Kestrel Capital (E.A.) Limited 1 KenolKobil 2013 Commercial Paper programme
INFORMATION MEMORANDUM
KES 1,700,000,000
COMMERCIAL PAPER PROGRAMME
BY WAY OF PRIVATE PLACEMENT
CREDIT RATING: A1
9th July 2013
Arranger and Placing Agent
KESTREL CAPITAL (E.A.) LTD
Kestrel Capital (E.A.) Limited 2 KenolKobil 2013 Commercial Paper programme
IMPORTANT NOTICE AND DISCLAIMER This Information Memorandum (together with any supplementary information and information incorporated by reference) contains summary information provided by KenolKobil Limited (the Issuer) in connection with a Commercial Paper (CP) notes programme (the Programme) under which the Issuer may issue and have outstanding at any time Commercial Paper notes (the Notes) up to a maximum aggregate amount of Kenya Shilling (KES) 1.7 billion or its equivalent in United States Dollar (USD). The Commercial Paper will be denominated in KES and USD. The Issuer has appointed Kestrel Capital (E.A.) Limited (the Placing Agent) as the Placing Agent for the Notes under the Programme, and has authorized and requested the Placing Agent to circulate this Information Memorandum in connection with the Programme. The Notes have not been registered under the Kenyan Capital Markets Authority and are being offered and sold as a private offer in accordance with Regulation 21 of the Capital Markets (Securities) (Public offers, Listings and Disclosures) Regulations, 2002. The Notes are not required to be approved by the CMA, or any other regulatory body, nor have any such authority pass upon or endorse the merits of this offering or the accuracy or adequacy of this private placement memorandum. The Issuer has confirmed to the Placing Agent that the information contained in this Information Memorandum is true and accurate in all material respects and not misleading and there are no other facts, the omission of which makes this Information Memorandum as a whole or any such information contained or incorporated by reference herein misleading. This Information Memorandum contains references to ratings. A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the relevant rating agency. This Information Memorandum is not intended to provide the basis of any credit, taxation, or other evaluation, and should not be considered as a recommendation by the Issuer or the Placing Agent that any recipient of this Information Memorandum should purchase any Notes. Each recipient contemplating purchasing any Notes is responsible for obtaining its own independent professional advice in relation to the Programme and for making its own independent investigation and appraisal of the financial condition, affairs and creditworthiness of the Issuer and of the Programme as it deems necessary and must base any investment decision upon such independent assessment and investigation and not solely on this Information Memorandum. The Placing Agent does not undertake to review the business, financial condition or affairs of the Issuer during the life of the arrangements contemplated by this Information Memorandum nor to advise any investor or potential investor in the Notes of any information or change coming to the attention of the Placing Agent.
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The Placing Agent has not independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Placing Agent as to the accuracy or completeness at any time of this Information Memorandum. No person has been authorized by the Issuer or the Placing Agent to give any information or to make any representation not contained in this Information Memorandum, and, if given or made, such information or representation must not be relied upon as having been authorized. Any purchase of the Notes will necessarily entail a degree of risk as unsecured obligations of the Issuer. The Placing Agent does not guarantee the Notes in any way including the repayment of principal and/or interest of the Notes, and any purchaser of the Notes would have no recourse against the Placing Agent. Neither the Issuer nor the Placing Agent accepts any responsibility, express or implied, for updating this Information Memorandum and neither the delivery of this Information Memorandum nor the offering, sale or delivery of any Notes shall, in any circumstances, create any implication that the information contained therein is true subsequent to the date thereof or the date upon which this Information Memorandum has been most recently amended or supplemented or that there has been no adverse change in the financial situation of the Issuer since the date hereof or, as the case may be, the date upon which this Information Memorandum has been most recently amended or supplemented or that any other information supplied in connection with the Programme is correct, complete or up to date at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. This Information Memorandum does not, and is not intended to, constitute or contain an offer or invitation to any person to purchase the Notes. The distribution of this Information Memorandum and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Information Memorandum or any Notes come are required by the Issuer and the Placing Agent to inform themselves about and to observe any such restrictions. Furthermore, the Issuer and the Placing Agent does not make any comment about the treatment for taxation purposes of payments or receipts in respect of the Notes. Each investor contemplating acquiring Notes under the Programme described herein is advised to consult a professional advisor in connection therewith. KenolKobil Limited’s ordinary shares are listed on the Nairobi Securities Exchange (NSE). As a result, the Issuer is subject to the rules and regulations of the CMA and the NSE as regards regular reporting and disclosure requirements of publicly listed companies.
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CONTENTS Page 1. Summary of the programme 6 2. KenolKobil Limited – Overview 8
2.1. Corporate Information 8 2.2. History 10 2.3. Geographical diversification 10 2.4. Employee staffing 10 2.5. Organisational Structure 10 2.6. Employee Stock Ownership Programme (ESOP) 11 2.7. Shareholder’s Profile 11 2.8. Refining and transportation 12 2.9. Network 12 2.10. Storage 12 2.11. Market Share and Growth 12 2.12. ISO Certification 13 2.13. Strategic outlook 14
3. Key Investment considerations 15 3.1. Geographical diversification 15 3.2. Economies of Scale 15 3.3. Market share 15 3.4. Multiple revenue streams 15 3.5. Strong Management 15 3.6. Positive Cash Flows and Profitability 15 3.7. Short Inventory Cash Cycle 16
4. Financial overview 17 4.1. Credit rating (GCR Rating) 17 4.2. Use of proceeds 17 4.3. Company working capital requirements 17 4.4. Financial overview 17
5. Risk factors 19 6. Industry overview 20
6.1. Sector classification 20 6.2. Major players 20 6.3. Changes in the industry 20 6.4. KPRL – change to merchant refinery 21 6.5. The Kenyan Open Tender System (OTS) 21 6.6. Crude and Refined Oil 21 6.7. Oil prices 22 6.8. Timeline 22
7. Business Segments Information 23 7.1. Fuel business 23 7.2. Lubricants 23 7.3. LPG 23 7.4. Non-‐fuel business 23 7.5. Trading desk 23 7.6. Export Sales 24
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8. Overview of subsidiaries 25 8.1. Kobil Uganda 25 8.2. Kobil Tanzania 25 8.3. Kobil Zambia 25 8.4. Kobil Petroleum Rwanda 25 8.5. Kobil Ethiopia 26 8.6. Kobil Burundi 26 8.7. KenolKobil Congo 26 8.8. Summary of KenolKobil’s subsidiaries 26
9. Corporate Governance – Board of Directors 27 10. Appendix 29
Definitions and abbreviations 29 Summary Financial Statements 30
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1. SUMMARY OF THE PROGRAMME Issuer KenolKobil Limited
10th Floor, ICEA Building Kenyatta Avenue, Nairobi, Kenya
P O Box 44202 – 00100 Nairobi, Kenya
Instrument Commercial Paper (Notes) being promissory notes, which constitute legally
binding, unsecured obligations of KenolKobil. Security The Notes are unsecured and will rank pari passu with all unsecured debt of
KenolKobil. Transferability These Notes are neither transferable nor tradable on the Nairobi Securities
Exchange. Purpose The Commercial Paper programme is to be used by KenolKobil as a revolving
short term financing facility to diversify and supplement current working capital financing facilities. By allowing KenolKobil to select the timing and the size of the issue of the Notes, the programme will enable the Company to achieve greater financial flexibility and reduce overall cost of financing.
