Why Flame Tree Group’s Profits Are Declining 

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  • The Flame Tree Group has announced a profit warning for the year ended December 31, 2022 
  • The earnings decline is due to  an increase of raw material prices, shipping costs, as well as depreciation of the local currencies against the US Dollar (USD). 
  • It is predicted that earnings for the year will be at least 25 percent less than the level of earnings in the previous year.

Kenya’s manufacturing giant, Flame Tree Group has announced a profit warning for the year ended December 31, 2022 stating that the earnings will be at least 25 percent less than the level of earnings in the previous year.

The firm attributes the decline to the increase of raw material prices, shipping costs, as well as depreciation of the local currencies against the US Dollar (USD). 

According to the firm, the price of plastics have gone up by 70 percent compared to 2021 while shipping costs have tripled over the past 12 months. At the same time, the Kenya Shilling has depreciated from 106 KES/USD against the USD as at June 2021 to 124 KES/USD at the end December 2022

“These factors combined have severely affected the margins and cash flows of the company, which also led to higher short-term debt, mainly LC lines to finance the purchase of raw material, hence leading to higher finance cost incurred,” the firm said in a statement. 

The company has issued a profit warning despite a positive progression of sales and market share.  

“The Board of Directors expect that the impact of above-mentioned adverse factors will be highly reduced in 2023 and anticipate market corrections and improved profitability to be registered in the coming periods,” the statement reads. 

Flame Tree Group manufactures and sells a range of beauty care products in Kenya which includes creams, nail polish, lotions and moisturizers. The firm also manufactures plastic products for bulk water storage which includes Roto Tanks and Jojo Plastics. 

The company also has operations in Mauritius, Rwanda, Ethiopia, Dubai and Mozambique. 

Kenya-based manufacturing giant sees dramatic increase in profits

Challenging Environment 

Flame Tree Group net profit went up by 36.4 percent to  Sh102.5 million for the full year 2021 from Sh75.1 million recorded in 2020.

Sales increased by 16.2 percent up to 3.383 billion however gross margin growth was minimal due to increased price of raw material and international shipping costs. 

Gross margin dropped from 39 percent to 34 percent following sharp increase in international oil prices and exorbitant increase in international shipping costs, which affected the cost of  raw materials.

“After a very challenging 2nd year of the Covid pandemic and unprecedented increases of oil prices and international shipping costs, which have impacted negatively our cost of sales, we are very satisfied with the results achieved this year, and continue to show a remarkable growth for the fourth year in a row as well as a strong and healthy financial position, with a low Net Debt/EBITDA ratio, x2.4. Our receivables have been kept under tight control and the DSO ratio improved by another 3 days,” said Heril Bangera, CEO Flame Tree Group in March 2022. 

In 2020, the firm reduced its ability to repay its debt according to South Africa ratings firm Global Credit Ratings (GCR).

The agency dropped the firms’ rating two places in the category of companies with moderate levels of creditworthiness. However, the company’s short-term debt ratings was retained at B, which means it has moderate to low levels of liquidity to settle its current liabilities.

“The rating action reflects the deterioration in Flame Tree’s earnings performance and cash flow generation, which has resulted in some pressure on credit protection metrics. Flame Tree’s ratings are constrained by sustained weak earnings and cash flow generation, due to a combination of operational challenges in some key territories and higher costs of imported raw materials,” the rating agency said. 

Flame Tree has a strong niche position in its core plastic tanks business, supported by diversified interests in fast moving consumer goods across East Africa.

“The group’s recognised supply chain advantages, underpinned by long-standing supplier relationships and an extensive network of dealers and distributors further entrench its sound competitive position,” GCR said.

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