Weakening shilling hurting Unga Group, considers contract manufacturing in strategic shift
KENYA – Unga Group, a Kenyan-listed food processing firm is among companies facing higher financing costs in the wake of the weakening shilling and the rise in the Central Bank Rate (CBR), which serves as the base for the pricing of some of its borrowings.
The CBR has risen from 10.5 percent last June to the current 12.5 percent in a bid to stem the slide of the shilling against hard currencies, significantly raising the cost of borrowing on loans.
Unga Group and its subsidiaries had taken loans; priced on the CBR plus a margin of three to 3.1 percent, amounting to KES1.1 billion (US$6.8M) as of June 2023, according to its latest annual report.
“Bank facility comprises a six-year term loan of Sh860 million taken in 2017 to finance the purchase and construction of a new wheat milling plant in Eldoret,” Unga noted of a facility from Absa Bank.
The weakening of the shilling—by 22 percent against the US dollar in the past 12 months alone—has also contributed to higher finance costs for Unga.
The Nairobi Securities Exchange-listed firm has liabilities in other currencies, including the dollar, which the depreciation of the shilling has inflated.
“Furthermore, dollar supply constraints within the market led to margin erosion, high forex losses, and increased interest expenses,” said Unga chief executive Joseph Choge in a review of the year-ended June 2023.
The company’s total finance costs nearly tripled to KES784.3 million (US$4.8M) in the review period from KES 267.4 million (US$1.7M) a year earlier.
The higher interest expenses also reflected a jump in borrowings to KES 1.07 billion (US$6.6M) from KES 493 million (US$3M).
Unga turns to contract manufacturing in strategic shift
Recently, the Group hinted at opting to use contract manufacturers to shore up its declining revenues battered by cutthroat competition in the flour milling sector, scarcity and high cost of raw materials, and the depreciation of the local currency against the US dollar.
The announcement came after the Group yet took another step, announcing redundancies citing that the company was struggling to record profits.
Unga disclosed, through its latest integrated report (2023), that under the new plan, the firm would explore contract manufacturing opportunities to boost capacity utilization across the human food and animal feed business segments.
“Under the new strategic plan, Unga has set a target of increasing capacity utilization, with contract manufacturing being one of the efforts that are already in the works,” the firm said.
“As an example, we currently process wheat and porridge flour for various customers, including the World Food Programme. We will continue to explore similar contract possibilities to boost capacity utilization across both the human food and animal feed business segments.”
The miller is seeking to re-invent itself by reinforcing its existing operations, deepening its market presence, exploring new business opportunities by venturing into new products and emerging markets, and fostering a high-performance work culture.
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