Amount The maximum face value of Notes outstanding at any one time will not
exceed Kenya Shillings 1.7 billion or its equivalent in USD. Interest Rate For Kenya Shilling denominated Notes, to be fixed over the relevant
Government of Kenya Treasury Bill yield rate as announced from time to time. For US Dollar denominated Notes, to be fixed over or below the relevant LIBOR rate.
Discount and Pricing
To be determined from time to time by KenolKobil under advice from the Placing Agent, and quoted as a percentage per annum of face value.
Notes will be issued at a fixed discount to face value. The discount rate may differ between individual Notes according to their time of issue, respective value and tenor. The applicable discount rates will be those that KenolKobil selects and agrees from bids obtained by the Placing Agents from investors.
Denomination The Notes are to be issued in denominations of Kenya Shillings One Million
(KES 1,000,000) face value or US Dollar equivalent or such other increased amount as elected by KenolKobil.
Tenor Notes will have tenors of one year or less but typically 30, 60, 90, 180, 270 or
360 days, as elected by KenolKobil. Arranger Kestrel Capital (East Africa) Limited
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Placing Agents
Kestrel Capital (East Africa) Limited
Issuing and Paying Agent
CFC Stanbic Bank Limited
Investors Qualified institutional, corporate and high net worth investors as approved by
KenolKobil. Governing Laws
The Laws of Kenya will govern the Notes.
Redemption On presentation to the Issuing and Paying Agent at their maturity, KenolKobil
will redeem Notes at their full face value through the Issuing and Paying Agent.
Withholding Tax
Withholding tax will be deducted at source as required by law.
Issuance and Custody of Notes
Notes will be delivered by the Issuing and Paying Agent and, unless otherwise requested by the holder, will be held by the Issuing and Paying Agent. Where the Issuing and Paying Agent acts as custodian for the holder of any Note, it will arrange for the Note to be presented for payment on behalf of the holder. If a Note holder takes physical delivery of a Note, he/she will be responsible for making physical presentation of the Note on the maturity date, as specified on the face of the Note, to the Issuing and Paying Agent. A claim against the Issuer for any payment(s) under the Note Programme is void unless such claim is made within 7 years from the date such payment(s) became payable.
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2. KENOLKOBIL LIMITED -‐ OVERVIEW 2.1 Corporate Information Board of Directors James Mathenge, Chairman David Ohana, Group Managing Director Patricia Lai, Group Finance Director Desterio Oyatsi, Non-‐Executive Director Per N V Jakobsson, Non-‐Executive Director Terry M Davidson, Non-‐Executive Director Daniel Ndonye, Non-‐Executive Director Secretary Ms W Jumba Livingstone Associates Deloitte Place, Nairobi P O Box 30029, GPO 00100 Registered Office ICEA Building P O Box 44202, 00100 Nairobi Bankers BNP Paribas 16 rue de Hanovre 75002 Paris NIC Bank Masaba Road, Nairobi P O Box 44599 -‐ 00100 CfC Stanbic Bank Kenya Stanbic Centre, Museum Hill, Nairobi P O Box 30550 -‐ 00100 Kenya Commercial Bank 6th Floor, Kencom House, Nairobi P O Box 48400 -‐ 00200 Bank of Africa Kenya Reinsurance Plaza, Taifa Road, Nairobi P O Box 69562 – 00400 PTA Bank 23rd floor NSSF Building, Nairobi PO Box 48596 -‐ 00100
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Ecobank Kenya Ecobank Towers, Nairobi P O Box 49584 – 00100 Standard Bank of London PLC 20 Gresham St, London EC2V 7JE Commercial Bank of Africa CBA Building, Mara and Ragati Roads Nairobi Diamond Trust Bank Nation Centre, Kimathi Street, Nairobi P.O. Box 61711 -‐ 00200 Auditors PricewaterhouseCoopers Limited PwC Tower, Westlands Nairobi Advocates Shapley Barret & Co. Prudential Assurance Building, Nairobi P O Box 40286 -‐ 00100 Karimbux-‐Effendy & Co. 4th Floor, Yaya Centre, Nairobi P O Box 43356 -‐ 00100 Arranger and Placing Agent Kestrel Capital (East Africa) Limited 5th Floor, ICEA Building, Nairobi P O Box 40005 -‐ 00100 Issuing and Paying Agent CfC Stanbic Bank Limited Stanbic Centre, Museum Hill, Nairobi P O Box 30550 -‐ 00100
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2.2 History Kenya Oil Company (Kenol) was founded by Mr. R S Alexander and was incorporated as a Private Limited Company in Kenya on 13th May 1959. The Company started its operations as a wholesaler selling packaged Kerosene, by the brand name "SAFI". Kenol became a public company quoted on the Nairobi Securities Exchange (NSE) in September 1959. A few years later, Kenol began investing in service stations. In January 1986, Kenol and Kobil Petroleum Limited (Kobil) entered into a joint operations and management agreement. This arrangement resulted in the sharing of a wide range of costs, including depots and managerial services thus enabling both Kenol and Kobil to lower their operating costs and enhance their ability to jointly bid for large supply contracts. In December 2007, Kenol acquired the entire issued share capital of Kobil in exchange for an allotment of new shares in Kenol to the shareholders of Kobil. As a result Kobil became a wholly owned subsidiary of Kenol and Kenol was renamed “KenolKobil”. 2.3 Geographical Diversification The Company’s vision is to be the leading brand in all the markets in which it operates and a major player in Africa. In line with this vision, KenolKobil has expanded its geographical presence in various parts of Africa, which has resulted in diversified earnings and spread of country risk. Until 1999, KenolKobil’s operations were restricted to Kenya. In Kenya, Kenol and Kobil brands operated under the same management through a joint management agreement. At the time, the Uganda market provided the main export market for KenolKobil products and a natural market for geographical expansion. Since then, the country has embarked on a regional expansion and currently has operations in Uganda, Tanzania, Zambia, Rwanda, Ethiopia and Burundi apart from Kenya. Please see section 8, Overview of Subsidiaries for more details on KenolKobil’s regional operations and geographical diversification. 2.4 Employee staffing KenolKobil currently has a combined workforce of 350 employees spread across Africa. The Company commenced a restructuring and reorganization exercise in June 2012 to reduce costs and improve efficiencies. The Company has reduced its total workforce down to 350, a 38% reduction from its highest employment level of 570 in June 2012. 2.5 Organizational Structure (a) Executive Committee The Head Office management structure in Kenya comprises of an Executive Committee, comprising of the Group Managing Director, Group Finance Director, Exports and Regional Support Manager, Group Trading and Supply Optimization Manager.
