya shilling that have caused an escalation of the price of finished goods.

Wheat grain price increase and shortage were because of adverse weather, pandemic related interruptions and increased global demand.

Maize supply and prices were stable in the first quarter. However, a poorer than expected harvest in the second quarter created shortages and an increase in prices.

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A global shortage of soya bean pushed prices to unprecedented levels. The reduction in local demand for flour has meant that by-products used in animal feeding have been in relatively short supply. It turned to imports from the region to bridge this gap.

Though the government has allowed duty-free importation of non-GMO raw materials, high global prices have not made importation a viable option yet.

Based on the company’s unaudited financial results for the first six months ended 31 December 2021 and the its second-half forecast, profit for the full year is likely to be at least 25% lower than prior year.

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Raw material prices are expected to remain high for the rest of the financial year. This may worsen the already soaring human food and animal feeds price situation.

The company also blames delayed VAT refunds for strained cash flows, made worse by an increase in working capital requirement to cover higher material prices.

“We continue to lobby for sustainable raw material solutions through policy changes such as approval of GMO raw materials, especially for animal feeds. The Board and management are working on strategies to counter the existing challenges,” added the board.

The manufacturer of human nutrition products and animal feeds, has been restructuring its operations to cut costs and improve efficiency.

Recently, it entered into a distribution deal with the National Cereals and Produce Board (NCPB) to widely avail its products to the Kenyan farmers.

This followed its formation of animal feed ventures both in Kenya and Uganda, in partnership with Dutch animal nutrition and aquafeed company, Nutreco International B.V.

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