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(b) Group Management Committee The Group Management Committee comprises of the Executive Committee and the Country Managers / General Managers of each Subsidiary. (c) Subsidiaries and operating entities The key subsidiaries and operating entities comprise of the following:
• Kobil Petroleum Limited • Kobil Uganda Limited • Kobil Zambia Limited • Kobil Tanzania Limited • Kobil Petroleum Rwanda Limited • Kobil Ethiopia Limited • Kobil Burundi SA • Representative Office in Zimbabwe • KenolKobil Congo SPRL
(d) Key operational structures The operational structure is organized into the following key departments:
• General Management • Accounting & Finance • Group Internal Audit • Marketing & Non-‐fuel Business Development • Operations & Project Development • Supply & Trading • Human Resources and Administration.
2.6 Employee Stock Ownership Plan (ESOP) KenolKobil implemented a group ESOP in 2003. The ESOP, a scheme approved by the Capital Markets Authority, has as its objective the retention, motivation and reward of KenolKobil’s high performance staff. 2.7 Shareholder’s Profile As at 31st December 2012, KenolKobil had 6,565 shareholders. The table below summarizes the Company's shareholding structure as at 31stDecember 2012:
Name of shareholder Number of shares
% Shareholding
Wells Petroleum Holdings Limited 366,614,280 24.91% Petroholdings Limited 255,211,080 17.34% Highfield Limited 183,350,000 12.46% Chery Holding Limited 116,080,400 7.89% Energy Resources Capital Limited 88,185,720 5.99% CFC Stanbic Nominees Kenya Ltd (A/c NR13302) 42,553,700 2.89% Standard Chartered Nominees Non Resd A/c KE9053 22,241,700 1.51% SCB A/C Pan African Unit Linked FD 40984 16,964,900 1.15%
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Standard Chartered Nominees (Non Resd AC 9054) 12,127,300 0.82% Standard Chartered Nominees (Non Resd AC 9057) 11,253,700 0.77% 2.8 Refining and Transportation KenolKobil has an agreement with the Kenya Pipeline Company (KPC) for storage and transportation of petroleum products to various parts of Kenya. As with the other petroleum distributors, KenolKobil has been using Kenya Petroleum Refineries Limited (KPRL), as all oil companies in Kenya are required to buy approximately 40% of their total product requirements from KPRL. 2.9 Network KenolKobil has an extensive distribution network, currently operating 159 service stations in Kenya; in addition, it has 249 service stations outside Kenya. The company’s regional growth has resulted in increased revenues and profits over the past 10 years. The table below summarizes the Company's progress over the last 22 years in developing its network: Network Growth
Sales Area 1991 1995 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Kenya 41 48 73 82 65 68 69 64 69 160 155 155 158 159
Uganda -‐ -‐ 26 42 52 52 58 60 61 61 61 61 61 60
Tanzania -‐ -‐ -‐ 11 15 15 15 18 18 19 23 25 25 21
Zambia -‐ -‐ -‐ 11 14 15 16 20 20 24 28 28 28 25
Rwanda -‐ -‐ -‐ 1 1 1 18 38 38 43 46 46 46 44
Ethiopia -‐ -‐ -‐ -‐ -‐ -‐ 1 1 50 59 64 64 64 80
Burundi -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ 4 14 16 19
Total 41 48 99 147 147 151 177 201 256 366 381 393 398 408
2.10 Storage KenolKobil has joint terminals in Nairobi and Mombasa, which are shared with Total. A dry goods storage depot is located at Ruaraka in Nairobi. The Company also works with Kenya Pipeline Company and other oil companies in Mombasa, Nakuru, Eldoret, Kisumu and Nairobi. The Aviation sector consumers are served through the Nairobi Refueling Services at Jomo Kenyatta International Airport and Mombasa Refueling Services at Moi International Airport. KenolKobil has a total storage capacity of approximately 93,500m3 across Africa. 2.11 Market Share & Growth The graph below details the Company's market share in Kenya between 1994 and 2012,
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Source: 1994 – 2001: Murdock McCrae & Smith 2002 -‐ 2010: Pipeline Coordinator (Oil Industry Secretariat Pipeline Coordinator – Ministry of Energy) 2011-‐2012: Petroleum Institute of East Africa (PIEA) KenolKobil has continued with its strategy of improving its market position by increasing the number of service stations and commercial clientele, resulting in an increase of volumes from 74,939m3 in 1994 to 1,070,587m3 in 2012, achieved in a very competitive environment. Key to this has been the strategic acquisition of Kobil in December 2007. The following graph demonstrates the trend:
KenolKobil is active in the major sectors of the economy, such as transport, energy, agriculture, tourism, construction, manufacturing, aviation and marine. The Company markets a wide range of petroleum products, such as gasoline, diesel, kerosene, Jet A1, bitumen products, fuel oil products, industrial diesel oil, LPG and lubricants. KenolKobil also entered the reseller market in 2003 with the establishment of a new section within the Company. 2.12 ISO Certification The Company in 2010 was re-‐certified ISO 9001:2008 from ISO 9001:2000 for the following activities: refining, blending, storage, distribution and marketing of petroleum products, lubricants, LPG and specialties. An audit has just been conducted for the re-‐certification in June 2013; the results are being finalized but the Company is confident on a positive outcome.
0.0
5.0
10.0
15.0
20.0
25.0
30.0 1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total inland (%)
0 200000 400000 600000 800000 1000000 1200000
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total inland volume (m3)
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2.13 Strategic Outlook While the Company’s recent negotiations with Puma Energy failed to result in a transaction, the Company continues to explore strategic alternatives in this regard in its ordinary course of business. While potential investors and partners continue to approach the Company with regard to strategic alternatives, the current focus of the Company’s Board of Directors and management is on the restructuring and turnaround of the business in 2013. Any possible transaction with an outside investor is not likely to occur until after 2013.
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3. KEY INVESTMENT CONSIDERATIONS
3.1 Geographical diversification As noted in section 8, the Company has diversified its revenue with approximately 20% of volume sales derived from outside Kenya. 3.2 Economies of Scale KenolKobil holds a strategic portfolio of attractive storage and distribution assets across Africa. With total storage capacity of approximately 93,500m3 across Africa, KenolKobil is one of the largest oil marketers on the continent. Large economies of scale and managing large volumes of product provide a competitive advantage to KenolKobil. 3.3 Market Share With oil storage depots and distribution capacity across much of greater Eastern Africa, KenolKobil’s size and coverage offers access to markets and clients that many other competitors cannot achieve. Please see Section 2.11 for more information on market share. 3.4 Multiple revenue streams The Company generates diverse revenue from various business lines including retail, reseller, commercial, African trading desk, aviation, exports, LPG, bitumen, lubricant, non-‐fuel business and storage/terminal hospitality. Please see section 7 for more information on the various segments. 3.5 Strong Management KenolKobil’s senior management team has an experienced and dedicated management team that exists in few other large oil marketing companies in Africa. 3.6 Positive Cash Flow and Debt Reduction Despite the losses incurred in 2012, the Company has returned to positive EBITDA in 1Q 2013 and expects a further improvement in EBITDA in 2Q 2013. However, due to continuing charges and liquidation of high cost inventory in 1H 2013, as well as the ongoing restructuring exercise whose full benefits are expected to be realized in 2H 2013, the Company expects the bulk of 2013’s improvements to be reflected in 2H 2013 results and a significantly improved balance sheet at 31st December 2013. While the Company’s recent reductions in excess working capital resulted in an immediate improvement in cash flow, the ongoing operating cost reductions, reduction in capital expenditures, and sale of non-‐core and non-‐performing assets, are expected to result in a significant reduction in debt by year-‐end 2013. These strategies alongside a more prudent foreign exchange hedging policy are expected to help turnaround the business in 2013 in the interest of all shareholders, provided the overall operating environment remains stable for the Company.
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3.7 Short Inventory Cash Cycle The inventory cash cycle below briefly explains how the inventory and cash flow in a typical cycle.
(Day) -‐10 (Acovity) Vessel
opening
0 Vessel loading
date
15 Vessel discharge
17 to 19 Taxes paid
(Cash ouplow)
19 (onwards) Sales
30 (a) Invoicing customers
(b)KenolKobil pays supplier (Cash ouplow)
60 to 90 Customers pay KenolKobil (Cash inflow)
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4. FINANCIAL OVERVIEW 4.1 Credit Rating (GCR Rating) KenolKobil was credit rated in June 2013 on financial results to 31st December 2012 by GCR. GCR also reviewed KenolKobil’s 1st Quarter 2013 results as part of its assessment. GCR is one of the leading rating agencies in Africa, rating more organizations than any other rating agency operating on the African continent. GCR is licensed by the Capital Markets Authority in Kenya.
KenolKobil has been assigned a corporate credit rating (short term) of A1. This means that the short-‐term credit issue carries a “Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.” The rating remains unchanged from last year despite the operating losses incurred in 2012. The full GCR Rating, 2013 is attached as a supplement to this Information Memorandum.
4.2 Use of Proceeds The CP programme will be used to finance short-‐term working capital requirements of the Company, including the importation and distribution of fuel products to the industry and the Company’s own customers. 4.3 Company Working Capital Requirements The Company has achieved significant growth in recent years both through internal growth and through acquisitions of companies. The establishment of a Trading Desk has helped the Company tap into new markets. The Company’s growth has resulted in the need for an increase in working capital requirements. Because of the Company’s high growth, it has become necessary to fund this growth both in terms of long-‐term and short-‐term capital needs. While the internally generated funds are set aside to cater for operational needs and to fund long-‐term capital investments (acquisitions and capital expenditure), the CP programme is designed to fund the Company’s short-‐term capital needs. The following table depicts growth in sales and short-‐term capital requirements for the Company for the last five years:
2012 2011 2010 2009 2008 (15
months) Net sales Kshs (000) 192,527,486 222,440,715 101,649,560 96,692,834 134,518,341
Net working capital Kshs (000)
12,955,779 21,455,187 18,678,657 6,229,291 8,836,573
4.4 Financial Overview The loss experienced in 2012 was a major break from the Company’s historical track record of consistently growing earnings. Most of the causes were of an exceptional nature as explained below, • The Company faced KES 4.6 billion in foreign exchange losses due to large foreign
currency hedges, which were placed by the Company in the later part of 2011
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and early 2012 as well as additional and rollover forward contracts to protect against depreciation of the Kenya Shilling. Subsequent to the currency hedges purchase, the Central Bank of Kenya aggressively raised interest rates, which resulted in a rapidly strengthening KES. The Company has currently enforced a general no currency hedging policy.
• The compression in gross margins to 2.23% in 2012 from 5.49% in 2011 was due to adverse movements in international oil prices (as shown in Section 6.7) when the Company was carrying an unusually high level of oil inventory. The Company has since embarked on a ‘just in time’ or ‘order against contract’ policy of inventory management to minimize inventory carry risks.
• KES 2.4 billion was due to increased interest expense driven by increased interest rates and debt to finance the above two losses. Interest rates for the Company increased from an approximate low of 14 % in 2011 to an approximate high of 21% in 2012. Total debt levels for the Company has since reduced from a high of around KES 18 billion during 2012 to approximately KES 15 billion as at May 2013
• Administrative expenses rose by KES 1.7 billion to KES 5.9 billion. However, most of the increase (KES 1.3bn), was due to change in inventory measurement and revaluation basis and ESOP provision of KES 0.4 billion. Without these additional items, the administrative expenses would have remained flat year on the year. The management has been focused on reducing operating expenditure following a business process analysis and has already noted a 35% drop in monthly operating costs in the first quarter of 2013.
Despite the losses incurred in 2012, the Company has returned to positive EBITDA in 1Q 2013 and expects a further improvement in EBITDA in 2Q 2013. However, due to continuing charges and liquidation of high cost inventory in 1H 2013, as well as the ongoing restructuring exercise whose full benefits are expected to be realized in 2H 2013, the Company expects the bulk of 2013’s improvements to be reflected in 2H 2013 results and a significantly improved balance sheet at 31st December 2013. While the Company’s recent reductions in excess working capital resulted in an immediate improvement in cash flow, the ongoing operating cost reductions, reduction in capital expenditures, and sale of non-‐core and non-‐performing assets, are expected to result in a significant reduction in debt by year-‐end 2013. These strategies alongside a more prudent foreign exchange hedging policy are expected to help turnaround the business in 2013 in the interest of all shareholders, provided the overall operating environment remains stable for the Company.
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5. RISK FACTORS
• Oil Price Volatility: KenolKobil is subject to the volatility of fluctuating crude and refined oil prices. Consequently, varying international crude prices, which are affected by various factors, present significant risks. KenolKobil mitigates this risk by taking into consideration the competitive price and supply factors in the industry and carefully managing its inventories and sales.
• Price Controls: Price controls have on occasions resulted in reduced margins when inefficiencies in the KPC and KPRL are not properly addressed, such as ullage and pumping capacity problems. KenolKobil is actively involved through the Petroleum Institute of East Africa (PIEA) in consultations with the Government to ensure fair implementation of these regulations.
• Exchange Rate Volatility: The Company’s major cost inputs are US Dollar denominated and KenolKobil is therefore exposed to currency risk. This risk is mitigated by the management's efforts to increase its US Dollar sales and frequent monitoring of the foreign exchange market in order to find ways of lowering the currency risk. KenolKobil also reduces the exchange risk by adjusting its retail prices, timely conversion of local currencies into US dollars, and careful management of inventories. The Company has currently enforced a general no currency hedging policy. The Energy Regulatory Commission’s (ERC) price controls instituted in 2010 also assist with adjusting retail pump prices for currency exchange rates.
• Competition: The current market environment is competitive especially with independent dealers making forays into the trading and retail business. KenolKobil seeks to address this risk through competitive pricing and better service delivery.
• Balance Sheet Debt: While the Company’s debt levels increased substantially in 2012 due to several exceptional circumstances noted earlier, the Company plans to reduce its overall borrowings as well as the more expensive credit facilities in 2013, while continuing to pursue more attractive financing alternatives to support its trading operations. Debt reduction is also expected due to decline in capital expenditures and the sale of non-‐core and non-‐performing assets across the group.
• Fuel Adulteration: The sale and distribution of petroleum products that do not meet regulatory standards by mixing substandard fuels is a problem faced by the oil industry. This results in an unfair competitive advantage to those practicing this trade, which can be damaging to both the consumers and the industry in general. Since 2010, the KRA has introduced a new system which has significantly reduced this risk.
• Credit Sales: Credit sales increase payment risk. In the circumstances, KenolKobil is addressing this risk by increasingly focusing on cash sales and maintaining strong credit control measures on outstanding credit balances. Days Sales Outstanding for KenolKobil is 30 days.
• Foreign Investments and Regulations: The Company is subject to foreign investment risk associated with its subsidiaries. Constant dialogue with the respective government regulatory bodies aims to minimize any potential risk by sensitizing government to the needs of the industry.
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6. INDUSTRY OVERVIEW 6.1 Sector Classification The Oil Industry is classified into the following main sectors: 1. Fuels business 2. Trading 3. Exports to neighboring countries 4. Liquefied petroleum gas 5. Lubricants 6. Non-‐fuel business 6.2 Major Players The following multinational oil companies (MNCs) currently dominate the industry: KenolKobil, Vivo Energy (formerly Shell), Total, Libya Oil and National Oil Corporation of Kenya (NOCK). There are other smaller oil companies operating in Kenya, such as Engen, Gapco, Galana, Petro Oil, Hashi Empex, Hass, Bakri, Gulf Energy and others. There is also a network of independent service station dealers that operate under the umbrella of the Independent Petroleum Dealers of Kenya. KenolKobil plans to continue benefiting from the exit of MNCs from the region as retail markets are generally not considered 'core business' for the large global oil companies, which are mainly involved in exploration, production and refining. KenolKobil's core business is oil marketing. As western multinationals exit Africa, there are other players that are attracted to the industry. In Kenya for example, Libya Oil recently bought the Mobil retail chain of petrol stations. Reliance Petroleum of India, which is particularly strong in refining, has also entered into the Kenyan market through Gapco. 6.3 Changes in the Industry Stringent requirements from KRA, high financing costs and margin pressures, as well as a preference by consumers to buy fuel from branded outlets, continues to enhance market consolidation for large players such as KenolKobil. In the last ten years, the following major changes have taken place:
• Increase in registered oil marketers; • Rise of the reseller segment; • Introduction of unleaded gasoline and low sulphur diesel; • Implementation of the Open Tender System (OTS) for the supply of crude and
refined fuel to the Kenyan market; • Introduction of a Single Entry Point (SEP) for the importation of refined
products; • The implementation of a new tax regime by the Kenya Revenue Authority. • Change in shareholding of the Kenya Petroleum Refineries Ltd. • Exit of several multinational oil companies. • Decision to change the KPRL processing regime from Toll Refining to
Merchant Refining.
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In addition, the Government introduced the Petroleum Pump Prices Cap Formula in December 2010. KRA’s Simba System introduced in August 2005 continues to be enhanced and has significantly reduced the dumping and adulteration of products thus enhancing fair competition. 6.4 Kenya Petroleum Refineries Ltd -‐ change to merchant refinery Up to July 2012, Kenya Petroleum Refineries Limited (“KPRL”) processed and refined imported crude on behalf of all oil marketers in Kenya. From August 2012, the Kenya Petroleum Refineries Limited (“KPRL”) became a “merchant refinery” to refine their own crude to sell refined product to oil marketers. All oil companies in Kenya have been required to buy approximately 40% of their total product requirements from KPRL. Given the high operating inefficiencies of KPRL, its current fate is being decided by Government and Essar Petroleum as owners. 6.5 The Kenyan Open Tender System (OTS) In January 2004, the Kenyan Ministry of Energy implemented the OTS to streamline and regulate the importation of crude and refined petroleum products for Kenyan use. OTS was put forward to create an orderly market place with an aim to reduce energy costs in Kenya through economies of scale. Under the OTS, each petroleum company’s monthly crude processing requirement is computed in accordance with a formula set by KPRL. Tenders are then invited from the oil companies to bid for the supply. The company with the lowest bid is awarded the tender. Title to the crude is then transferred after the buyer has prepaid the tender price to the importer. The fluctuation of oil prices has made trading conditions challenging. The OTS has somewhat mitigated the difficulties posed by the fluctuating oil prices as all the players in the Kenyan Oil Industry are sourcing crude oil and most refined oil products at the same prices increasing price homogeneity. 6.6 Crude and Refined Oil Kenya’s current crude requirement is about 1.6 million Metric Tons (MT) per year, assuming approximately 40% of Kenya’s total fuel needs are derived from imported crude oil. The remaining 60% of the fuel needs are met via imported refined products. Although the government allowed limited imports through Shimazi Oil Terminal (SOT), it has implemented the Single Entry Point (SEP) system that requires all refined oil products enter the Kenyan market through one point. This has somewhat helped to level the playing field for the oil marketers in Kenya. However, ullage constraints for refined product imports into KOSF (Kipevu Oil Storage Facility) through the SEP posed challenges for the local oil importing companies in 2012 due to the significant delays and ship demurrages incurred on the discharge of these shipments into KOSF. The Government, however, in liaison with the Oil Industry, is working on mechanisms to alleviate this problem.
Kestrel Capital (E.A.) Limited 22 KenolKobil 2013 Commercial Paper programme
6.7 Oil Prices The annual average ADNOC (Abu Dhabi National Oil Company) price for Murban Crude Oil in 2012 was posted at US$112.97/bbl and was an increase of 2.14% from US$110.60/bbl in 2011. The average freight cost in 2012 was $25.00/MT and currently is around $25-‐30/MT. The graph below shows the change in the price of Murban Crude oil over the last 2 years.
6.8 Timeline The following timeline illustrates graphically how the working capital needs under the OTS are met: Crude
Product
90
95
100
105
110
115
120
125
130
0 B/L
-‐10 LC date
30 LC matures
Due from KPRL but subject to discharge
-‐10 LC date
0 B/L
12 Discharge date
14 Discharge date + 2
days Payment date,
subject to discharge
30 LC matures Refinance
24 Discharge day + 12 days
Last date for payment, subject to discharge
Default if not paid
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7. SEGMENT INFORMATION 7.1 Fuel Business Fuels Business is the largest of the business segments and forms the core of the entire operations. KenolKobil markets and sells crude as well as variants of white fuels including Premium Motor Spirit (i.e. gasoline), Regular Motor Spirit, Automotive Diesel, Industrial Diesel, Bitumen, Kerosene, and Jet A1 (Aviation) Fuel. Fuels are generally homogeneous products. The market for fuels is competitive since product differentiation is closely tied to the marketer's corporate reputation and ability to deliver. The Fuels Business segment is further subdivided into Retail Sales and Commercial Marketing to large commercial clients. Aviation KenolKobil supplies Jet A1 aviation fuel to major international and local airlines flying into and out of East Africa on both long term and short-‐term agreements. KenolKobil has two large aircraft refueling services at the Jomo Kenyatta International Airport in Nairobi and at Moi International Airport in Mombasa. 7.2 Lubricants In 2001, KenolKobil launched its own brand of lubricants, which are now available in Kenya and in other countries. The Company markets three lubricant brands namely, Castrol, Kenol and Kobil covering a wide range of applications in the automotive, manufacturing and processing, industrial and marine sectors. It now accounts for 10% of market share of the total lubricants sold in the Kenyan market and has been gaining market share in other markets. 7.3 LPG K-‐Gas is KenolKobil’s Liquefied Petroleum Gas (LPG) brand and was launched in February 2003. The brand commands a market share of 28% in retail, 5% in commercial and an overall market share of 14% in Kenya. K-‐gas is operational in Kenya, Uganda, Ethiopia, Rwanda and Burundi. KenolKobil invested in a filling and storage plant in Rwanda in 2010 and in Uganda in 2012 in addition to the one in Kenya. 7.4 Non-‐Fuel Business Since 2001, the Company has expanded its business portfolio outside of fuel business and has continued to establish bank branches, ATMs, convenience stores, restaurants, tyre centres and garages, pharmacies, insurance offices, phone businesses, beauty shops, designer clothing stores warehouses and many other non-‐fuel businesses in its strategically located petrol stations. These businesses are operated and managed by independent third parties whereby KenolKobil earns rents or royalties. The non-‐fuel business is a growing alternate revenue stream to the fuel related business segments. 7.5 Trading Desk In 2002, the Company formally established a Trading Desk to develop new markets in African countries, especially those that have no refining facilities for petroleum
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products. The Trading Desk participates in tenders to supply petroleum products to Kenya, Mozambique, Malawi, Sudan, Ethiopia, Mauritius and other countries in the region. Despite the intense competition, the trading desk delivered about 30% of the combined crude and refined product oil requirements in 2012 into Kenya under the OTS. Trading desks in Zimbabwe and Tanzania are used to service the inland markets of the Southern African region. 7.6 Export Sales KenolKobil’s export sales have moved from 25,000 m3 in 2007 to peak at 98,000 m3 in 2011. In 2012 KenolKobil recorded a decline in sales to 75,000 m3 mainly due to problems experienced at the KPC on account of supplies to the KenolKobil subsidiaries, namely Kobil Uganda, Kobil Rwanda and Kobil Burundi, which procure products through Kenya. Regions including Eastern DR Congo and South Sudan are also supplied via exports from Kenya. Expectations are that improvements in KPC as well as general Mombasa port operations, possibly through partial privatization, will be seen under the new Government.
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8. OVERVIEW OF SUBSIDIARIES 8.1 Kobil Uganda Kobil Uganda was the first subsidiary with its inception in 1999. Kobil Uganda’s performance has been reasonable despite the very competitive market that has very many small players. KenolKobil currently has 60 stations in Uganda. KenolKobil acquired a 1,800m3 fuel terminal in Jinja, enhancing its distribution capacity and providing additional storage capacity. Kobil Uganda remains a leading provider of bitumen and bituminous products in Uganda and specializes in providing these products to the rural areas and to the small and medium enterprises. 8.2 Kobil Tanzania Limited Kobil Tanzania started operations in May 2001 and its retail network has grown to 21 service stations. The expected completion of Kobil Mtwara station this year will increase the number of stations to 22. In July 2011, KenolKobil entered into a long-‐term lease for a terminal with a 33,000m3 storage capacity. In order to capture the emerging trading business out of Dar es Salaam, an arm of the African Trading Desk was established at the terminal. The terminal has created a platform for servicing the Group’s regional subsidiaries as well as supporting the trading business in participation in Tanzania’s Bulk Procurement System (BPS). 8.3 Kobil Zambia Limited KenolKobil spread its interest to Southern Africa when it acquired a 100% interest in Jovenna Zambia in March 2002. Kobil Zambia continued to invest in the retail network, which has grown to 25 service stations. KenolKobil expects to commission another two stations during the year to bring the total number of stations to 27. Investing in Lublend has solidified KenolKobil’s position as Zambia’s leading supplier of lubricants. Kobil has increased storage capacity substantially by entering into hospitality agreements, making it possible to procure and store sufficient volumes to satisfy its growing market. In late 2011, Kobil commenced an upgrade of its depot in Lusaka to a modern terminal through construction of a 6,000m3 storage tank and a LPG plant is planned on the same site. The terminal will enhance Kobil Zambia’s competitiveness, both within the country and in the neighboring regions. 8.4 Kobil Petroleum Rwanda Limited Kobil Rwanda was incorporated in May 2002. The company has since grown to become Rwanda’s leading petroleum marketer with a market share of over 34%. Kobil Rwanda has grown its network to 44 service stations, the most expansive in Rwanda. In the acquisition of Shell Rwanda SARL, alongside the service stations it also assumed management of the largest depot facility in Kigali with a capacity of over 16,000 m3. In February 2010, Kobil Rwanda commissioned a new filling and storage plant in Rwanda, which will be used for meeting the LPG needs of Rwanda, Burundi and DRC. Recently the Company improved its capacity by adding an additional 20MT bullet tank to enhance filling capacity to cater for the needs of Kobil Burundi and hospitality users.
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8.5 Kobil Ethiopia Limited Kobil Ethiopia was established in 2005. Kobil Ethiopia has 80 operational stations spread all over the country. In its acquisition of the Shell Ethiopia’s assets, Kobil acquired a terminal in Addis Ababa with a storage capacity of 3,230m3. Kobil Ethiopia plans to continue enhancing its businesses in other sectors including bitumen, lubricants and LPG. 8.6 Kobil Burundi SA In October 2009, KenolKobil acquired Oil Burundi S.A from Engen International Holdings (Mauritius) Limited. Kobil Burundi’s service stations count has grown to 19. Going forward, KenolKobil looks forward to growing its non-‐fuel business segment alongside its fuel segment. In February 2011, Kobil Burundi acquired a depot complex in Bujumbura and has finished the construction and commission of a 4,850m3 storage terminal. Following the commissioning of the terminal, KenolKobil no longer needs to seek hospitality at the SEP multi-‐user depot in Bujumbura. Instead it offers hospitality to others. KenolKobil is planning to develop a re-‐export business into DR Congo. In the near future, KenolKobil plans to develop a LPG storage and filling plant. 8.7 KenolKobil Congo SPRL In October 2011, KenolKobil acquired a 4,000m3 fuel storage terminal in Lubumbashi from World Oil Congo SPRL. This terminal is currently under rehabilitation and expected to be commissioned in the 2nd half of 2013. 8.8 Summary of KenolKobil’s Subsidiaries Subsidiary Stations Volume Contribution to Group Uganda 60 2% Tanzania 21 5% Zambia 25 3% Rwanda 44 2% Ethiopia 80 4% Burundi 19 1% Zimbabwe Incorporated in Kenya figures Mozambique 0 Not active Congo DR 0 Not yet active
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9. CORPORATE GOVERNANCE Board of Directors Mr. J Mathenge – Chairman Mr. James Mathenge was appointed as Chairman on 23rd April 2013. His experience includes past position of managing director of Magadi Soda Company Limited and is also a Director and Chairman of several corporate organizations and professional bodies. Mr. Mathenge possesses a vast wealth of experience in the oil industry. He served as Managing Director and Country Chairman of Caltex Oil Kenya Limited between 1998 and 2003. His entry into the oil industry in 1979 has given him extensive experience in the regional oil market as well; having worked at the Caltex Petroleum Regional co-‐ordination office for East and North Africa region based in Dallas, Texas, USA. He holds Bachelors and Masters Degrees in Economics from the University of Nairobi. Mr. D Ohana – Group Managing Director Mr. David Ohana was appointed KenolKobil’s Managing Director in July 2013. He previously held the position of General Manager, Kenya. Mr. Ohana has an Economics and Business Administration degree with previous experience in the international oil industry before joining KenolKobil in 2002 as Head of Operations and Non-‐fuel Business Development. In 2004, he was appointed as head of Marketing and Fuel Business Development. In 2009, he was promoted to the position of General Manager for the Kenya operations. From 2010-‐2012, he was Chairman of the Petroleum Institute of East Africa (PIEA) and from 2012-‐present, he is the Chairman of the Kenya Oil Industry Supply Coordination Committee (Supplycor). Ms. P Lai – Group Finance Director Ms. Patricia Lai was appointed KenolKobil's Finance Director in February 2006. She has experience at senior management level in accounting and finance, having previously worked in South Africa. Ms. Lai is a Chartered Accountant and holds a Bachelor of Commerce and Bachelor of Accountancy degree from the University of Witwatersrand, South Africa. Mr. D Oyatsi -‐ Non-‐Executive Director Mr. Desterio Oyatsi was appointed a non-‐executive Director on August 10, 2007. Mr. Oyatsi is an Advocate of the High Court of Kenya, and Managing Partner of Shapley, Barret & Co., Advocates. Mr. Oyatsi's main practice is commercial law. He is currently a Commissioner of Kenya Law Reform Commission and Non Executive Director of Metropolitan Life Insurance Kenya Ltd. During 1999-‐2002, he acted as a Non Executive Director of Capital Markets Authority and between 1999-‐2003, as a Non Executive Director of Telkom Kenya Ltd. Mr. P N V Jakobsson -‐ Non-‐Executive Director Mr. Per Jakobsson has for the last 8 years been the Managing Director of a property company and investment company active in Stockholm. Apart from being
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experienced in property development and management, Mr. Jakobsson has experience in the downstream oil Industry in Africa. Mr. D Ndonye -‐ Non-‐Executive Director Mr. Daniel Ndonye was appointed as non-‐executive director on April 6, 2011. He is a career auditor, having worked with Deloitte and Touche for over 37 years where he rose through the ranks to become the managing partner for East Africa, a position that he served for 20 years before being appointed the Chairman of the Deloitte Africa board for two years. He has also had various leadership positions including Chairman of the Institute of Certified Public Accountants of Kenya (ICPAK), Chairman of the Registration of Accountants Board (RAB) for 20 years and was also Chairman of the Board of Trustees of the Kenya Wildlife Service for three years. He currently also holds board director positions in several institutions. Mr. T Davidson – Non-‐ Executive Director Mr. Terry Davidson was appointed a Non-‐Executive Director on September 25, 2007 before taking up his current role as Board Advisor in April 2010. He is an experienced career banker, having successfully served as the Chief Executive Officer of the Kenya Commercial Bank for four and a half years until he took an early retirement. He has also served for over 30 years, in senior capacities within the Citibank Group in London including Managing Citibank Kenya and South Africa being the Regional HO. A Kenyan by birth, Mr. Davidson is a Council Member of the University of Nairobi, and a member of the Board of several leading enterprises including the Deposit Protection Fund. He has also served as the Chairman of the Kenya Bankers' Association on two occasions, and has previously served in the Board of the Federation of Kenya Employers.
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10. APPENDIX
Definitions and Abbreviations
KenolKobil / Company KenolKobil Limited
KPC Kenya Pipeline Company
KRA Kenya Revenue Authority
KPRL Kenya Petroleum Refineries Limited
LIBOR London Interbank Offered Rate
LPG Liquefied Petroleum Gas
OTS Open Tender System
SEP Single Entry Point
CMA Capital Markets Authority
Kshs/KES Kenya Shillings
CP Commercial Paper
Commercial Paper
Commercial Paper is an unsecured, short-‐term loan issued by a corporation, typically for financing working capital. It is usually issued at a discount, reflecting current market interest rates.
Directors or Board The persons named herein as Directors of the Company
Employee Employees of KenolKobil Limited
ESOP Employee Stock Ownership Plan
GCR Global Credit Rating Company
NSE Nairobi Securities Exchange
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Summary Financial Statements Consolidated Income Statements (In Kshs millions) Period/Year ended 31-‐Dec-‐12 31-‐Dec-‐11 31-‐Dec-‐10 31-‐Dec-‐09 Net sales 192,527 222,302 101,650 96,693 Gross profit 4,288 12,195 7,597 6,038 EBITDA -‐6,087 6,716 3,789 2,924 Profit before tax -‐8,965 4,934 2,836 1,933 Net (loss) / profit after tax -‐6,285 3,274 1,915 1,295
Earnings per share (basic) Kshs per share -‐4.27 2.22 1.30 0.88
Consolidated Statement of Financial Position (in Kshs millions) As at 31-‐Dec-‐12 31-‐Dec-‐11 31-‐Dec-‐10 31-‐Dec-‐09 Non-‐current Assets 8,144 5,828 4,359 4,311 Current Assets 24,540 40,146 26,013 25,124 Current Liabilities 25,340 32,794 18,879 19,293 Net Current Assets -‐800 7,352 7,134 5,831 Total Assets 7,344 13,180 11,494 10,142 Non Current Liabilities: Deferred tax 230 -‐ 189 248 Long term loan 668 1,530 95 76 Shareholder's funds 6,446 11,651 11,209 9,818 Long term Liabilities & Shareholders’ Funds 7,344 13,180 11,494 10,142
Consolidated Statement of Cash flows (In Kshs millions) Period/Year ended 2012 2011 2010 2009 (Loss) / Profit before tax -‐8,965 4,934 2,836 2,114 Cash from operating activities 2,956 -‐852 -‐9,697 4,150 Cash (utilized in) / from investing activities -‐1,163 -‐1,572 -‐896 -‐161
Cash from financing activities -‐2,886 3,550 9,012 -‐2,795 (Decrease) / Increase in cash -‐1,093 1,126 -‐1,581 1,194 Movement in cash and cash equivalents
Opening cash as at 1 January/ 1 October 3,272 2,133 3,678 2,437
(Decrease) / Increase -‐1,093 1,126 -‐1,581 1,194 Effects of exchange gain / (loss) difference 12 12 36 46
Closing cash at end of period 2,191 3,272 2,133 3,678
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